CHAPTER FIVE
5.0 FINANCIAL PLANNING
5.1 PRE-OPERATIONAL COST
These are the cost of expenses incurred before the start of the business operations.
items Amount
Licences 10000
Permits 2000
Deposit for water connection 4000
Raw materials 90000
Equipment 10000
Machineries 50000
Insurance 12000
Advertisement 2300
Telephone supply 1000
Total 181300
5.2WORKING CAPITAL
These is the difference between the current assets and current liabilities of a firm on a given date.
CURRENT ASSETS- CURRENT LIABILITIES= WORKING CAPITAL
ITEMS YEAR 1 KSH YEAR 2 KSH YEAR 3 KSH
Stock of raw materials 90000 35000 20000
Stock in progress 100000 70000 65000
Stock of Finished goods 75000 45000 35000
Cash in hand 100000 85000 70000
Cash at bank 10000000 9000000 800000
Debtors 345000 245000 250000
Total current Assets 10710000 1380000 8440000
Less: Current 4505000 235000 150500
Liabilities
Creditors 2500000 150500 100000
Estimated Working 3705000 994500 8189500
Capital
Assumptions:
1. All stock will be reducing in the subsequent years to minimize too much moneytied in stock.
2. Cash at bank will be increasing as customers will be encouraged to pay through the bank account or lipa na Mpesa accounts or paybill.
3. Debtors will be maintained to avoid defaulters.
5.3 PREPARATION OF CASH FLOW PROJECTION
This is a list of receipts (cash inflows) cash payments (outflows) and the net cash available at regular periods of time.
JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC
Cash
inflows
Opening 90000 100000 150000 140000 240231 80000 100002 111252 500000 89742 152478 450000
cash
Cash sales 120000 200000 250232 80000 240000 120000 241253 254136 150000 324000 452785 245362
Receipts 150000 100000 - - 50000 100000 450000 500127 678410 - 754210 987451
from 0
debtors
Loans 200000 - - - - - - - - - - -
received 0
Total cash 371000 400000 400232 220000 530231 300000 791255 865515 878410 413742 135947 1682813
inflows 0 3
Cash
outflow
(payment)
Payment 245960 - - - - - 145100 100000 - - - 500000
to
creditors
Purchases 500245 5000 10000 - - - - - - - - 240000
(cash)
Wages 211352 189000 189000 189000 189000 189000 189000 189000 189000 189000 189000 189000
and
salaries
Transport - - - - - - - - - - - -
Electricity 5000 3000 2500 3000 3124 3100 2400 2583 3000 4500 4000 3500
Loans 192115 192115 192115 192115 192115 192115 192115 192115 192115 192115 192115 192115
repayment
Total cash 860208 316015 320515 311015 311139 455515 410598 311015 312515 312015 312015 1051515
outflows
Net cash 284979 83985 79717 -91015 219092 -11115 335740 454917 567395 101227 104745 631298
brought 2 8
forward
5.4 Preparation of Proforma income statement and balance sheet.
5.4.1 projected income statement
Trading, profit and loss account. This shows the profits or loss made by a firm during a particular period.
YEAR 1 KSH YEAR 2 KSH YEAR 3 KSH
Sales 3450000 2450000 2345000
Less cost of goods sold 2000000 500000 100000
Gross Profit 1450000 1950000 2245000
Less Expenses 324658 340000 780000
Selling and distribution 1125342 16100000 1465000
General administration - - -
Salaries and wages 250000 250000 250000
Telephone - - -
Water 180 160 90
Electricity 5500 4500 3500
Stationery 1000 500 450
Interest on loan
Maintenance and repair 23000 37000 10000
Trading profit and loss
Less taxation (VAT- 234 234 234
16%)
Net profit/ after 11070428 15807606 1200960
taxation
5.4.2 Pro-forma balance sheet
This shows the assets liabilities and capital of the business at a given time.
PRO-FORMA BALANCE SHEET AS AT 20th June 2026
ASSETS AMOUNT KSH LIABILITIES AMOUNT KSH
Fixed assets capital 500000
computer 240000 Owners equity 200000
furniture 200000
Equipment 100320 Add: Net profit 189035
Total fixed assets 504320
Less drawings 55000
CURRENT ASSETS
stock 29000 LONG TERM
LIABILITIES
debtors 200000 Bank loan 250000
Cash in hand 860850
Cash at bank 405330 SHORT TERM
LIABILITY
creditor 299465
2539820 2539820
5.5CALCULATION OF BREAK-EVEN POINT
This is an attempt to determine the level of sales at which the business does not suffer a profit or a loss. It is that point where the sales are only enough t cover the
business fixed expenses. Once you reach the break-even point any extra sale that you make gives profit.
5.5.1CONTRIBUTION MARGIN
Contribution margin=sales-total variable costs
Year 1=3450000-1070428=2379572
Year 2=2450000-1580760=869240
5.5.2 CONTRIBUTION MARGIN %
Contribution margin * 100 = Contribution margin %
Sales
Year 1=2379572-10704280
Year 2 =869240-
5.5.3 Determine the total fixed costs
This are the operating expenses for one year
5.5.4 CALCULATE THE BREAK EVEN LEVEL OF SALES IN SHILLING.
5.5.5 break-even points
5.6 profitability ratios
5.6.1 gross profit margin
5.6.2 return on equity
5.6.3 net profit margin
5.6.4 return on assets
5.6.5 current ratio
5.7 desired financing
5.8 proposed capitalization
