Crafting a

1
successful WEEK 6

financial plan
2
Learning objectives
 At the end of the topic, students should be able to:

1. explain the significance of financial plan as an element of a viable business

plan.
2. create projected financial statements that reflect with their proposed
business.
3. analyse the financial prospects of the proposed business.
4. Describe the difference between equity capital and debt capital.
5. Discuss various sources of equity and debt capital available to entrepreneurs.
3 Financial plan

The FINAL step in the preparation of a business plan.

Financial plan is a crucial aspect of a business plan as it will validate the

viability of the organisation, marketing and operation plan developed earlier.

Financial plan is prepared after all budgets and costings pertaining to

organisation, marketing and operation are completed.
4
5 Financial plan

To determine the size of investment.

To identify and propose the relevant sources of finance.

The significance To ensure that the initial capital is sufficient.

of a financial
plan
To appraise the viability of the project before actual investment
is committed.

To be used as a guideline for implementation.

6
Financial plan
Organisation budget
Furniture/ Fixtures & fittings/Office
equipment/Salary/Rent/Utilities etc.

(Check your organization plan)

Marketing budget
Promotional expenses/Distribution
cost/Sales commission/Salary/travelling
expenses, etc.
(Check your marketing plan)
Financial plan
 Project implementation cost schedule
 Source of financing schedule
 Pro forma cashflow statement
 Pro forma profit and loss account
 Pro forma balance sheet
 Financial analysis- break even
analysis/ratio

Operation budget
Raw materials/machines
&equipment/salary/wages/Rental etc.
(Check your operation plan)
 1) Project implementation cost schedule
Components Details
Capital expenditure  Long-term capital expenditure (fixed assets)
(A)  Either you buy by cash/hire purchase OR bring in your personal assets
Working capital  The amount of initial money needed by you to generate your first sales.
requirements (B)  Before making any solid amount of sales (particularly in the first few months), you need
money to operate your business (monthly expenses in administration, marketing and
operation departments need to be paid).
 Usually between 2-3 months, depending on the nature of your business.
Other expenditure  Other expenses that you have to pay prior to your business operation activities. For
(C) example, payment for business registration, licensing, insurance premium, road tax, stamp
duties, legal and professional fees, deposits (rental and utilities). Normally a one-off or
annual-based expenses.
Contingency cost  Contingency cost (%) is the cost added to the total of capital expenditure, working capital
(D) and other expenditure.
 Contingency cost is allocated to take care of any variance of the actual from the budgeted
expenditure.
 E.g. increased cost of raw materials

7
 Project implementation cost schedule

Project Implementation Cost for Co. XX

(RM)
(A)Capital expenditure
(B)Working capital requirements
(C)Other expenditure
(D)Contingency costs (y%) x total of (A+B+C)
TOTAL ???

8
9 Project implementation Cost
 Calculate the amount of money needed to start your business.
 It is the first step to show the financial viability of your business by
providing a reliable amount of financial capital needed in starting up
your business.
 Does the amount reflect the whole plan that you have prepared in
organizational, marketing and operational plan?
 Does the amount realistic?
 Does the amount reflect with the chosen industry?
10
Project implementation cost
The following financial information was gathered from organisational, marketing and
operational plans that were developed by an entrepreneur who wants to start his
own business.
1. It is estimated that the administrative monthly expenditure consists of the
following: 
Rental of premises - RM3,000
Salaries - RM4,000
Utilities - RM1,000
 
2. The business registration fees is expected at RM2,000 and he needs to pay
insurance and road tax for RM400 and RM300 respectively.
3. The deposit for utilities is RM800.
4. Marketing expenses are expected at RM1,500 monthly.
5. The cost for buying raw materials and paying wages for operational workers will
be RM8,000 in total.
 Project implementation cost
11

6. Land and building for the business will be contributed by the entrepreneur
and the market value is RM45,000.
7. Machinery and equipment is RM23,000.
8. Some renovation works need to be done on the proposed business premise
and the cost is expected at RM4,000.
9. He considers for a hire purchase agreement for the van that he will use for
his business operation. The cost will be RM25,000.
10. Several cabinets and shelves are needed and will be part of the fixtures
and fittings of the business. This cost is estimated at RM7,000.
11. The initial working capital is prepared for a period of 2 months.
12. Contingency cost is expected at 10%.
 Example: Project implementation cost
RM RM
A. Capital Expenditure
12 Land & Building 45,000
Machinery and equipment 23,000
Furniture and Fixtures 7,000
Vehicle 25,000
Renovation 4,000
104,000

