5 Basics of business administra- 5.

1 Introduction to business plan

tion and business plan elaboration

Handout

Annex 2 Introduction to business plan

DO YOUR OWN BUSINESS PLAN

A Manual For The Entrepreneur

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CONTENTS

Introduction

How to use the Manual

Business Plan Format

Business Plan Guide Questions

Part I - GUIDE

Executive Summary
Marketing Plan
Production Plan
Organisation & Management Plan
Financial Plan

Part II - EXAMPLE (Case Study)

Executive Summary
Marketing Plan
Production Plan
Organisation & Management Plan
Financial Plan

Part III - WORKBOOK

Executive Summary
Marketing Plan
Production Plan
Organisation & Management Plan
Financial Plan

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DO YOUR OWN BUSINESS PLAN

A Manual For The Entrepreneur *

INTRODUCTION

There is a saying:

"If you want something done well,

then do it yourself!"

This is certainly the case when it comes to preparing your own business plan. As long as
you, the entrepreneur, are aware of the mechanics of how to put together your business proposal,
no one can do it better than you! When a business plan is being worked out, there are too many
big questions, the answers of which only the entrepreneur can know, that are far too important to
be left to someone else who claims that he can spare the entrepreneur the trouble of preparing his
own business plan.

In working out your own project, you have the opportunity to prepare a sound business
plan based on data which you yourself have collected and in which you have the utmost
confidence. As a result, your business plan is tailor-made to your own strengths and
weaknesses. You decide how much of your savings you are prepared to invest in the project,
how much income you need from the business, who your clients will be, and the technical
process which is right for your level of skills, resources and market size.

Some extra work is required for doing your own business plan. The people who have to
be contacted and from whom you will want to gather data will all be either regular customers of
your products, or regular suppliers of raw materials or equipment.

This Manual is intended to help you in organising the information you need to assemble
a sound proposal that you can take to the bank for a loan or that you feel confident in carrying
out.

* Revised by Arnulfo F Itao with the assistance of Binod Shrestha, Anwarul AzimSyed,
Ferry Yahya and Swarna Kodagoda, based on the original version prepared by Rainer
Kolshorn and James Tomecko and similar work by the Kenya Institute of Management.

HOW TO USE THE MANUAL

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The Manual is divided into three parts:

PART I _ contains the Guide in preparing the Business Plan.

PART II _ contains the Example of a Soap Manufacturing Project.

PART III _ contains the Workbook in formulating the Business Plan.

Each part has four sections corresponding to the four aspects of the Business Plan - i.e.,
marketing plan, production plan, organisation & management plan, and finance plan. The
four aspects comprise the various functions of the business, that is, marketing, production,
organisation & management, and finance.

The Business Plan starts with an Executive Summary which gives a brief highlight of
the project and the proponent (the entrepreneur).

In each section guidelines are given on questions like, "how to arrive at your estimated
market share", "how to determine your minimum production level", etc. After the guidelines,
each section has an example of how the manual can be applied using the case of a small soap
manufacturer.

If you answer the questions step by step, you will be able to prepare a sound, logical and
realistic Business Plan yourself!

Bankers or other potential investors do not want to be presented with only two pages of
figures when they evaluate your project. They want to know how thoroughly you have
researched your project because ultimately they have to trust you for its implementation. By
answering the questions in this manual, you will find that you are well prepared to defend your
Business Plan based on an intimate knowledge of your project.

The Workbook contains all the step-by-step questions given in the Manual, followed by
open spaces and appropriate forms for you to fill out with the details of your Business Plan. If
you consult the Manual instructions and study the example under each section, it will not be
difficult for you to complete the Workbook. And voila! You have made your own Business Plan.

Before starting to use this Manual, read it through carefully! You will find that the
questions logically follow each other. For example, one of your most important decisions will be
identifying your production capacity. This is done by first determining the total quantity of the
product being sold in your market area, then estimating what share of this total quantity you can
capture using effective marketing strategies and finally, based on this estimate, you may arrive at
your production capacity.

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Next describe your production process as clearly as possible. This gives the evaluator a
good idea of why you need certain equipment or why certain skills are required. If there are
alternative processes, explain why you have chosen the one.

Then estimate what raw materials, labour and other overhead expenses will be needed for
production. After completing the sections on marketing and production, you will be in a position
to estimate the marketing and production cost of your product. Then, add your administration
cost (e.g., manager's salary, secretary's salary, communications, office supplies, depreciation of
office equipment, etc.) to determine the total product cost.

If the product cost seems reasonable, carry on to the section on finance. If you borrow
funds, you must provide for interest expense as part of the product cost. If it appears too
expensive after you have added your profit margin, then see where some expenses can be
reduced. For example: do you need all those workers or can their productivity be increased?
Can overhead expenses be reduced?

The final section on finance gives you a reasonably accurate estimate of your profit, your
minimum level of production, if you want to avoid making a loss (break-even), the return on
investment (ROI) of the project, etc.

This section will help you decide whether you should proceed with the project. Does it
offer you a sufficient return for the risk you take, your time and energy? Will it be difficult to get
the necessary loan? Do you have adequate collateral to secure your loan? Do you have enough
capital - whether cash or in kind (land, building, machinery, etc.) required by the bank as your
commitment to the project? Can minimum production level be maintained? Will your money get
a higher rate of return if deposited in the bank or if put into the business? How much higher is it
compared to bank interest for deposit and loans?

A Word of Caution! The Guide contains more elaborate explanations, formats or

calculations which are not found in the Example. Similarly, the Workbook contains several
figures indicating the need for a table, chart or drawing which are not found in the Example. The
reason is that we have attempted to broaden the usefulness of this Manual to fit various sizes of
manufacturing industries, that is, from micro to small and medium enterprises (MSMEs).
Admittedly, our case study as found in the Example belongs more appropriately to the first
category.

A Word on the Style! As much as possible, the second person "you" is used because this
Manual is addressed to YOU - the entrepreneur.

A Word on Gender! For convenience and uniformity, the masculine gender is used
throughout.

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BUSINESS PLAN

FORMAT

EXECUTIVE SUMMARY

1. Brief Description of the Project

2. Brief Profile of the Entrepreneur

3. Project's Contributions to the Economy

Section 1
MARKETING PLAN

1.1 Description of the Product

1.2 Comparison of the Product with Its Competitors'

1.3 Location

1.4 Market Area

1.5 Main Customers

1.6 Total Demand

1.7 Market Share

1.8 Selling Price

1.9 Sales Forecast

1.10 Promotional Measures

1.11 Marketing Strategy

1.12 Marketing Budget

Section 2
PRODUCTION PLAN

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2.1 Production Process

2.2 Fixed Capital

2.3 Life of Fixed Capital

2.4 Maintenance and Repairs

2.5 Sources of Equipment

2.6 Planned Capacity

2.7 Future Capacity

2.8 Terms and Conditions of Purchase of Equipment

2.9 Factory Location and Layout

2.10 Raw Materials Needed

2.11 Cost of Raw Materials

2.12 Raw Materials Availability

2.13 Labour

2.14 Cost of Labour

2.15 Labour Availability

2.16 Labour Productivity

2.17 Factory Overhead Expenses

2.18 Production Cost

Section 3
ORGANISATION & MANAGEMENT PLAN

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3.1 Form of Business

3.2 Organisational Structure

3.3 Business Experience and Qualifications of the Entrepreneur

3.4 Pre-Operating Activities

3.5 Pre-Operating Expenses

3.6 Office Equipment

3.7 Administrative Expenses

Section 4
FINANCIAL PLAN

4.1 Project Cost

4.2 Financing Plan and Loan Requirement

4.3 Security for Loan

4.4 Profit and Loss Statement

4.5 Cash Flow Statement

4.6 Balance Sheet

4.7 Loan Repayment Schedule

4.8 Break-even Point (BEP)

4.9 Return on Investment (ROI)

4.10 Financial Analysis

BUSINESS PLAN

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GUIDE QUESTIONS

EXECUTIVE SUMMARY

1. What is the nature of the project?

2. What are the entrepreneur's competencies and qualifications?

3. What are the project's contributions to the local and national economy?

Section 1
MARKETING PLAN

1.1 What is the product?

1.2 How does it compare in quality and price with its competitors?

1.3 Where will the business be located?

1.4 What geographical areas will be covered by the project?

1.5 Within the market area, to whom will the business sell its products?

1.6 Is it possible to estimate how much of the product is currently being sold?

1.7 What share or percent of this market can be captured by the business?

1.8 What is the selling price of the product?

1.9 How much of the product will be sold?

1.10 What promotional measures will be used to sell the product?

1.11 What marketing strategy is needed to ensure that sales forecasts are achieved?

1.12 How much do you need to promote and distribute your product?

Section 2
PRODUCTION PLAN

2.1 What is the production process?

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2.2 What buildings and machinery (fixed assets) are needed and what will be their cost?

2.3 What is the useful life of the building and machinery?

2.4 How will maintenance be done and are spare parts available locally?

2.5 When and where can the machinery be obtained?

2.6 How much capacity will be used?

2.7 What are the plans for using spare capacity?

2.8 When and how will the machinery be paid for?

2.9 Where will the factory be located and how will the factory be arranged?

2.10 How much raw materials are required?

2.11 How much will the raw materials cost?

2.12 What are the sources of raw materials? Are they available throughout the year?

2.13 How many direct and indirect labour are needed and what skills should they have?

2.14 What will be the cost of labour?

2.15 Are workers available throughout the year? If not, what effect will this have on
production?

2.16 How will the workers be motivated?

2.17 What factory overhead expenses are involved?

2.18 What is the production cost per unit?

Section 3
ORGANISATION & MANAGEMENT PLAN

3.1 How will the business be organised?

3.2 How will the business be managed and operated?

3.3 What is the business experience and qualifications of the entrepreneur?

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3.4 What pre-operating activities must be undertaken before the business can operate?

