Financial MGT

Fundamentals of Entrepreneurship All Rights Reserved
© Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 1

CHAPTER 13
FINANCIAL MANAGEMENT FOR
SMALL AND MEDIUM
ENTERPRISES

Objectives
The objectives of this chapter are to:

identify the necessary steps to be taken in order to
prepare a simple project costs schedule
suggest potential sources to fund a new project
identify inputs to prepare pro forma financial
statement
conduct simple financial ratio analysis for business

Learning Outcomes
At the end of this chapter, students should be able to:

list various types of common sources of financing for SMEs
identify important elements required in preparing a financial plan
identify necessary financial statements to be prepared in managing a small
business

The Importance of Finance for
SMEs
The need for finance in SMEs might arise on four
occasions.
The first, and most common is the need for start-up
capital to help in the establishment of a new business.
The requirement to finance business expansion, i.e. for
purchase of new buildings, plant, or machinery; to finance
working capital by holding more stocks/work in progress
and trade debtors. Finance might also be needed for
taking over other existing businesses as an expansion
strategy.

The Importance of Finance for SMEs
(cont.)
The need for finance in SMEs might arise on four

occasions.
The third occasion is when ‘venture capital' is
required, particularly to finance an innovation. This
type of capital, also known as 'risk capital‘.
The last occasion is to adjust the existing financial
structure of the business, e.g. changes in the
proportion of equity to debt or the proportion of long to
short-term debt.

Types of Finance for SMEs
The main types of finance for SMEs can be categorized into debt and
equity finance.
 Debt Finance
– Debt financing is a financing method which typically involves an
interest-bearing instrument, normally a term loan. This type of
financing requires the entrepreneur to pay back the funds borrowed
plus an interest.
 Equity Finance
– Equity financing offers some form of the ownership in the business to
the investor. Equity finance requires the entrepreneur to give up
some degree of control and ownership of the business.

Internal or External Funds (cont.)
Financing can also be considered from the perspective

of internal versus external funds. The most frequently
used funds are internally generated funds. The internal
funds can come from various sources within the business,
such as personal savings of the entrepreneur, profits
retained in the business, sales of fixed assets, reduction of
working capital, and account receivable.
The external source of finance can be generated from
outside the business and the most frequently used
sources of external finance are banking and
developmental financial institutions (DFIs).

Financial Plan
A financial plan is also known as a financial budget.

Determines whether or not a business proposal is viable.
The process of estimating future income, expenses and
assets of the business. In business, a financial plan or a
financial forecast consists of three primary pro forma
(projected) financial statements, cash flow statement,
income statement, and the balance sheet prepared within
a business plan.

The Importance of Financial Plan
To Determine Total Project Implementation Cost.

To Determine Amount of Funding Required and Identify Proposed
Sources of Funds.
To Ensure Sufficient Initial Investment .
To Analyse the Viability of the Project .
To Guide Project Implementation .

The Importance of Financial Plan (cont.)
The process of preparing a financial plan involves:

determining total project implementation costs
determining amount of funding required and identifying proposed
sources of funds
calculating amount of depreciation on fixed assets
calculating amount of loan and hire purchase repayments required
estimating amount cash inflow and outflow during the planned
period
estimating amount of profit generated during the planned period
estimating financial position at the end of the planned period
performing financial analysis to determine financial viability of the
proposed business

Steps in Developing a Financial
Plan
To develop a workable and meaningful financial plan, the
entrepreneur has to follow these seven steps:
Gathering relevant financial inputs
Preparing project implementation cost schedule
Identifying sources of financing
Preparing pro forma cash flow statement
Preparing pro forma income statements
Preparing pro forma balance sheet
Performing financial analysis based on the above pro
forma statements

Steps in Developing a Financial Plan (cont.)





Step4: Preparing the Pro Forma Cash Flow Statement

The pro forma cash flow statement is another important part of the
financial plan. Pro forma cash flow statement refers to the projected
statement of cash inflow and outflow throughout the planned period.
The pro forma cash flow statement must be able to show the
following information:
cash inflows—the projected amount of cash flowing into the
company
cash outflows—the projected amount of cash flowing out of the
company
cash deficit or surplus—the difference between cash inflows and
cash outflows
cash position—the beginning and ending cash balances for a
particular period

Step 4: Prepare Pro Forma Cash Flow Statement (contd.)

Elements of cash inflows:
 Equity contribution (cash)

 Term loan
 Cash sales
 Collection of receivables
 Others

Step 4: Prepare Pro Forma Cash Flow Statement (cont.)

