Module 8: Financial Plan

BY T MANTANGA
 8.1 sources of a long term & short-term financing

 all businesses need finance to be able to start. The type of ownership will determine where funding will be
obtained
 E.g for a sole trader it will be the responsibility of the sole trader do provide the required start up, in a
partnership capital will be contributed by partners and in a company, shares will be sold.
 In most cases it is not always possible to obtain enough capital hence business may need to borrow money
in a form of a loan, we must types of capital (borrowed and Own)
 If a business uses own capital the reward is to share in the profit . In case of a sole trader and partnership
profit belongs to the owners , incase of a company the profit belongs to the company ansd shareholders
who contributed to capital receiving dividends
 Borrowed capital can be a long term loan (mortgage loan) nor a short term loan (bank over draft, trade
creditors) interest has to be paid on borrowed capital weather / not the enterprise shows profit
 8.1.1 fixed and working capital

ASSETS OWNER’S EQUITY LIABILITIES

Fixed assets (fixed capital/ non current Own capital (equity funding) Borrowed capital / Finance
assets) + Net Profit that is calculated by all income – all Non current liabilities
expenses (see a list of income accounts) • Loans
- Land & Building - Sales, Commission income, Rent income, • Mortgage Bonds
- Equipment Interest income
- Vehicles Less
Current assest Expense accounts Current Liabilities
• Trading stock Electricity ,purchases ,salaries, advertises, wages, • Bank overdraft
• Debtors/ Trade and other receivables interest in loan, interest on bank overdraft • Creditors / trade payables (suppler of
• Bank the enterprise
• Cash float Less
• Petty Cash Drawings (money/goods taken by the owner for
personal use
Working capital – it is generated from
current assests
Trande /receivables can be converted to
cash
All business need working capital to buy
stock and pay current liabilities
 Cot..

a. Fixed capital – this refers to the assets bought to be used in the enterprise with the aim of not reselling , they have a
lifelong span
b. Working Capital – all enterprises need cash available to pay its expenses e.g expenses and to repay liabilities , this cash is
generated from current assets when tock is sold, and debtors pay their debt and there is cash in the bank , if a business
does not have enough capital, it can be illiquid
c. Growth Capital - it is also know as expansion capital , a business needs tis type of capital to expand the business / to
reconstruct operations might be also needed to enter a new market
 8.1.2 the methods of obtaining equity capital

 Equity financing is the permanent funds of the business contributed by owners

 Equity financing has risk
 For a sole trader and partnership, they contribute their own capital into a business that they
are not sure it is going to succeed / not
 in a company they obtain equity finace by selling shares and shareholders receive dividends
on their own shares
 8.1.3 The facilities and instruments for borrowed capital

 Borrowed capital is money that business owes other people / entities

 Explain from the text- book pg 194
 8.2 Financial Management

 This sections deals with controlling ,leading, planning and organizing aspects of business
 It relates to obtaining , controlling and using funds
 Financial Management include the following aspects
 Read of the textbook
 8.2.1 Functions of Projected financial statements

 Enable an entrepreneur to know if their business will be financially viable or not

 They show how the business is expected to perfume or earn money over a period of time
 Enables business owners to calculate profit of the business based on projections
 Projecting profit is known as forecast , financial institutions require a details forecast before
they can provide you with financial aid
 Important financial statements in a
business
Financial Statement Content Purposes
Statement of Profit and Loss All expenses and income To calculate gross and net profit , looks at fin results of
a specific period
Determines profitability of the business
Cash Flow statement All receipts and payment Cal cash position of the business and determines
liquidity(ability to pay debts) of the business

Statement of changes in equity Records how capital and Only applicable for companies, it reflects movement in
reserves change during the reserves and capital
year
Statement of Financial Position All assets, Owner’s equity and Shows Financial position of the enterprise / business
liabilities and determines the solvability(when can a business
has more assets that liability of the business
 8.3: Creating projected financial statements

 A cash flow statement shows they flow of money in and out of the business
 It is concerned with receipts and payments
 It does not record credit , but is does record money from those received from those creditors
 If something is not in cash it cannot be recorded in the cash flow
 On the other hand, the projected cash flow is drafted to calculate the cash flow of the
business for a specific period
 When compiling a projected cashflow statement is taken as basis and amounts for purchases
and sales estimated
 Aspects of a cashflow

a. Bank Balance (Opening Balance) – it can be a favorable balance/an over –draft. When it is
an overdraft, the money must be in () , an closing balance of one month becomes the
opening balance of the next
b. Receipts – forecasted sales ; sales can include sales cash and credit sales , cash sales are
recorded in the month they are received in , debtors can pay within 30 days depending on
the policy of an enterprise , only when debtors pay the amounts can be recorded under
receipts and last it is other money received for the sale of assets etc.
c. Payments – they include monthly expenses ; other expenses can be for other things like
buying a new asset /paying of a loan and lastly it is estimated purchases as with sales
purchases can be paid immediately in cash / can buy on credit ; cash purchases will be
recorded in the month in which they are bought while payments will depend on the credit
purchase
 Cont ..

d. Closing balance of the bank account –

- Cash balance will be calculated at the end of each month
- The difference between opening balance in the bank if it is favorable you must +receipts –
payments
- If is starts with a debit balance it needs to be – from the receipts not added
- This closing balance becomes the opening balance of the following month
 Projected statement of Profit /Loss

 A profit and loss statement (Income statement) – is used to calculate gross and the net profit
 Only income and expenses are recorded
 The layout of an income statement will differ for a service undertaking, retailor and
manufacture
 It is drafted to draw a profit / loss for a specific period in the future it has the same format as
the ordinary statement of profit and loss but is based on aspects like sales forecast ,projected
income and projected sales
 A. Create a sales forecast and projected
income expenses

 There following information to draw up a projected statements if profit and Loss

 A sales forecast
 Other projected incomes
 Other projected expenses
 Various budgets can be drawn like sales budget and budgeted statement of profit or loss
 Budget statement is a financial plan showing possible expenses for a certain period
 Sales budget is calculation of possible sales for a certain period
b. Statement of Profit or Loss for the 3
types of business

Service Company Merchandising Manufacturing

company Company
• It does not carry • Merchandising carries • A manufacturing
inventory/ stock for the inventory for resale company carries
purpose of reselling it but known as purchases three types of
only for use.
• Whatever is not sold is inventory :
• E.g consumable items
such as spare parts kept as stock to be - Direct materials (Raw
sold for future materials)
- Work in process
inventory
- Finished Inventory
8.3.3 The difference with Statement or losss and
cash flow

Statement of Profit /Loss Cash Flow Statement

• It reflects the probability of the • The statement reflects liquidity of
business an enterprise (Purely about money)
• Consist of income and expenses • Consist of receipts and payments
• Income (cash sales and sales on • No credit transitions can be
credit) recorded
• Expenses paid or not must be • Only received payments or
recorded for the specific financial payments made
period • It shows all cash received also
• No statement of financial account financial position items are
appears on this statement included e.g money for an old
vehicle sold or paying back loan
 Unit 8.4: Determining the loan
requirements

 All business have start up pre operating cost that must be paid before the business strats
operating
 An entrep has to calculate hoe much money will be needed to fund these cost and
determine how much will be borrowed and how much will come from the owner