3.5 What pre-operating expenses will be incurred?

3.6 What fixed assets will be required for the office?

3.7 What administrative cost will be incurred?

Section 4
FINANCIAL PLAN

4.1 What is the total capital requirement?

4.2 Is a loan needed? What will be the equity contribution of the entrepreneur? And how
much?

4.3 What security (collateral) can be given to the bank?

4.4 What does the Profit and Loss Statement indicate?

4.5 What does the Cash Flow Statement indicate?

4.6 What does the Balance Sheet indicate?

4.7 What is the loan repayment schedule?

4.8 What is the break-even point (BEP)?

4.9 What is the return on investment (ROI)?

4.10 Is the project feasible?

PART I - Guide

EXECUTIVE SUMMARY

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<The Executive Summary, although appearing first in the order of presentation in the
Business Plan, is actually the last to be prepared, that is, after the four sections of the business
plan (marketing, production, organisation & management, and finance) have been completed.
It should be short (not more than two pages single space) but loaded with vital information
about the project and the proponent.>

1. What is the nature of the project?

Briefly describe the project - the product, market, location, legal form, plan of operation
and financing plan.

2. What are the entrepreneur's competencies and qualifications?

Give a brief introduction of yourself as an entrepreneur, your background, your past track
record, business experience and training, especially mention those skills and qualities
needed by or related to the project, and how you plan to use this knowledge and skills
into the business, etc.

3. What are the project's contributions to the local and national economy?

Describe the important socio-economic and developmental contributions of the proposed

project to the local and/or national economy. These contributions should be significant
factors and priority concerns of the government, banks and society in general. These
contributions may include employment generation, utilisation of local skills and
materials, income generation, import substitution, export earnings, etc.

PART I - Guide

Section 1
MARKETING PLAN

1.1 What is the product?

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Give a short description of the product, its size, colour, shape and the range of products to
be offered. Describe product features, uses and benefits, whether it is a new or an
existing product.

1.2 How does it compare in quality and price with its competitors?

In answering this question, determine what will make the product unique in the market.
Will it be of better quality than what is currently available, or will the price be
significantly different to make it easier to sell? What other features will make it different
from competitors' products?

1.3 Where will the business be located?

Location of the business is essential to either reduce costs, or increase the chances of
customers stopping at the business to look at your products or at least make inquiries. If
the business is retail or service oriented, it must be near the market. If it is production
oriented, it may be better to be closer to its raw material sources or near infrastructure
facilities (e.g., port), transport and utilities (e.g., power) centres.

The important factors to consider in location are:

- proximity to essential raw materials

- proximity to markets and distribution channels

- availability of transport facilities

- availability of efficient and cheap skilled labour

- existence of related industries (forward/backward linkages)

- infrastructure facilities (e.g., road, power, port, etc.)

- communication facilities (e.g., post office, telephone, fax, telex, etc.)

Good location is one of the most crucial factors in market development, hence choice of
location should therefore be carefully considered. Location should also be differentiated
in terms of marketing outlets or factory location. In most small businesses, marketing
outlet and factory may refer to one and the same location.

1.4 What geographical areas will be covered by the project?

Determining the geographical coverage (that is, where to market the product) depends
very much on the nature of the product; how well it lends itself to transport and

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distribution; the size of the market in different localities; the presence of strong
competitors in the areas under consideration; your willingness to travel and, of course, on
existing contacts or channels of distribution you are familiar with.

In general, it is easier to deal with a limited market area, since travel time and distribution
costs can be kept to a minimum.

1.5 Within the market area, to whom will the business sell its products?

Here we are really talking about a specific target group or market segments among the
population, within the specified market area you have chosen, to whom you will aim to
sell your products. Identify these customers as clearly as possible (e.g., their
characteristics and profile in terms of age, sex, income, buying practices, consumption
pattern, etc.) in order to ensure that the product does indeed suit their taste, needs, wants,
taste, income, lifestyle, etc.

Will you sell to wholesalers, retailers, and if so, what are the consequences? If you plan
to have a retail outlet, choice of location is critical.

1.6 Is it possible to estimate how much of the product is currently being sold?

This estimate should be possible to do in a number of ways. Basically, the approach is to

move from the general to the particular. For example, you can start by estimating
consumption, usage or sales of the product per head of the population in your market
area.

Then, one by one eliminate certain segments (specific groups categorised by age,
income, location, sex, habits, etc.) of the population who may not be your consumers so
that, in the end, a reasonable figure can be assumed to be correct. If possible, it is good to
check some statistics, if they are available. If you cannot avail of any reliable statistics
(secondary data), it may be better to make a simple and low-cost sample survey, i.e.,
gather firsthand or primary data. For example, if you know how many shops there are
which sell your or similar products, and if you question a few of them regarding their
sales, you can estimate the total sales of the product.

Market Survey Checklists

The following is a series of checklists which can guide you in your interview with
wholesalers, retailers, and consumers (people who use the product) or customers (people
who buy your product). The questions are intended to be illustrative and you should learn
how to begin your interview (by building rapport with your interviewees so that they will
open up and not feel suspicious or threatened) and pose your questions diplomatically,
politely and clearly to get the desired information and accurate answers.

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If the questions are adequately answered, you can make a preliminary estimate of the
total demand in your market area and the share of the market which you can realistically
capture, given an effective marketing strategy. If similar products are distributed mainly
by wholesalers and retailers, conducting such a survey is really the first step in
establishing a relationship with your customers and finding out their needs.

There are two main reasons for doing the survey:

a) Accurate collection of information so that a reliable level of sales and production

can be forecasted;

b) Establishment of good relations with your own potential customers or buyers.

I. Wholesalers/Importers' Checklist

Most consumer products such as biscuits, sugar, toothpaste, matches, etc., find their way
to the consumers through wholesalers who purchase the goods in bulk from a factory or
distributors and then sell them in smaller quantities to grocery stores and retail shops
(customers).

Since there are usually few wholesalers and many retailers, it is often best to start your
market survey by seeing the wholesalers. Once you have defined your market area, try
and locate all the wholesalers who supply your area and ask the following questions:

1) How many wholesalers are there in your market area? What are their names and
where are their locations?

2) What market areas does each wholesaler cover?

3) How much of your product does each sell per year? Is it increasing every year? If
yes, by how much?

4) Are there seasonal fluctuations?

For example: 1 2 3 4 5 6 7 8 10 11 12 months

High

Medium

Low

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5) What about the extent of competition? Are they large in size, are their product
features the same, what are their quality standards? What are their marketing
practices?

6) What about product improvements, i.e., do they think the market needs some new
design, more varieties, better features, new product specifications?

7) What are their selling price of your product?

8) At what price do they buy it?

9) What is the length of credit extended to them by their suppliers (one week, one
month?), if any?

10) Assuming your product is of a suitable quality and priced competitively, how
much of your product would they take as a sample order?

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II. Retailers' Checklist

Retail shops are the last link between producers and consumers. Ultimately, they make
the final sale to the public. Their proximity to the buyers makes them valuable sources of
information on what people actually want and buy.

For example, if a person buys ink which turns out to be of poor quality, then the customer
will complain to the shop from where he made the purchase, rather than going to the
factory. For this reason, retailers are in a strategic position to identify gaps in the market,
particularly between what his customers demand and what his wholesalers can supply.
Some creative retailers may be able to give you new product ideas that could also be
made in your factory.

The objectives of interviewing retailers are:

a) To cross-check data provided by wholesalers;

b) To learn about the needs, wants, taste, buying habits, etc., of the consumers;

c) To look for potential new products;

d) To learn how to position your product as against your competitors' products;

e) To learn how to market your product more effectively;

f) To help identify promotional measures that will be useful in selling the

product (e.g., display boards, give-aways, samples, etc.);

g) To help formulate the marketing strategy of the business.

Some questions which may be asked from the retailer:

1) How much of the product does he sell in a year?

2) How many competitors does he have in his neighbourhood?

3) Does he experience any seasonal fluctuation in sales?

4) From what wholesaler or manufacturer does he buy the product?

5) Is he given any credit by his suppliers?

6) If he is given credit for the product, for how long is the credit given?

7) Does he sell on wholesale anywhere, if so, where?

8) What is his purchase price for the product?

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9) What is his selling price for the product?

10) Does he have any ideas whether his customers would like any changes or
improvements in the product?

11) Does he buy the product cash or on credit?

12) Does he sell on commission?

III. Customers' or Consumers' Checklist

Even if you have interviewed wholesalers and retailers, it is important to discuss market
acceptance with customers (who buy the product) and consumers (who use the product).
Their feedback is very useful, either to cross-check previously collected opinions or to
stimulate new ideas that neither of the other two groups of interviewees have touched on
or captured.

In particular, if your product is a capital good (e.g., machinery), it is necessary to talk to

consumers as they normally purchase directly from the factory. Some questions which
can be asked from customers and consumers are:

1) Why did you buy this product?

2) When (What month) did you buy it?

3) How often do you buy this product?

4) Will you be needing more of this product in future? How many?

5) How much did you pay for it?

6) Are you satisfied with it?

7) Would you like to see any changes or improvements?

8) From where did you buy it (locality), from whom?

9) Why did you buy it from this particular supplier?

You must have a record of the profile of your interviewees (wholesalers, retailers,
consumers) such as age, occupation, income, buying habits, sex, consumption pattern, etc. as this
information will be helpful in analysing and describing your market.

1.7 What share or percent of this market can be captured by the business?

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This is always a difficult question to answer precisely, since much depends on your
ability as an entrepreneur to sell your product, your network, the effectiveness of your
marketing strategy and your aggressiveness in pushing the product combined with
business common sense. It also depends on the extent and strength of competition.
However, some guidelines can be given. If you have done your market survey properly,
you will know the following information about your competitors:

a) whether there are few or many competitors;

b) whether they are large or small in size;

c) whether their product features are similar or not similar to one another;

d) whether their product features are similar or not similar to yours.

The following decision guide may help in processing this information to make an
estimate of your market share.

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DECISION GUIDE

Number of Their Size * Their Product Market Share (in %)

Competitors Features

Many Large Similar 0 - 2,5

Few Large Similar 0 - 2,5

One Large Similar 0 - 5

Many Large Dissimilar 0 - 5

Few Large Dissimilar 5 - 10

Many Small Similar 5 - 10

Few Small Similar 10 - 15

Many Small Dissimilar 10 - 15

One Large Dissimilar 10 - 15

Few Small Dissimilar 20 - 30

One Small Similar 20 - 50

One Small Dissimilar 40 - 80

No competitor 100

* It is assumed that your business will be in the "small" category when entering the
market.