B. Working Capital *
Marketing 1,500
Production/Operation 8,000
Administration 8,000
35,000
C. Other Expenditure
Pre-operating:
Business registration 2,000
Insurance 400
Road tax 300
2,700

Deposits:
Utilitiees (Telephone. Water/electricity) 800
3,500
Total 142,500

D. Add: Contingency Cost (10%) 14,250

TOTAL PROJECT IMPLEMENTATION COST 156,750
13 2. Sources of finance schedule
 After determining the amount of financial capital needed to start your
business, you have to decide the way of how to finance your business.
 The financial requirement will be obtained from which financial sources?
 Open to many options that are available.
 Show how you will finance the amount and how much personal cash that you
need to bring in.
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Sources of finance schedule

1. The entrepreneur plans to buy the van via hire purchase agreement from
Mayban Finance. The cost of the van is RM25,000.
2. He plans to apply for term loan of RM40,000 from the same financial institution
that provides hire purchase for his van.
3. As an ex-graduate of a local university, he can apply for government grant
worth of RM30,000.
4. The remaining capital requirement will be financed by his personal saving.
15 Sources of finance schedule
Sources of Finance Schedule
RM RM
A. Equity Contribution
Cash 16,750
Land & Building 45,000
61,750
B. External sources
Hire purchase 25,000
Term loan 40,000

Government grant 30,000

95,000
TOTAL SOURCES OF FINANCE 156,750
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3. Pro forma Cash flow Statement

 Refers to the projected statement of cash inflow and cash outflow throughout
the planned period.
 To show your business can generate sufficient cash.
 No liquidity issue.
17
Pro forma Cash flow Statement
Identify the elements of cash in flow
• Include any item that involved cash transactions
Equity contributions Cash from entrepreneurs (not other form of assets)

Term loan Amount of loans from any institutions, e.g. commercial

banks or government agencies

Cash sales Money received from the selling activities.

Only cash sales. Differentiate between cash and credit
sales

Collection of receivables Amount collected from credit sales.

Sales of assets The amount received from the disposal of company’s

assets.
 Pro forma Cash flow Statement
18
Identify the elements of cash out flow.
• Include all expenses that involved cash payment
Administration expenditure Check for any cash expenses in organisational, marketing
and operational plan.
Marketing expenditure
Operating expenditure
Term loan repayment Principal and interest paid on term loan and hire purchase.
Hire purchase repayment

Pre-operating expenditure e.g market research, legal fees, registration of your business
etc.
Payments for deposits Deposits for the utilities, business premise etc.

Other expenses paid by cash

 Example: Pro forma cash flow statement

Months Pre-ope. April May June July Aug. Sept Oct. Nov Dec Jan Feb March Year 1 Year 2 Year 3
A Cash inflow:
Equi ty-Ca s h
19 Te rm l oa n
Gove rnme nt gra nt
Ca s h s a l e s
Othe rs ***

B Total cash inflow

C Cash outflow:
Admi ni s tra ti ve exp.
(l i s t the m)
Ma rketi ng exp.
(l i s t the m)
Ope ra ti ona l e xp.
(l i s t the m)

Loa n repa yme nt:

Pri nci pa l
I ntere s t
Hi re pch. Repa yme nt:
Down pa yme nt
Pri nci pa l
I ntere s t

Ca pi ta l e xpendi ture:
Ma ch. & equi p.
Fi xture s & fi tti ngs
Re nova ti on
Pre -ope ra ti ona l e xp:
Depos i ts
D Total cash outflow
E Cash surplus/deficit
F Beginning cash bal.
G Ending cash bal.
20
4. Pro forma profit and loss account

 A statement which shows the expected profit or loss for the

planned period (financial performance).
 Sales (revenues)
 refer to the sales forecast derived earlier in the marketing plan. The total of forecasted cash and credit sales for
each year throughout the planned period.