Elements of cash outflows:
 Marketing expenditure
 Operations expenditure
 Administrative expenditure
 Term loan repayment
 Hire purchase repayment
 Purchase of fixed assets
 Pre-operating expenditure
 Payments for deposits
 Miscellaneous expenditure

Example: Pro Forma Cash Flow Statement

Step 5 Preparing the Pro Forma Income Statement [B]

The next step in developing a financial plan is to prepare the pro forma
income statement which shows the expected profit or loss for the
planned period, usually for three consecutive years.
Elements in the Pro Forma Income Statement
Generally, the pro forma manufacturing account consists of the
following elements:
cost of goods manufactured
gross profit
net profit
For manufacturing companies, the cost of goods manufactured must
be calculated first, while for trading companies; it is the gross profit.
Service companies can straight away calculate the net profit.



Step 6 Preparing the Pro Forma Balance Sheets

Elements of the Pro Forma Balance Sheet
The general elements of the pro forma balance sheet include:
– assets
– owner’s equity
– liabilities


 Assets
– Non-current assets
• Fixed assets are used and depreciated by a company
for more than a year, and thus, they are considered
non-current assets.
– Current assets
• Current assets are short-term assets that can be
converted into cash within a year. Examples of these
assets are cash, stock (raw materials, work-in-process
and/or finished goods), account receivables and other
short-term investments.
 Owners’ Equity
– Owners’ equity refers to the original capital contributions from
the owners or shareholders in terms of cash or assets plus the
accumulated amount of net profit. However, if the company
suffers a loss, the amount of loss will be deducted from the
original equity contribution.
 Liabilities
– Liabilities are the amounts owed by the company to outsiders.
They are categorized as current liabilities and non-current
liabilities (long-term liabilities).The most common forms of
current liabilities are accounts payable and accrued payments.
Non-current liabilities or Long-term liabilities refer to the long-
term obligations of the company that mature in a period of
more than one year. They usually include long-term loans as
well as hire purchase.

Analysing Financial Statements

Financial Ratio Analysis
Liquidity Ratios
Efficiency Ratios
Profitability Ratios
Solvency Ratios


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Fundamentals of Entrepreneurship All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 1

Fundamentals of Entrepreneurship All Rights Reserved

The objectives of this chapter are to:

Fundamentals of Entrepreneurship All Rights Reserved

At the end of this chapter, students should be able to:

Fundamentals of Entrepreneurship All Rights Reserved

Fundamentals of Entrepreneurship All Rights Reserved

The need for finance in SMEs might arise on four

Fundamentals of Entrepreneurship All Rights Reserved

Fundamentals of Entrepreneurship All Rights Reserved

Financing can also be considered from the perspective

Fundamentals of Entrepreneurship All Rights Reserved

A financial plan is also known as a financial budget.

Fundamentals of Entrepreneurship All Rights Reserved

To Determine Total Project Implementation Cost.

Fundamentals of Entrepreneurship All Rights Reserved

The process of preparing a financial plan involves:

Fundamentals of Entrepreneurship All Rights Reserved

Fundamentals of Entrepreneurship All Rights Reserved

Fundamentals of Entrepreneurship All Rights Reserved

Fundamentals of Entrepreneurship All Rights Reserved

Fundamentals of Entrepreneurship All Rights Reserved

Fundamentals of Entrepreneurship All Rights Reserved

Fundamentals of Entrepreneurship All Rights Reserved

Step4: Preparing the Pro Forma Cash Flow Statement

Fundamentals of Entrepreneurship All Rights Reserved

Step 4: Prepare Pro Forma Cash Flow Statement (contd.)

 Equity contribution (cash)

Fundamentals of Entrepreneurship All Rights Reserved

Step 4: Prepare Pro Forma Cash Flow Statement (cont.)

Fundamentals of Entrepreneurship All Rights Reserved

Fundamentals of Entrepreneurship All Rights Reserved

Step 5 Preparing the Pro Forma Income Statement [B]

Fundamentals of Entrepreneurship All Rights Reserved

Fundamentals of Entrepreneurship All Rights Reserved

Fundamentals of Entrepreneurship All Rights Reserved

Step 6 Preparing the Pro Forma Balance Sheets

Fundamentals of Entrepreneurship All Rights Reserved

Fundamentals of Entrepreneurship All Rights Reserved

Fundamentals of Entrepreneurship All Rights Reserved

Analysing Financial Statements

Fundamentals of Entrepreneurship All Rights Reserved

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