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1.8 How much of the product will be sold?

Now that you have estimated the market share you can realistically capture, you make an
estimate of your targeted sales (sales forecast), that is, every month for the first year and
yearly for the next five years. The first annual sales forecast is generally a fraction of the
estimated market share and could be anywhere from 60 to 80% of the market share in the
beginning. This is to give allowance for some errors in estimating the market.

1.9 What is the selling price of the product?

There are three common ways of determining the selling price of your product. These
are:

a) The "Cost-Plus Method"

This is done by adding a reasonable profit margin (say 20% to the final total
product cost (i.e., marketing cost plus production cost plus administration cost,
plus finance cost). The final product cost per unit is determined by dividing the
total product cost by the number of units produced. To this figure you may add a
profit margin.

b) The "Comparative Method"

This method compares your product with others in the market and then, based on your
product's quality and other features, you may fix your price lower, higher or the same as
your competitors'.

c) "What the Market Will Bear Method"

This method is based on supply and demand of the product. For instance, if there is a
scarcity of the product in the market (sellers' market), you can set your selling price high,
hence your profit margin could be higher. Similarly, if there is a surplus of the product in
the market (buyers' market), you may be forced to lower your price, and consequently
your profit margin. (Two alternatives to avoid reducing profit margin are: (1) to reduce
the product cost by identifying which areas under marketing, production, administration
and finance can be reduced), and (2) to identify other market segments who can afford to
buy at the original price).

In practice, all three methods should be used from time to time in any business, but in
general and especially when starting a business, it is safer to use the "Cost-Plus Method".
It is also a good business strategy to anticipate your competitors' reaction to your pricing
strategy.

1.10 What promotional measures will be used to sell the product?

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Promotion is one of the most neglected aspects of marketing a product. Promotion is

necessary to entice and convince buyers to purchase your product and not your
competitors'. Promotion is generally divided into advertising, sales promotion, publicity
and personal selling. Some of these measures are:

- advertisements on radio, newspapers, magazines, trade journals or, if

appropriate on television,

- volume discount (reduced prices when selling in bulk),

- handbills distribution,

- prompt, regular, courteous and efficient service to your clients,

- good merchandising ensuring proper display of your product on the shelves of

your market outlets,

- special credit facilities to regular customers,

- posters,

- billboards,

- signboards,

- free samples,

- free trial,

- press release,

- buy one - take one,

- raffles,

- coupons,

- sponsorship of local shows, festivals,

- participation in trade fairs and exhibits,

- personal selling.

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One word of caution on promotional measures. These activities cost money to your
business, so be sure that for every promotional measure adopted, there is a foreseeable
increase in sales. Without a justifiable increase in sales, cost will escalate, hence
increasing the unit cost of the product. Make sure to include these costs in your
marketing budget.

1.11 What marketing strategy is needed to ensure that sales forecasts are achieved?

Formulating a marketing strategy means proper planning, balancing and integration of

the business's product strategy, pricing strategy, distribution strategy and promotion
strategy. In order to market effectively, you must identify your market, know your
product and study your competitors. You also have to spend some amount for promotion,
price your products correctly and distribute them to your retailers and/or consumers
effectively and efficiently. You should not assume that because your product is good that
customers will automatically buy your product.

1.12 How much do you need to promote and distribute your product?

You must have a marketing budget that includes your marketing cost such as for
promotion, distribution and salaries of your sales force, if any.

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PART I - Guide

Section 2
PRODUCTION PLAN

2.1 What is the production process?

In order to find out what costs (labour, raw materials and overheads) are involved in
production, it is useful to follow the whole production process and to identify how the
raw materials are received and gradually, step by step, transformed through various
processes (e.g., cutting, mixing, assembling, finishing, packaging, etc.) into a finished
product. Description of the process need not be a lengthy explanation, but should cover
all the major operations. A process flow chart (see Table 2.1 for example) is a useful tool
to depict the production process. This will also clarify how many workers are required at
each stage and what skills are needed.

2.2 What building and machinery (fixed assets) are needed and what will be their
cost?

Identify these items carefully and estimate their cost accurately. If the requirements are
over-estimated, the results can either be:

a) Too much production occurs and stocks are built up - this costs money and ties
up capital uselessly;

b) Excess capacity means that you are investing in some assets or paying interest on
building and equipment that are not giving you any return. This will also increase
cost in the long run by having higher depreciation than necessary (in our example
we are assuming that Mr Rainero owns the land and constructs the building);

c) There is also the possibility that the project may not be financed at all
because it appears too expensive.

In general, it is better to start on a very modest scale with a small building, or even a
rented space, and the minimum essential machinery. Remember, if the demand for your
product exceeds the 8-hour capacity (one shift) of the equipment, an extra shift can be
added at a later stage, or you can operate on overtime after the regular shift. Especially
when starting a business, proceed with capital purchases with extreme caution, and only
when the market is secured.

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Regarding machine capacity, the supplier should give the right information to the
entrepreneur. In many cases, suppliers tend to over-rate the capacity and efficiency of
their machinery; so do not count on the machines working at 100% rated capacity. By
determining the realistic capacity of each machine, it is then possible to estimate
accurately the proper balancing of the machines and men, i.e., how many of each tools or
machines are required, and correspondingly the workers and skills required to operate the
machines, to ensure a smooth and efficient production operation.

Determining the costs of building and machinery should be relatively easy since every
entrepreneur can find out this information from machinery suppliers. Again, you should
be cautious not to build fancy buildings or obtain equipment which are too modern or too
sophisticated to operate and maintain. Machinery salesmen usually try to sell the most
expensive or most modern equipment first, so be aware of what you need and can afford,
and do not be taken in to purchase equipment which may not be essential or even suitable
to your scale of production, especially in the initial stages of your operation.

Be aware that there may be a wide range of technology options ranging from labour-
intensive (more labour is required relative to the number of machines or investment in
machines) to capital-intensive (more machines are used or higher investment in machines
relative to the labour required).

If quality labour supply can be assured, it is often wise to use labour-intensive technology
since your factory will be less dependent on its machines which can break down at any
time, suffer from power failure, and be idle for lengthy periods. If, on the other hand,
labour is troublesome and unreliable due to seasonal availability, a more capital-intensive
approach on a modest scale may be more practical. However, if workers are properly
motivated, they can be encouraged to become more reliable.

Finally, list all the land and improvements, building, furniture and fixture, machinery and
factory equipment including installation cost, giving their size, capacities and cost, to
arrive at the total cost of fixed assets.

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2.3 What is the useful life of the building and machinery?

The answer will depend on the maker of the building (i.e., whether made of wood,
concrete structure, etc.) and machinery and on how much you use your fixed assets. To
arrive at an annual depreciation charge, deduct the scrap value at the end of its expected
life, and then divide the value of the asset by the number of years of its productive life. If
it has no scrap value, simply divide the value by the number of years.

In your country, the Tax Office publishes general rates of depreciation. In many
countries, the general practice is as follows, although some variations may exist:

Fixed Asset Life Annual Depreciation

Machinery 10 years 10%

Building 20 years 5%

Furniture 5 years 20%

Vehicle 7 years 15%

2.4 How will maintenance be done and are spare parts available locally?

It makes little sense to import equipment which, although it may be more dependable,
may result in long work stoppages while you wait for the arrival of spare parts from
abroad. Maintenance service and spare parts should be available locally to ensure
continuous production. Do not forget to estimate the cost of maintenance and spares as
this will form part of production cost. Maintenance cost is part of factory overhead
expenses.

2.5 When and where can the machinery be obtained?

It is necessary to check with machinery suppliers. Estimate accurately the delivery time
of the machinery as this is vital in preparing your pre-operating schedule. Also, do not
forget to include in the cost of the machinery, the transport cost to the factory, the import
duty (if imported), insurance up to the point of installation, and installation charges, if
any.

2.6 How much capacity will be utilised?

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100% capacity utilisation normally means that the equipment is working eight hours a
day, six days a week. Most factories work on an 8-hour on one shift basis and many of
them use their equipment for only a portion of this time. Seasonal fluctuations in capacity
utilisation should be accounted for. A good example is a brick factory where operation
may run continuously for 24 hours a day during the construction season and may be shut
down for six months due to monsoon rains.

2.7 What are the plans for using spare capacity?

Machines and equipment should be used as much as possible. This keeps the workers in a
steady rhythm and the equipment in good running order. During periods where low
capacity utilisation is foreseen, attempts should be made to ensure that other works (e.g.,
product improvement and development) are undertaken which may not at first be directly
related to the main production but which later on may develop into a new product.

2.8 When and how will the machinery be paid for?

Some machinery suppliers are prepared to sell their equipment on hire-purchase scheme.
This spreads the cost of the machinery over a longer period of time, resulting in higher
total costs, but it enables the business to have greater cash liquidity or lower investment
requirement during the start up period. Before purchasing the equipment, find out the
terms of sale, i.e., whether cash, credit, or hire-purchase, the length of payment and other
conditions like guarantee, after-sales service, training of operators, etc.

2.9 Where will the factory be located and how will the factory be arranged?

Almost always in small industries, the factory has the same location as the business
address.

Equally important is to determine the floor space required by the business (for
production, office, store room, toilet, etc.) and more importantly, how the factory space is
going to be laid out in terms of the arrangement of the machines and equipment. To
answer this question, it is essential that you must know the production process and the
machines/equipment needed for each process so that, as much as possible, you can
arrange the machines according to the production flow.

You can also determine the size of the machines and the space it will occupy (including
allowance for movement). A plant layout will be very useful for this purpose. You can
arrange your machines in a straight line or a U-shape.

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2.10 How much raw materials are required?

Now that you have a good idea of the production level you want to achieve, find out the
type, quality and quantity of raw materials needed. Find out the input-output ratio or
conversion ratio, e.g., how many kg. of oil would be required to produce 120 kg of soap
per day. These should be specified according to square meter, kg, ton, pieces, etc., which
will be used per month.