 Cost of goods sold

 refers to the cost of producing or acquiring finished goods for sale.
21
Pro forma profit and loss account
 Operating expenses
 Expenses incurred in the normal day-to-day operations of the business.
 Administrative expenses
 Marketing expenses
 Interest payment, depreciation
 Miscellaneous expenses
 Include pre-operational expenses (business registration, legal fees, licenses,
road tax, insurance etc.
 OPERATIONAL EXPENSES: only relevant for trading and service businesses.
For manufacturing activities, separate calculation of costs of goods
manufactured is needed.
 Company's Name
Proforma profit and loss account for the year ended 31 March 2020
RM RM RM
Sales XX
(-) Sales return (xx)
22 Net sales XX

(-) Cost of goods sold

Opening inventory XX

Purchases XX
(-) Purchase return (xx)
Net purchases XX
(+) Carriage inwards xx
(+) Wages xx
(+) Import duty xx
Purchase cost XX
Cost of goods sold XX
(-) Closing inventory (xx)
Cost of sales (xx)
GROSS PROFIT XX

(+) other incomes:

Rental XX
Interest XX
Commission XX
XX

(-) Operating expenses:

Administrative expenses (list them all) XX
Marketing expenses (list tem all) XX
Depreciation XX
Interest on hire purchase XX
Interest on loan XX
Total operating expenses (XX)
NET PROFIT/(LOSS) XX
 5. Pro forma balance sheet
23

 Pro forma balance sheet shows the financial position of a

business at a specific point in time in terms of:
 Assets owned
 How the assets are financed
 Pro forma balance sheet
Pro Forma Balance Sheet as at XX Month 2020
24       RM RM RM   RM
FIXED ASSETS   Cost Acc. depr. Book Value    
Land   45,000 0 45,000   
Machiney & Equipment 23,000       
Furniture & Fixtures   7,000       
Van   25,000 5,000 20,000   
Renovation   4,000       
    104,000      X
             
CURRENT ASSETS            
Cash            
Stock (Inventory)            
Debtors (Ac. Receivables)          
Deposit            
TOTAL CURRENT ASSETS          
             
CURRENT LIABILITIES          
Creditors (Ac. Payable)          
TOTAL CURRENT LIABILITIES          
             
TOTAL ASSETS           XXX A

             
EQUITY            
Capital            
Profit/(loss)   XX (P&L account)      
             
LONG TERM LIABILITIES          
Term loan            
Hire purchase            
              XXX B

A and B should equal

 6. Analysing Financial Statement
25

 How good is your financial projection?

 Break-even analysis
 Ratio analysis
26 Break even analysis

 What is the breakeven point?

 NO LOSS, NO PROFIT
 Calculate the number of sales that you need to achieve in
order to cover your costs.
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28 Operation costs
Example: production of biscuits

Types Details Costs Cost per biscuit

Direct material cost Flour, eggs, butter, sugar, water RM7,150 RM13150.00
Direct labour cost Direct labour salaries RM6,000 50,000 biscuits
=RM0.263/biscuit
Overhead costs Rent, utilities, depreciation of RM6,000
machines

Direct materials

0.02kg/unit x 50,000 =1,000 kg Flour RM3/kg RM3,000 Direct labour= 6 workers x RM1000
= RM6,000
0.005 kg/unit x 50,000 = 250 kg Butter RM8/kg RM2,000

0.01 kg/unit x 50,000 = 500 kg Sugar RM2.50/kg RM1,250

2,000 eggs Eggs RM0.30/egg RM600

0.005 liter/unit x 50,000 = 250 liters Water RM1.20/liter RM300

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If sales exceed 17,804 biscuits, you start to gain a profit.

 Financing a Business

 Entrepreneurs must aware of various options in financing their business.

 Layered financing:
 Piecing together capital from multiple sources.

 Capital:
 Any form of wealth employed to produce more wealth.
 Two types:
1. Equity
2. Debt

13 - 30
 Financing a Business
31
Equity financing
 The personal investment of the owner(s)
in the business.
 It is known as risk capital because
investors assume the risk of losing their
money if the business fails.
 Does not have to be repaid with interest
like a loan does.
 But, the entrepreneur must give up some
ownership in the company to outside
investors.
Debt financing
 Must be repaid with interest.
 Is carried as a liability on the
company’s balance sheet.
 Can be just as difficult to secure as
equity financing, even though
sources of debt financing are more
numerous.
 Can be expensive, especially for
small companies, because of the
risk/return tradeoff.
32 Financing for start-ups

Source: Kelley, Abdul Ali, Brush, Corbett, Majbouri & Rogoff :

2012 United States Report-Global Entrepreneurship Monitor (p. 23)
33 Sources of Equity Financing
Types Details
Personal savings • The first source you should look for money, the most
commonly used by start up companies.
• To show your commitment
• Bootstrapping

Friends and family • Keep the arrangement strictly business!

members
Crowd funding • Raising capital through social networking
• E.g. pitchIN
• https://pitchin.my/
34
Sources of Equity Financing
Types Details

Grants (government • Financial support given by a particular agency/institution in

agencies/institutions etc.) the form of grants.
• Could be invited to participate in a specific entrepreneurship
development programme.

