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Outline Cost of project Means of financing Estimates of sales and production Cost of production Working capital requirement and its financing Profitability projections
Financial Projections Balance Sheet Cash Flow Statement Cost of Project and Time Phasing
Means of Finance and Time Phasing Interest and Loan Repayment
Depreciation Cost of Production
Estimate of Working Results
Working Capital Needs
Working Capital Advance (WCA)
Production Plan Projected Sales
Interest on WCA
Tax Factor
Cost of Project The cost of project represents the total of all items of outlay associated with a project which are supported by long-term funds. It is the sum of the outlays on the following: •
Land and site development
•
Buildings and civil works
•
Plant and machinery
•
Technical know-how and engineering fees
•
Expenses on foreign technicians and training of Indian technicians abroad
•
Miscellaneous fixed assets
•
Preliminary and capital issue expenses
•
Pre-operative expenses
•
Margin money for working capital
•
Initial cash losses
Means of Finance To meet the cost of the project the following means of finance are available: •
Share capital
•
Term loans
•
Debenture capital
•
Deferred credit
•
Incentive sources
•
Miscellaneous sources
Project Financing Decision The key business considerations relevant for the project financing decisions are: •
Cost
•
Risk
•
Control
•
Flexibility
Estimates of Sales and Production In estimating sales and production, assume that: The capacity utilisation would be at 40-50 percent of the installed capacity in the first year, 50-80 percent in the second year, and 80-90 percent from the third year onwards •
•
Production and sales will be equal
•
The selling price used may be the present selling price
Estimates of Production and Sales (Details may be furnished separately for each product and until the plant reaches maximum capacity utilisation) Product
1.
Installed capacity (qty per day per annum)
2.
No. of working days
3.
No. of shifts
4.
Estimated production per day (qty)
5.
Estimated annual production(qty)
6.
Estimated output as % of plant capacity
7.
Sales (qty) (after adjusting stocks)
8.
Value of sales (in’000 of Rs)
Product
1st 2nd 3rd
4th
1st 2nd 3rd
4th
yr
yr
yr
yr
yr
yr
yr
yr
Product (i) (ii) (iii) Note : Production in the initial period should be assumed at a reasonable level of utilisation of capacity increasing gradually to attain full capacity in subsequent years.
Cost of Production Given the estimated production, the cost of production may be worked out. The major components of cost of production are: •
Material cost
•
Utilities cost
•
•
Labour cost Factory overhead cost
Working Capital Requirement and Its Financing In estimating the working capital requirements and planning for its financing, bear in mind the following: •
The working capital requirement consists of raw materials and components, work-in-process, finished goods, consumable stores, debtors, and operating expenses.
•
The principal sources of working capital finance are working capital advances provided by commercial banks, trade credit, accruals and provisions, and long-term sources of financing.
•
There are limits to obtaining working capital advances from commercial banks. They relate to the maximum permissible bank finance for working capital and the amounts that can be raised against each individual current asset.
Profitability Projections ( or Estimates of Working Results) Given the estimates of sales revenues and cost of production, the next step is to prepare the profitability projections or estimates of working results (as they are referred to by term-lending financial institutions in India). The estimates of working results may be prepared along the following lines: A Cost of Production B Total administrative expenses C Total sales expenses D Royalty and know-how payable E Total cost of production (A+B+C+D) F Expected sales G Gross profit before interest H Total financial expenses I Depreciation
J Operating Profit (G - H - I) K Other income L Preliminary expenses written off M Profit/loss before taxation (J+K - L) N Provision for taxation O Profit after tax (M - N) Less Dividend on - Preference capital - Equity capital P Retained profit Q Net cash accrual (P+I+L)
Cash Flow Statement Sources of Funds 1.
Share issue
2.
Profit before taxation with interest added back
3.
Depreciation provision for the year
4.
Development rebate reserve
5.
Increase in secured medium and long-term borrowings for the project
6.
Other medium/long-term loans
7.
Increase in unsecured loans and deposits
8.
Increase in bank borrowings for working capital
9.
Increase in liabilities for deferred payment (including interest) to machinery suppliers
10. Sale of fixed assets 11. Sale of investments 12. Other income (indicate details) Total (A)
Disposition of Funds 1.
Capital expenditure for the project
2.
Other normal capital expenditure
3.
Increase in working capital*
4.
Decrease in secured medium and long-term borrowings - All India Institutions - SFCs - Banks
5.
Decrease in unsecured loans and deposits
6.
Decrease in bank borrowings for working capital
7.
Decrease in liabilities for deferred payments (including interest) to machinery suppliers
8.
Increase in investments in other companies
9.
Interest on term loans
10. Interest on bank borrowings for working capital 11. Taxation 12. Dividends - Equity - Preference 13. Other expenditure (indicate details) Total (B) - Opening balance of cash in hand and at bank - Net surplus/deficit (A-B) - Closing balance of cash in hand and at bank * Working capital here is defined as: (Current assets other than cash )(Current liabilities other than bank borrowings)