2.11 How much will the raw materials cost?

After determining the quality and quantity of raw materials needed, find out their unit
costs (i.e., LC2,000 per ton, LC15 per square meter, etc.) and list these costs next to the
material and prepare a list of average monthly raw materials requirement and their costs.
Include duties and relevant taxes, if raw materials are imported.

2.12 What are the sources of raw materials? Are they available throughout the year?

In sourcing raw materials, at least three factors are critical. Firstly, the price should be as
low as possible. Secondly, their source should be as close as possible to the production
site to reduce transport costs. Thirdly, the source should be reliable.

If raw materials are not available throughout the year, at least two alternatives are
possible - either the factory will have to reduce production, or it must build up a stock of
raw materials when they are plentiful so that production can be continuous. If the latter is
chosen, additional working capital is required and should be included in the calculation
of your cash needs and determination of your project's investment requirement so that the
business can cope with this situation. For example, think of the problem to obtain fruits
for a fruit processing plant during off-season!

2.13 How many direct and indirect labour are needed and what skills should they
have?

Labour in a factory is divided into direct and indirect. Direct labourers are those who are
directly or intimately involved in production. Indirect labourers are all those other
workers who facilitate production such as utility men, foremen, maintenance workers,
among others, who are not directly involved in production.

To determine the number and type of direct labourers needed, break down their skills into
three categories: skilled, semi-skilled and unskilled. Their salary scales should be
calculated accordingly.

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2.14 What will be the cost of labour?

Estimate how much each worker (from the production supervisor/foreman down to the
production worker, maintenance man, utility man, for example) should receive on a
monthly basis. Labour cost should include effective total labour cost to cover basic
salary, wage, fringe benefits, paid leaves, free meals, social and medical insurance, etc. In
some cases, direct labour will be paid according to piece work. If this is the case, estimate
the production output of the worker and multiply this number by the piece rate (LC).

2.15 Are workers available throughout the year? If not, what effect will this have on
production?

Many factory workers in small businesses receive low wages and, therefore, supplement
their income with agricultural or other extra jobs outside. If this is the case, the business
must be ready to cope with such a situation and, either pay its workers competitive or a
higher wage/salary/piece rate, or recruit new or temporary workers during this time, or
even be prepared to reduce production. Whatever course of action is decided upon, it
must be accounted for in determining the production schedule.

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2.16 How will the workers be motivated?

Workers can be motivated in a number of ways: humane treatment, good working

environment, increased responsibility, other incentives (e.g., profit sharing, awards for
deserving workers, bonus and providing facilities, such as meal and snack allowance,
transport allowance, medical allowance, lodging, etc.) If these are given, their costs
should be calculated and included in computing actual labour cost or as overheads.

2.17 What factory overhead expenses are incurred?

Factory overhead expenses include such costs as rent of factory space, maintenance and
repair cost, depreciation of factory machines and equipment, cost of utilities (water,
electricity, salary of supervisors, cleaners and maintenance men. In the case of electricity,
if it is used in large quantity and the amount used depends directly on the level of
production, it should be treated as a raw material rather than as an overhead. But if
electricity is only used for lighting and general purposes, then treat it as overhead.

Only the costs, such as those listed above, which do not change or vary much according
to the level of production, are treated under overheads.

2.18 What is the production cost per unit?

Production cost includes the cost of direct raw materials, direct labour and factory
overheads. Two methods are mentioned here to calculate production cost per unit, as
follows:

Method 1

To arrive at the production cost per unit, add the monthly cost of direct raw materials
(step 2.11), direct labour (step 2.14), overhead expenses (step 2.17), then divide this
amount by the number of units produced during the month (step 2.6).

Method 2

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It is unfortunate that in real life costing is not quite as simple as given above. The
complication arises from the fact that few small industries produce only one item for sale.
Whereas it may be easy to identify the raw material cost in any one item, estimating the
labour content or allocating a portion of the overheads to a particular item presents
another problem.

Allocating Labour Costs:

To assign direct labour cost to any product, follow this simple rule:

Multiply the hourly direct labour charge (LC) by the number of hours of direct labour
that goes into manufacturing the product.

The hourly direct labour charge is derived by dividing the total direct labour cost by the
number of hours of direct labour available.

For example, if 8 direct labourers work 8 hours a day, 6 days a week, for 4 weeks, then
the total hours of direct labour available per month is:

8 workers x 8 hrs/day x 6 days/week x 4 weeks = 1,536 hrs

If the total cost of these direct labourers is LC4,000, then the hourly rate (LC) is:

Total direct labour cost of LC4,000/1,536 hours available = LC2.60 per direct labour
hour (Hourly rate)

Example:

If a chair requires 6 hours of direct labour to make, then the direct labour cost of that
chair is:

Hourly rate of LC2.60 x 6 hours = LC15.60

Allocating Overhead Expenses:

There are two ways of allocating overheads. These are:

a) by relating overheads to labour hours,

b) by allocating them in relation to sales.

The first and preferred way is to relate overhead expenses to the hours of direct labour
involved in making the product. This can be done by dividing total overhead expenses by
direct labour hours available and then multiplying this amount by the number of hours it
takes to make the product.

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Example:

If total overhead expenses is LC3,000 and total direct labour hours is 1,536, then the
hourly overhead rate is:

Total overheads of LC3,000/1536 total hours = LC1.95 per direct labour hour (Hourly
overhead rate)

Then, multiply the hourly overhead rate by the number of direct labour hours used to
make the product:

Hourly Overhead Rate of LC1.95 x 6 hours to make one chair = LC11.70

This figure can then be added to the raw material and direct labour charge to arrive at the
unit production cost of the product.

The second method of allocating overheads is according to % of sales of that particular

product in relation to total sales. If, for example, a furniture maker produces the
following products:

Products Unit Selling Sales per Month % of Sales

Price (LC)

20 chairs @ LC 200 4,000 20%

10 beds @ LC 400 4,000 20%

12 tables @ LC 1,000 12,000 60%

Total Sales LC20,000 100%

Total sales is LC20,000 of which 20% is chairs, 20% beds, and 60% tables.

Therefore, 20% of overheads could be allocated to chairs.

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The overhead charge per chair can then be calculated as follows:

Total Overheads for 20 chairs is:

Total Overheads per month of LC3,000 x 20% = LC600

The overhead charge for each chair is, therefore, LC30:

LC600/20 chairs = LC30

Similarly, for beds, it is:

LC600/10 beds = LC60

And for tables:

LC600/12 tables = LC150

After having determined the raw material cost per unit, the direct labour cost per unit and
the overhead rate per unit, the unit production cost can be calculated by adding all of
these three cost components:

+ Unit Raw Material Cost

+ Unit Direct Labour Cost
+ Unit Factory Overhead Cost

= Unit Production Cost

Alternatively, unit production cost can be derived from the following calculation:

+ Total Raw Material Cost

+ Total Direct Labour Cost
+ Total Overhead Cost
= Total Production Cost divided by Total Production Volume (e.g., kg or units)

= Unit Production Cost

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PART I - Guide

Section 3
ORGANISATION & MANAGEMENT PLAN

3.1 How will the business be organised?

There are four common forms of business organisation: (1) sole proprietorship, (2)
partnership, (3) private limited company (closed corporation), and (4) public limited
company (public corporation).

Most small businesses, however, are registered as sole proprietorship, meaning that the
owner-manager or the entrepreneur is the owner as well as the general manager of his
business.

Partnership involves co-ownership of the business by one or a few partners who may be a
family member or close friends. Partners may bring into the business their capital or their
expertise, or both.

Private limited company involves ownership of the business by a limited number of

people (usually relatives and close friends) who band themselves for purposes of the
business. Ownership is based on shareholding which can be transferred to other
shareholders with the consent of the existing owners.

Public limited company (public corporation) involves many persons owning the business
who may not be affiliated with one another. Ownership is determined by shareholding
which are floated in the stock exchange and transferable to the public. A corporation has
a legal personality and has a limited liability. A corporation may be managed differently
from its owners.

Countries have various regulations regarding the registration of business under each
form. It is important that you know them - the relevant laws (e.g., taxation, liability, etc.),
the forms to be filled up and the licenses/permits to be acquired (and paid for) before you
can legally operate as a business.

3.2 How will the business be managed and operated?

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For the business to operate smoothly and efficiently, there must be some structure of
authority and responsibility (chain of command), division of labour (job distribution), and
definition of what each one must do in the business (job description). Therefore, the
business needs an organisational structure. This is mostly depicted through an
organisation chart. See Table 3.2 Part II, for illustration.

In designing the organisational structure, it is important that the various functions of the
enterprise (marketing, production, organisation and management and finance) be
performed. In a small business, one person can handle several functions. For instance, the
entrepreneur may double up as general manager as well as production manager.

In small businesses, it is also common to have family members hold responsibility in the
business or even perform production work. For instance, the wife may be the treasurer
and marketing manager, while the older children help out as part-time production
workers.

3.3. What is the business experience and qualifications of the proponent?

To ensure business survival and growth, it is important that the people who run the
business must have the proper qualifications and suitable experience. The survival and
growth of the business depends on the competence and ability of management. A class B
(medium potential) project managed by a class A (highly competent) manager will
mostly turn out to be successful, while a class A project (high potential) run by class C
(incompetent) management will fail.

In particular, if the proponent wants to borrow money from the bank or if he wants to get
trade credit from his suppliers (raw materials or machinery), he must be able to convince
them about his ability, competence and integrity.

It is, therefore, important that the proponent include the highlights of his bio data as well
as that of the other key officers of the business that are relevant to the business operation.

If possible, the proponent should include bank references, former employers, or well
known and respected community leaders who can vouch for his integrity and ability.

3.4 What pre-operating activities must be undertaken before the business can
operate?

Before the business can start actual operation, there are many preparatory steps that have
to be done. The proponent must be aware of these and plan their execution so that he can
save on cost, time and energy.

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Some of these preparatory activities include attendance in a training program (whether

skill-related, management or entrepreneurship), preparing your business plan, doing
market survey, making trips to machinery and raw materials suppliers, registering the
business, hiring a consultant, etc.