Public stock sale • Initial public offering (IPO)

• When a company raises capital by selling shares of its
stock to the public for the first time.
 Sources of Equity Financing
35

Types Details
Business Angels • Wealthy individuals who invest in emerging entrepreneurial companies in exchange for
equity (ownership) stakes.
• Willing to invest in the early stages of a business- they have a personal interest or
experience in a particular industry.
• They look for:
• Qualified management team
• A business with a clearly defined niche, market potential and competitive advantage.
• Market research that proves the existence of a sizeable customer base.
• A viable market strategy - the venue by which they get their investments back, ideally
with a handsome return.
• They want a clean exit for their investment, rather than a business that might yield
dividends over time.
• The Challenge: Finding angels!
• Networking is the key.
• Asking friends, attorneys, bankers, accountants, other business owners and consultants
for suggestions and introduction.
 Sources of Equity Financing
36

Types Details
Venture capital • Private, for-profit companies that purchase equity positions in young businesses that they believe have
companies high-growth and high-profit potential.
What Do Venture Capital Companies Look For?
a) • The ability of the management team.
Competent • The experience, managerial skills, commitment and the ability to expand the team as the
management business grows.
team
b) • Factor that will enable a small business to set itself apart from its competitors.
Competitive • e.g. innovative product, unique marketing strategies etc.
edge • Some unique factors that create a sustainable competitive advantage, making a company a
leader in its industry.
 Sources of Equity Financing
37
Types Details
Venture capital c) Growth • Hot industries that have prospects in rapid growth – the profit potential is greater in these
companies industry areas.
• Growth potential within three to five years.

d) Viable • A plan for a feasible exit strategy, to be executed within 3 to 5 years.

exit strategy

e) Other • Some factors in the screening process are not easily measured-they are intuitive, detected
intangible by gut feeling.
factors • this feeling might be the result of the small firm’s solid sense of direction, its strategic
planning process, the chemistry of its management team or other factors.
 Sources of Debt Financing
38
Types Details
Commercial banks a) Short term loans
Financial institutions • Less than a year.
• Is commonly used for working capital requirement- purchase of inventory, boost output, finance credit sales to
customers or take advantage of cash discounts.
b) Long term loans
• Normally secured by collateral, extended for one year or longer.
• Is commonly used for constructing buildings, purchasing real estate and equipment, expanding a business, and
other long-term investments.
• Matching the amount and the purpose of a loan to the appropriate type and length of loan is important.

c) Factoring account receivables

• A small business can sell outright its account receivable to a factor. A factor buys a company’s account
receivable and pays them.
• A financial institution that buys business’s accounts receivable at a discount ( 2% to 40% of the face value of a
company’s account receivable). Depending on the following factors:
• Customers’ financial strength and credit ratings.
• The industry and its customers’ industries because some industries have a reputation for slow payments.
• History and financial strength, especially in deals arranged with recourse.
• Credit policies
 Sources of Debt Financing
39

Types Details
Commercial banks d) Leasing
Financial institutions • Another common bootstrap financing technique.
• Lease any kind of assets, including office space or heavy equipment.
• An entrepreneur can use leased assets without investing their capital and depreciating
assets. No down payment is required and the list of paying installment of the assets is
spread over a longer period, then a company’s cash flow improves.
e) Credit cards
• The fastest and most convenient source of debt capital.
• Putting business start-up costs on credit cards is expensive and risky.
• However, prudent entrepreneurs rely on credit cards only for making monthly purchase that
they are certain can be paid off when the credit card bill comes due.
There are many other types of debt financing!
 Sources of Debt Financing
40

Types Details
Government loan • Any loan programme provided by government-related
programmes organisations.

Suppliers/Vendors • Trade credit is used extensively by small businesses as a

source of financing.
• Vendors and suppliers commonly finance sales to businesses
for 30, 60 or even 90 days.
PRESENTING YOUR BUSINESS PLAN
• Rehearse and be prepared - less than 20 minutes.
• Demonstrate enthusiasm about the business but don’t be overly emotional.
• Focus on communicating the dynamic opportunity your idea offers and
how you plan to capitalize on it.
• Hook investors quickly with an up-front explanation of the new venture, its
opportunities, and the anticipated benefits to them.
• Use visual aids.
• Follow the 10/20/30 rule for PowerPoint presentations
• (10 slides, 20 minutes, font 30)
• Offer proof.
• Hit the highlights. 41