It is advisable that the proponent list down all these pre-operating activities and decide
when and how long each activity will take place. Some of these activities can be done
simultaneously (e.g., making market survey and contacting suppliers), while others have
to be done sequentially (purchasing the machinery before their delivery and installation
in the factory).

To aid the proponent, he can prepare a Gantt chart which depicts in one column all these
pre-operating activities and another column to illustrate the timetable (in weeks,
preferably) it would take to start and complete each activity.

See Table 3.4 Part II, for an example of a Gantt chart.

3.5 What pre-operating expenses will be incurred?

Pre-operating expenses are those expenses which are needed in order to plan and to
prepare for the business operation. These include worker training, market survey, testing,
travel to source suppliers of raw materials and machinery, or to negotiate with potential
market outlets, etc.

In some cases, you may be able to find workers who do not need any training, but in
many cases some form of training is required. As owner-manager, you should have a
good idea of the manufacturing process. You may have acquired this knowledge and skill
from your previous work, business experience or training. Or this may require that you
spend some time in another factory of similar size for exposure.

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In most cases, it makes sense to hire at least one good technician who is familiar with the
process and who can give on-the-job training to the workers below him. This, however,
will take some time, and time is money. Therefore, this cost should be estimated. It may
be necessary, for instance, to pay workers a stipend during their on-the-job training
before they start full production on a piece rate basis. These pre-operating costs have to
be accounted for as part of the total project cost (project's total capital requirement).

3.6 What fixed assets will be required for the office?

Aside from the fixed capital needed to manufacture the products or to facilitate and
maintain the production operation, the business needs other fixed assets to maintain the
administrative aspects of the business.

These assets include a typewriter, furniture and fixtures, cabinets, electric fans,
calculator, computer, vehicle, etc. These fixed assets have also to be depreciated
according to their useful life.

3.7 What administrative cost will be incurred?

To support production and marketing activities of the business, some administrative

activities have to be performed, and costs have to be incurred in the performance of these
activities. For this reason, administrative costs are also called operating expenses.

Administrative costs include the salary of the office secretary, bookkeeper, driver,
security guard, depreciation of fixed assets, furniture and fixtures used in the office,
communications, etc.

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PART I - Guide

Section 4
FINANCIAL PLAN

4.1 What is the total capital requirement?

Total capital requirement, also known as total project cost or total investment
requirement, is composed of three items: fixed assets, pre-operating expenses and
working capital.

Fixed assets is the sum total of all costs of land and improvements, building, machinery,
furniture and fixtures, vehicle, etc. (step 2.2)

Pre-operating expenses are those necessary expenses which are incurred before the
business starts operating. These include registration fees and licenses, training costs, cost
of preparing business plan, trips to raw material and equipment suppliers, etc. (step 3.5)

Working capital is the amount of money permanently needed in cash or in kind to keep
the business operating while it is awaiting full payment for goods sold to customers.

Working capital can be calculated by adding five factors:

1) the cost of maximum raw material stocks that will have to be stored to ensure continuous
production. In some cases this may be three to six months worth, if the raw material is
difficult to obtain or has to be imported, whereas in other cases (where raw materials are
readily available) only one or two weeks worth may be needed;

2) The cost of finished goods which will be kept in stock awaiting distribution to the
customers;

3) The cost of work-in-process which are on the factory floor but have not yet been
converted into a final product or finished goods;

4) The cost of goods already distributed to customers but which have not yet been paid for
(accounts receivable);

5) The amount of ready cash needed to pay workers and overheads.

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- To determine the cost of raw material stocks, simply multiply the quantity
needed by its purchase price;

- To determine the cost of finished goods stock, multiply the number of units to be
kept by the unit production cost (step 2.18)

- To determine the cost of work-in-process, first estimate the number of days it

takes to convert the raw material into finished goods, then multiply this by the
daily production level (step 2.6), then multiply the figure obtained by the unit
production cost determined in (step 2.18). Finally divide this figure by 2.

- To determine the cost of goods already distributed but not yet paid for, estimate
the quantity that will be given on credit and multiply this number by the unit
production cost (step 2.18)

- To determine the amount of cash needed in the business, add the monthly
labour cost in step 2.14 and overheads (step 2.17) to the monthly marketing
expenses (step 1.12) and the administrative expenses (step 3.7)

Add these five cost elements together to arrive at the total working capital requirement.

To calculate the total capital requirement, add the following:

+ Fixed Assets (step 2.2, step 3.6)

+ Pre-Operating Expenses (step 3.5)
+ Working capital (step 4.1)

= Total Capital Requirement (Project Cost)

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4.2 Is a loan needed? What will be the equity contribution of the entrepreneur? And
how much?

How the total capital requirement is going to be sourced is called the financing plan.
Bankers want to know these sources and what different project cost components are
being funded by these various financial sources. After determining the total capital
requirement, the next step is to see whether the amount required is too much for you to
finance on your own, or beyond your capability to finance. If this is the case, then a loan
will be needed.

The entrepreneur is almost always expected to make an equity (owner’s capital)

contribution to the project. For example, if the project costs LC50,000, the bank may
require the entrepreneur to put up at least LC10,000, or 20%. The LC10,000 constitutes
the owner’s equity.

To arrive at the amount of loan needed, subtract the equity from the total capital
requirement. List these as follows (using our CEFE Soap Manufacturing example):

Source Amount Use

Equity LC27,000 Working Capital

Loan LC70,020 Machinery

Capital Requirement LC97,020

It is also possible to borrow from other sources like family members, friends, raw
material and equipment suppliers in addition to banks. Hence, your financing plan
(although given here in a very simplified manner) may look like the one above.

4.3 What security (collateral) can be given to the bank?

In addition to equity, the bank will want to know what kind of security the entrepreneur
can offer the bank to ensure that the loan is really repaid. Normally land and building (the
title of ownership has to be certified by the appropriate government authority) are used
for security purposes. Be aware that if your building or house is valued by the bank at
LC100,000, the bank may only accept 60% of its full value, or LC60,000, for security
purposes.

In many countries, a titled land has a collateral value from 80 to 100%. Likewise, the
machinery, vehicles or building which the loan will finance can also be used as collateral.
For example, machinery and equipment have a collateral value of 60% of its purchase
cost in many countries.

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Some credit institutions, especially those catering to small loans, accept personal property
(e.g., jewellery, private car, refrigerator, sewing machine, etc.) as collateral.

If the entrepreneur does not have enough security to cover the loan needed, he must then
raise this security from friends and relatives or reduce the size of his project until the loan
size matches the security requirement of the bank.

4.4. What does the Profit and Loss Statement indicate?

We now have all the data for preparing a profit and loss statement, also known as income
statement.

Start with sales which are derived from multiplying the unit selling price by the volume
of expected sales during the year (step 1.9). From the annual sales revenue figure, step
by step, subtract all the yearly expenses. They are as follows:

1) Raw Material Cost - This is the sum of all raw materials used to produce the
products that were sold.

2) Labour Cost - This is the sum of all direct labour costs for the whole year.

3) Factory Overhead - This is the sum of all miscellaneous costs such as minor raw
materials, indirect labour, maintenance and repair cost, depreciation of
production machinery, electricity, water, supplies, etc. associated in producing the
product for the whole year.

The three items above are known as Cost of Goods Sold. Sales minus these three items
results in Gross Profit.

4) Marketing Cost - This is the sum of all selling and promotional costs, including
distribution cost to retail shops, commissions, etc. (See step 1.12)

5) Administrative Cost - This is the sum of all administrative costs, including office
supplies, security guard's salary, accountant/bookkeeper’s salary, telephone bills,
entertainment expenses, and depreciation of office equipment and furniture, etc.
(see step 3.7)

Gross Profit less marketing and administrative costs results in Operating Profit.

6) Financial Cost - This is the sum of interest paid to banks on the amount of
borrowing.

Operating Profit less financial cost results in Net Profit Before Tax. Net Profit Before
Tax less the relevant business income tax results in Net Profit After Tax.

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Profit and Loss Statement (one year) LC

Sales: 120 kg per day x 20 days per month x 12 months x 403,200

LC14, or unit selling price (step 1.9)

Less:
Raw Material: LC26,070 x 12 months (step 2.11) 312,840
Labour: LC1,600 x 12 months (step 2.14) 19,200
Overheads: LC2,333 x 12 months (step 2.17) 28,000 360,040

Gross Profit 43,160

Less:
Marketing (step 1.12) & Administrative Cost (step 3.7) 6,600
(LC50 + 500 x 12 months)

Operating Profit 36,560

Less:
Interest Expense (step 4.6) 7,002

Net Profit Before Tax 29,558

If you are borrowing money from the bank, the latter would usually require you to project your
profit and loss statement (and other figures) corresponding to the life of the loan. That is, if you
intend to pay the loan in five years, the bank will ask you to project your figures (e.g., sales
forecast, profit and loss statement, cash flow statement, balance sheet, loan repayment schedule,
etc.) for five years.

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Determination of Selling Price and Profit Margin

Monthly Cost

Raw Material 26,070

Direct Labour 1,600

Overhead Expenses 2,333

Total Monthly Production Cost 30,003

Marketing and Administrative Cost 550

Interest 583.50
Total Monthly Product Cost 31,136.50

LC 31;136.50
Unit Product Cost =
120 kg x 20 days

Total Cost per kg = LC12.97

Profit Mark Up per kg = LC 1.03
Factory Selling Price= LC14.00

4.5 What does the Cash Flow Statement indicate?

In this part of the business plan, the Cash Flow Statement is calculated and included.
While the profit and loss statement gives the results of financial transactions of a business
during a certain period (e.g. month or year), the cash flow statement shows the sources
(inflows) and applications (outflows) of the cash in the business during the year. The
example below is drawn from the business plan of the CEFE soap manufacturing project.

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Cash Flow Statement (first year)

Cash Flow LC

Cash sales 201,600

Collection of accounts receivable 184,800
Total Cash Inflow 386,400

Cash Outflow

Direct materials 312,840

Direct labour 19,200
Factory/operational overheads* 25,200
Inventory of raw materials 26,070
Inventory of work-in-process 750
Inventory of finished goods 15,000
Marketing expenses 600
Administrative expenses 3,400
Interest payment 7,002
Loan amortisation 14,004
Total Cash Outflow 424,066

Net Cash Inflow (Outflow) (37,670)

Cash Balance Beginning 61,020
Cash Balance Ending 23,354

* Excludes depreciation expenses and amortisation of pre-operating expenses which

are non-cash transactions.

4.6 What does the Balance Sheet indicate?

The balance sheet is the statement of assets and liabilities and gives the financial picture
of the business as of a certain date, for example, at the end of the year.

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Balance Sheet as at the end of first year

ASSETS LC

Current Assets

Cash 23,354
Raw materials (RM) Inventory 26,070
Work-in-Process (WP) Inventory 750
Finished Goods (FG) Inventory 15,000
Accounts Receivable 16,800
Total Current Assets 81,974

Fixed Assets

Land 4,000
Building 20,000
Machinery & Equipment 9,000
Office Equipment 1,000
Less: Accumulated Depreciation 3,400
Net Fixed Assets 26,000
Total Fixed Assets 30,600

Other Assets

Pre-operating expenses -

TOTAL ASSETS 112,574

LIABILITIES

Current Liabilities

Accounts Payable -
Loans Payable 4,004
Total Current Liabilities 4,004

Long-Term Liabilities

Loans Payable 42,012

Total Long-Term Liabilities 42,012

OWNER’S Equity

Capital Beginning 27,000

Accumulated Capital 27,000
Add: Net Profit after Tax 29,558

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Less: Withdrawal/Dividends -
Total Owner’s Equity 56,558

TOTAL LIABILITIES AND EQUITY 112,574

4.7 What is the loan repayment schedule?

After determining the annual net profit, prepare the Loan Repayment Schedule. An
example is given below. For a loan of LC120,000 at the cost of 10% for six years, the
repayment schedule is shown in the table below:

Year Amount of Instalment Due Interest Payable Total Amount

Principal at 10%
Outstanding

1 120,000 20,000 12,000 32,000

2 100,000 20,000 10,000 30,000

3 80,000 20,000 8,000 28,000

4 60,000 20,000 6,000 26,000

5 40,000 20,000 4,000 24,000

6 20,000 20,000 2,000 22,000

Total 120,000 42,000 162,000

4.8 What is the break-even point (BEP)?

Three kinds of break-even point (BEP) are commonly referred to, namely:

1) BEP Sales (LC)

2) BEP Production (volume)

3) BEP Percentage (%)

a) Break-even Point (BEP) Sales

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Break-even point (BEP) Sales - is that amount of sales value at which no profit or
loss is incurred by the business.

b) Break-even Point (BEP) Production

Break-even point (BEP) Production - is that level (volume or quantity) of

production at which no profit or no loss is incurred by the business. Production
above this level will result in a profit and production below this point will result
in a loss.

c) Break-even Point (BEP) Percentage

Break-even point (BEP) Percentage - is that level of percentage of sales or

production at which the business makes neither profit nor loss. Production above
this level will result in a profit and production below this point will result in a
loss.

To determine the BEP, three figures need to be found. These are:

Sales: annual sales as given in the profit and loss statement (step 4.4).

Variable Costs - these are costs which change significantly according to levels of
production and usually consist of raw material cost plus direct labour (step 4.4), provided
it is hired and terminated according to how much production a factory is making.

Fixed Costs - these are costs such as indirect labour and overhead expenses (steps 2.17
and 3.7), interest and depreciation. These costs do not change significantly, if the factory
produces more or less.

Break- even Point (BEP) Calculation

1. BEP Sales

To determine BEP Annual Sales, multiply annual sales found in income

statement by the annual fixed costs.

Annual Sales x Annual Fixed Cost

BEP (Sales) =
Annual Sales - Annual Variable Costs

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2. BEP Production

To determine BEP Production Volume, divide BEP Sales by the Unit Selling
Price (USP)

Break-even Point Sales

BEP Production =
Unit Selling Price

Another method is:

Divide Annual Fixed Costs by Unit Selling Price less Unit Variable Cost, also
known as Contribution Margin, that is, what is left to cover fixed costs and profit.
At BEP, the contribution margin can only cover fixed costs, not profit.

Annual Fixed Costs

BEP Production =
Unit Selling Price - Unit Variable Costs

3. BEP Percentage

To determine BEP Percentage on yearly sales, multiply the yearly fixed costs by
100, divided by annual sales minus the variable costs.

Annual Fixed Costs x 100%

BEP Percentage =
Annual Sales - Annual Variable Costs

4.9 What is the return on investment (ROI)?

One important issue that should be looked into when deciding whether or not to go ahead
with your business is to answer this crucial question "Will my money be better off in this
business or in the bank where it can earn a fixed interest in long term bonds or savings or
time deposits?" To answer this question, calculate the project’s return on investment
(ROI) which is one of the measures of profitability.

This is done by dividing Net Profit (step 4.4) by the total capital requirement (step 4.1):
It is better to use Net Profit After Tax, if this is applicable.

Net Profit
Return on Investment = x 100
Total Equity
A variation in the profitability measure is the Return on Owner's Investments (ROI).
This is derived by dividing Net Profit Before Taxes by the Owner’s Equity (Capital or
Investment), as shown below:

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Net Profit
Return on Owner’s Investment = x 100
Owner’s capital

If the percentage is greater than the bank’s rate on long term deposits, including
allowances for the country’s inflation rate during the same period, then the project
appears financially viable. If it is below the bank rate, then you may consider several
alternatives which could include measures like increasing production level (provided the
market is sufficient), looking for ways to reduce costs, or even abandoning the project
altogether.

4.10 Is the project feasible?

Now that all questions related to the four aspects of the business project - that is,
marketing, technical, organisation and finance - have been answered, a conclusion should
be made on the feasibility of starting the business. Is the profit on the first year sufficient
to meet the loan and interest repayments? Can marketing or raw material supply
problems be overcome? What happens to project profitability, if raw material cost
increases by 10%? What if sales forecast is only 80% realised? Any further outstanding
questions should be dealt with in this last section.

You also have to decide for yourself whether the profit you expect to make is worth all
the risks you are taking in the business.

Likewise, in addition to ROI which is one of the measures of profitability, other kinds of
financial analysis can be done to give a better picture of the business. These include:

1) Measures of liquidity (e.g., current ratio)

Current Assets
Current Ratio =
Current Liabilities

A ratio of 2 to 1 has often been considered a desirable one. This rule of thumb, however,
is not necessarily valid in all cases and is industry dependent.

2) measures of solvency (e.g., debt-equity ratio)

Total Debts
Debt-Equity Ratio =
Total Equity

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This ratio is very useful to creditors. A low debt-equity will be considered favourable by
creditors as it indicates the business is mostly funded by the owners.

Another financial tool which is required by some banks is Sensitivity Analysis, that is,
subjecting the effects on production cost, profitability, margins, etc. by the changes of
certain important inputs such as raw materials' price or labour cost increase by a certain
percentage, say 5 or 10%.

PART II - Example

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CEFE SOAP MANUFACTURING PROJECT

EXECUTIVE SUMMARY

1. Brief Description of the Project

CEFE Soap Manufacturing is registered with the country’s Small Industries Office in
1990 as a sole proprietorship and is located at 38 Brockhampton Street in the town of
Idstein. It aims to produce laundry soap. During the last five years, the proponent - Mr
John Rainero has been engaged as a grocery store merchant selling common domestic
and household goods such as: cooking oil, soap, sugar, kerosene, bread, biscuits, soft
drinks, etc., on wholesale and retail. Many people from the town and the neighbouring
villages patronise his shop because of the wide assortment of his merchandise,
convenient location, friendly service and credit facility for selected wholesale buyers.
One of his best selling items is laundry soap.

The total project cost amounts to Local Currency (LC)96,500 and the proponent proposes
to finance this capital requirement by a loan of LC69,500 or 72%, and the balance of
LC27,000 or 28% by his own capital.

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2. Brief Profile of the Entrepreneur

The business is owned by Mr John Rainero, a native of Idstein, a small town 50 km. from
the country's capital city of Lagro.

He was motivated to go into the manufacturing of laundry soap after hearing many
complaints from his retailers and customers about the inferior quality of existing laundry
soap. He gathered information and studied the process of making soap from several
literatures given to him by the Ministry of Industry. He also attended three-day training
on soap making technology. He has also a relative in the city who is presently working in
a soap manufacturing firm whom he has approached for information and guidance.

He completed his secondary school (high school) education and worked for five years as
a stockroom clerk in the capital city. He went back to his town after marriage and decided
to set up his grocery store. At 40 years of age with four children and a supportive wife, he
successfully built up his business into a reasonably large grocery store in the town.

This study has been prepared to determine the commercial, technical and financial
viability of the project, that is producing and marketing good quality laundry soap for
distribution in the town and surrounding villages.

3. Project's Contributions to the Local Economy

The project will employ six employees, excluding family members of the entrepreneur. It
aims to raise the quality standards of the rural population by providing superior quality
laundry soap. It will also result in healthy competition by forcing existing soap
manufacturers in the area to improve their product quality.

PART II - Example

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Section 1
MARKETING PLAN

1.1 Description of the Product

Common laundry soap is currently sold in small round balls with a diameter of 3 inches
or 7 centimetres which can easily be cupped in the palm of the hand and then rubbed with
water into the clothes that are being laundered. The size and weight of each piece vary
slightly according to customers’ needs and what they can afford, but the normal range is
between 200-400 grams per piece. Depending on the type of oil used in making the soap,
the colour can range from light to dark brown. The soap carries the brand name
"Energiser".

1.2 Comparison of the Product with its Competitors'

Mr Rainero, who regularly deals in soap in his grocery store, has long observed that the
quality of soap currently sold in the market is poor and he has received many requests
from his customers for a better quality soap. Due to the distance of the town from the
capital city (about 50 km.), only three soap distributors regularly supply soap in the area.
Quality of the soap is based on its cleansing power, smoothness in rubbing soap against
the clothes, no chemical reaction to the hands, and less water consumption for a clean
rinse.

The proposed manufacturing project aims to fulfil these four requirements.

The main factor in determining a soap's quality is the oil used. Mr Rainero intends to use
palm oil instead of the more commonly available rice bran oil. He sells the ordinary
quality soap at a price of LC13.50. per kilo (kg), but his regular customers say they
would be willing to pay up to LC15.50 per kg, if the soap is superior.

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1.3 Location

The business will be located in Mr Rainero's present store location in the town centre of
Idstein at 38 Brockhampton Street. This location has been chosen for the following
reasons: the production operation can easily be supervised by the owner; it is near the
transportation hub; it is close to its targeted markets; and only minor investment in
building expansion will be needed.

1.4 Market Area

Mr Rainero plans to distribute the soap principally in his grocery store and in ten
neighbouring villages which are within two hours' ride by public transport from the town
centre. This area has been selected because: (a) Mr Rainero personally knows many of
the major retailers of soap in these villages; (b) it is close to the factory location; and (c) it
is often neglected by distributors from the capital city of Lagro.

1.5 Main Customers

While the main buyers of soap are eventually individual households, Mr Rainero plans to
sell his soap in his grocery store where there are many walk-in clients from the town as
well as retailers from the villages. In the ten neighbouring villages he has contacted the
15 major soap retailers and they have agreed to sell his soap, provided its quality is at
least as good as what they are selling now. These retailers have confirmed that their
customers are demanding a better quality soap.

1.6 Total Demand

These retailers, when surveyed, claim that each of them sell approximately 1,000 kg of
soap every month, or a total demand of about 15,000 kg per month.

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1.7 Market Share

A sample survey of competitors in the area indicated that there are only three
manufacturers selling soap to the 15 major retailers to whom CEFE Soap Manufacturing
plans to sell its product. The competitors are small in size and the quality of their
products is inferior to what is planned by the project.

Because the number of competitors is small, their size is small and their product is
dissimilar to the one proposed, a market share of 20 to 30% is estimated as being
reasonable. The more conservative estimate of 20% in the first year will be assumed. In
the initial stages of production, operating at 100% capacity cannot be assumed. There are
bound to be initial operating problems, raw material shortages, distribution difficulties,
etc., hence only 80% is projected to be served in the first year.

1.8 Selling Price

The selling price is based on "Cost-Plus Method". Mr Rainero feels that a profit mark up
of 8% over the total product cost is very reasonable and competitive especially at this
initial stage.

Unit product cost is estimated at LC12.97 (step 4.5). Adding the 8% profit mark up, his
wholesale price is LC14 whether delivered or walk-in. This means that by adding another
10% mark up for the retailer, the retailer’s selling price will be LC15.40. At this price, it
is slightly below the price of LC15.50 which his regular customers indicate to be willing
to pay for a superior quality soap. He charges the retail price of LC15.40 for walk-in
single purchase clients.

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1.9 Sales Forecast

If the total demand is 15,000 kg per month and the projected market share is 20%, the
project’s potential market size is 15,000 kg x 20/100 or 3,000 kg per month. However,
for practical purposes, only 80% of the projected market size will be considered for sales
forecast, that is, 3,000 kg x 80/100 or 2,400 kg per month, or 28,800 kg in a year.

Mr Rainero believes that the market is expanding quite rapidly as the town of Idstein has
the highest population growth rate among the 20 towns in the province of Eschborn, and
a large cement plant will be built soon near the town. Conservatively, he projects that his
sales volume will increase by 10% every year and attain 100 % of the projected market
share by the third year. He estimates that 70% of his sales will come from wholesale and
the remaining 30% from walk-in single purchase customers.

Year Projected Sales

Volume (kg) Amount (LC)

1991 28,800 403,200

1992 32,400 453,600
1993 36,000 504,000
1994 36,000 504,000
1995 36,000 504,000

1.10 Promotional Measures

In order to secure the goodwill of the retailers, 15 days’ credit will be extended to these
village shopkeepers who regularly buy in bulk. Present manufacturers/ distributors do not
extend credit. Other promotional measures to help in marketing the product will be free
delivery for volume purchases, word of mouth advertisement by satisfied clients, use of
posters, and regular and prompt supply by the manufacturer.

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1.11 Marketing Strategy

The project's marketing strategy is based on the following strategies:

a) Product strategy - it has a superior product.

- it has an appealing brand name ‘’Energiser’’

connoting more cleansing power.

b) Pricing strategy - its retail price of LC15.40 is lower than the most
expensive brand (LC15.50).

- the business will extend l5 days' credit to regular

village shop-owners.

c) promotion strategy - free delivery;

- word of mouth advertisement;

- prompt, courteous & efficient service;

d) distribution strategy - over-the-counter sales in his existing grocery store;

- l5 major village retail stores.

1.12 Marketing Budget

CEFE Soap Manufacturing will have very modest cost to promote and distribute its
product. It will rely mostly on word of mouth promotion by satisfied customers as well as
endorsement by the retailers of the product because of its superior quality. Hence, the
only cost it will incur will be occasional give-aways and distribution of the product
(including transportation and sales commission) for a total monthly marketing budget of
LC50, or annual budget of LC600.

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PART II - Example

Section 2
PRODUCTION PLAN

2.1 Production Process

The production process of making soap is as follows:

1. Water is mixed in a container with caustic soda in a ratio of 3 measures of water

to 1 of caustic soda.

2. The oil is placed in a large iron or copper pan and is then slowly melted over
a fire.

3. When the oil reaches 70 degrees centigrade, caustic soda and water solution are
added very slowly to the oil until the mixture thickens.

4. The above mixture is then removed from the fire and allowed to cool.

5. When it has cooled sufficiently, it is then formed by hand, using unskilled

labour, into round balls and stored for sale.

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2.2 Fixed Capital

Per Month
LC
Land 5,000
Building - 200 sq. ft at LC100/sq. ft. 20,000

The equipment needed for production will have a capacity of 150 kg

per day or 3,000 kg per month, assuming 20 working days and will
be produced in a single batch each day.
Equipment:

1 iron or copper pan, capacity 150 kg/batch 3,500

1 oven, capacity one pan 1,500
1 water container for mixing 500
1 weighing scale 1,500
Various small tools and furniture 2,000

9,000

Total Fixed Assets LC34,000

2.3 Life of Fixed Capital

The life of the building is 20 years and for the equipment, because of its regular contact
with heat and chemicals, five years. The depreciation charge will be 5% on building and
20% on equipment.

The annual depreciation cost, assuming no scrap value, will therefore be:

5% of 20,000 (building) LC1,000

20% of 9,000 (equipment) LC1,800
Annual depreciation cost: LC2,800
or monthly depreciation cost: LC233.33

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2.4 Maintenance and Repairs

Because of the simplicity of the equipment, almost all servicing and repairs can be done
on the factory site by Mr Rainero himself. The iron or copper pan and oven will be
produced by metal workers and brick layers from the town itself. These craftsmen can
also assist in any repairs beyond the capabilities of the entrepreneur.

2.5 Sources of Equipment

The machinery and equipment will be locally manufactured on the factory site with local
craftsmen. No transport charges will be incurred for the equipment.

2.6 Planned Capacity

The factory has a production capacity of 150 kg per day of operation. The factory will
initially operate at 80% capacity, or 120 kg per day for 20 days in a month.

2.7 Future Capacity

Extra capacity, particularly in the size of the iron or copper pan, is available and will be
used only when demand is sufficiently large to justify working extra hours or days.

2.8 Terms and Conditions of Purchase of Equipment

The equipment will be paid for at the time of installation.

2.9 Factory Location and Layout

The factory will be located in two rooms adjacent to Mr Rainero’s grocery store in the
town centre. The factory will be constructed by him as his contribution or equity to the
project. The total size of the rooms will be 20 sq. ft. The land is owned by Mr Rainero
and has a market value of LC5,000 and also forms part of his equity and will serve as
collateral.

2.10 Raw Materials Needed

For a daily production level of 120 kg, the following raw materials are required:

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Caustic soda 8.5 kg

Oil 85.0 kg
Water (26.5 litres) 26.5 kg
Total 120.0 kg

The only other raw material required is wood for the purpose of boiling the mixture. For
this purpose, about 20 kg of wood (per day) is sufficient.

2.11 Cost of Raw Materials

Wood LC 1 per kg
Caustic Soda LC 11 per kg
Oil LC 14 per kg

Raw materials cost per month will be:

Oil: 85 kg/day x 20 days x LC 14 = LC 23,800

Caustic Soda: 8.5 kg/day x 20 days x LC 11 = LC 1,870
Wood: 20 kg/day x 20 days x LC 1 = LC 400
Total raw materials cost per month LC 26,070

2.12 Raw Materials Availability

The most essential raw material for soap is oil. The availability of oil varies from season
to season. The most frequently used oils for soap are buffalo tallow, vegetable oil, rice
bran oil and palm oil.

Mr Rainero has contacted a number of small suppliers of oil in the town vicinity, and
because the requirement for this project is not large, regular availability is assured. He
has, however, made a provision to keep a regular stock of palm oil equivalent to one
month production to ensure continuous production. This will mean 85 kg per day x 20
days in a month or 1,700 kg of oil stocks are required to run the factory continuously.

2.13 Labour

Mr Rainero himself will sometimes participate in production and will manage four part-
time workers. In addition, one full-time assistant or foreman will be hired to help in
production and to supervise the production operation.

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2.14 Cost of Labour

The owner will pay himself a wage of LC800 and his assistant will be paid LC600 per
month. The four part-time workers will earn LC400 each on a piece rate basis.

Indirect Labour:
Per Month
LC
Owner/Manager 800
Foreman 600
1,400

Direct Labour:
4 workers at LC 400 1,600
Total Labour Cost 3,000

2.15 Labour Availability

Workers for this type of industry are available throughout the year, even in seasons of
peak agricultural activity. No foreseeable problems are expected as most of the work
requires no previous skills.

2.16 Labour Productivity

Wages to the four workers will be paid on a piece rate basis, i.e., on the number of kilos
of semi-finished products they form into balls. Tea will be served free during break time
lasting 15 minutes.

2.17 Factory Overhead Expenses

Factory overhead expenses consist of:

Per Month
LC

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 Indirect Labour 1,400

 Electricity and water 100
 Maintenance 250
 Tea for workers 100
 Transport of raw materials 250
 Depreciation of building & equipment 233
Total Factory Overheads per month 2,333

2.18 Production Cost

Production cost for a kilo of soap can be calculated as follows:

1. Raw Materials per month (step 2.11)

Per Month
LC
Oil 85 kg x 20 days at LC14/kg 23,800
Caustic soda 8.5 kg x 20 days at LC14/kg 1,870
Wood 20 kg x 20 days at LC14/kg 400
Sub-Total 26,070

2. Direct Labour per month (step 2.14)

Direct Labour - 4 persons at LC400 1,600

Sub-Total 1,600

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3. Factory Overhead Expenses per month (step 2.17)

Per Month
LC
Indirect Labour (LC800 + 600) 1,400
Electricity and water 100
Maintenance 250
Tea for workers 100
Transport of raw materials 250
Factory depreciation 233
Sub-Total 2,333

Total Production Cost 30,003

Production cost per unit (kg) in a given period:

Total Production Cost

=
Number of Units

LC 30,003
=
120 kg x 20 days

LC 30,003
=
2,400

= LC 12.50

Unit (kg) Production Cost = LC 12.50

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PART II - EXAMPLE

Section 3
ORGANISATION & MANAGEMENT PLAN

3.1 Form of Business

The business will be registered under the name "CEFE Soap Manufacturing" as a sole
proprietorship and owned by Mr John Rainero. It will have its business address located at
38 Brockhampton Street in the town of Idstein.

3.2 Organisational Structure

The business will be managed by Mr Rainero who will act as general manager, personnel
manager and production manager. He will be assisted by a production foreman who will
be in charge of production in the absence of the entrepreneur. Mr Rainero’s wife will act
as marketing manager as well as treasurer. A part-time bookkeeper/secretary will also be
hired. Four part-time workers will be hired for the operation. During peak operation, Mr
Rainero’s older children will be expected to help in production.

Delivery of the finished product to the retailers will be done by contracting outside labour
when the need arises.

Being a small operation, the business will be managed in an informal and paternalistic
way. However, strict rules will be enforced regarding quality standards and production
operation.

The organisational structure is depicted in the organisation chart (see Table 3.2).

3.3 Business Experience and Qualifications of the Entrepreneur

Mr Rainero, the entrepreneur, has been running a grocery store in the town centre for the
last five years. He deals in the wholesale and retail of common domestic and household
items such as sugar, salt, cooking oil, soap, kerosene, as well as other packaged foodstuff
and dry goods.

Retailers from nearby villages come to him to buy their stock. He has, therefore, gained
their friendship, goodwill and patronage.

Table 3.2 Organisation Chart

CEFE Soap Manufacturing Project

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Owner-
Manager
(Mr Rainero)

Secretary/
Bookkeeper
(to be hired)

Production/
Marketing Finance/
Personnel
Supervisor Treasurer
Supervisor
(Mr Rainero) (Mr Rainero)
(Mr Rainero)

Foreman
(to be hired)

Four
Workers
(to be hired)

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He was motivated to go into the manufacture of laundry soap after hearing many
complaints from his retailers and customers about the inferior quality of existing laundry
soap. He started gathering information and studied the process of making soap from
literature given to him by the Ministry of Industry. He also attended a three-day training
on soap making technology. He has also a relative in the city who is presently working in
a soap manufacturing firm whom he has approached for information and guidance.

He completed his secondary school (high school) education and has worked for five
years as a stockroom clerk in the capital city. He went back to his town after marriage
and decided to set up a grocery store.

He has some savings which he can put up as capital of the proposed manufacturing
business. He plans, however, to borrow money from the bank.

His bio-data is found in the annex (not included here).

3.4 Pre-Operating Activities

Mr Rainero has listed down the following activities to be undertaken before he can
operate his business:

1. Registering the business - 1 day

2. Preparing the business plan - 4 weeks

3. Applying for a loan and approval - 8 weeks

4. Contacting equipment suppliers - 1 week

5. Constructing the factory - 4 weeks

6. Hiring labour - 2 days

7. Installing the equipment - 2 days

8. Purchasing raw materials - 2 days

9. Trial production - 1 week

Mr Rainero aims to start his operation approximately three months after his loan
application, or six weeks after release of his loan.

These pre-operating activities with their corresponding timetable appear in Table 3.4 in a
Gantt chart.

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Table 3.4 Gantt Chart

CEFE Soap Manufacturing Project

Pre-Operating Activities

Timetable (in weeks)

Activities 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

1. Registering the Business

2. Preparing the Business Plan
3. Applying/Approval of Loan
4. Contacting Equipment Suppliers
5. Constructing the Factory
6. Hiring Labour
7. Installing the Equipment
8. Purchasing Raw Material
9. Trial Production

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3.5 Pre-Operating Expenses

Training workers will not be necessary as their job is simple and no special skills are
required. The owner has received some training from the Ministry of Industry and is
conversant with the process of making soap.

Some costs, however, will be incurred in registering the business, in doing some sample
tests of soap to determine the appropriate and exact mixture of chemicals and oils. Other
costs such as two trips to the oil supplier to contract a regular supply of oil, visit to a
soap-making factory in the city, and some entertainment of potential buyers will be
necessary. These costs are as follows:

Pre-Operating Expenses LC
Registration Cost 100
Sample Production 500
Survey Costs 600
Training Costs 400
Entertainment Cost 200
Transportation Cost 100
Electricity/Gas 100
Total Pre-Operating Expenses LC2,000

3.6 Office Equipment

Mr Rainero wants to be modest in his expenses. He will just buy two inexpensive tables
and four chairs, a calculator, an electric fan, and a filing cabinet. All these will cost
LC1,000. Monthly depreciation for these equipment will be LC50, or LC600 annually.

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3.7 Administrative Expenses

The entrepreneur wants to keep his cost low in order to be competitive. His monthly
administrative expenses consist of:

LC
Treasurer’s Allowance (wife) 250
Bookkeeper/Secretary’s Salary 100
Depreciation of Office Equipment 50
Supplies and Communication 25
Electricity 25
Supplies and Communication 50
Total LC500

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PART II - EXAMPLE

Section 4
FINANCIAL PLAN

4.1 Capital Requirement (Project Cost)

LC

4.1.1 Fixed Assets (step 2.2)

 Land 4,000

 Building 20,000

 Machinery & Equipment 9,000

 Office Equipment 1,000

Total Fixed Assets 34,000 34,000

4.1.2 Pre-Operating Expenses (step 3.5) 2,000

4.1.3 Working Capital

Value of one month of raw material (RM) stocks 26,070

(step 2.11)
Value of finished goods (F/G) stocks 1/2 month 15,000
of production i.e., 120 kg x 10 days cost price
Value of work-in-process (W/P) for one day 750
(each batch of soap needs to be moulded into
production time x daily production rate x cost/2, or
1 day x 120 kg x LC12.50/2
Value of goods distributed but not yet paid for. 15,000
This will be another 1/2 month’s production 120 kg
Value of cash needed for operation. This will be 4,200
the cost of 1 month of labour (step 2.14),
Total Working Capital 61,020 61,020

Total Capital Requirement LC 97,020

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4.2 Financing Plan and Loan Requirement

Mr Rainero plans to contribute LC27,000 covering the cost of the land, building and the
pre-operating expenses. A loan will be required for the rest of the project cost.

Particulars Owner’s Loan Total

Equity

Fixed Capital (in LC)

Land 4,000 - 4,000

Building 20,000 - 20,000
Machinery & Equipment - 9,000 9,000
Office Equipment 1,000 - -
Pre-Operating Expenses 2,000 - 2,000

Working Capital - 61,5020 61,5020

Total 27,000 70,020 97,020

Percent 28% 72% 100%

4.3 Security for Loan

Mr Rainero has an existing land where his grocery storey and the factory are situated.
This has an appraised market value of LC5,000. In addition, his father has five hectares
of untenanted land valued at LC50,000. This land will be pledged as security against the
loan.

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4.4 Profit and Loss Statement (one year)

LC

SALES: 120 kg per day x 20 days per month x 12 403,200

months x LC14, or unit selling price (step 1.9)

Less:
Raw Materials: LC26,070 x 12 months (step 2.11) 312,840

Labour: LC1,600 x 12 months (step 2.14) 19,200

Overheads: LC2,333 x 12 months (step 2.17) 28,000 360,040

GROSS PROFIT 43,160

Less:
Marketing (step 1.12) & Administrative Cost (step 3.7) 6,600
(LC50 + 500 x 12 months)

OPERATING PROFIT 36,560

Less: Interest Expense (step 4.6) 7,002

NET PROFIT BEFORE TAX 29,558

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For the next five years, the projected income statements appear below:

PROJECTED INCOME STATEMENTS

(LC)

Year 1 2 3 4 5

Sales Target 28800 32400 36000 36000 36000

Capacity 80% 90% 100& 100% 100%

SALES 403200 453600 504000 504000 504000

Less:
Raw materials 312840 351945 391050 391050 391050
Labour 19200 19200 19200 19200 19200
Overheads 28000 28000 28000 28000 28000
MANUFACTURING 360040 399145 438250 438250 438250

GROSS PROFIT 43160 54455 65750 65750 65750

Less: Mktg & Adm Cost 6600 6400 6000 6000 6000
NET PROFIT BEFORE
INTEREST & TAX 36560 48055 59750 59750 59750
Less: Interest 7002 5601 4201 2800 1400

NET PROFIT BEFORE 29558 42454 55549 56950 58350

TAX
ACCUMULATED PROFIT 29558 71912 127461 184411 242761

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4.5 Cash Flow Statement

PROJECTED CASH FLOW STATEMENTS

(LC)

Pre- YEAR
Particulars Operatin
g
Period 1 2 3 4 5

CASH INFLOW
Equity (step 4.2) 27,000 - - - - -
Borrowings (step 4.2) 70,020 - - - - -
Cash Sales (step 1.10)* 201,600 226,800 252,000 252,000 252,000
Collection of A/R (step 184,800 224,700 249,900 252,000 252,000
1.10)*
Other Income - - - - -
Total Cash Inflow 97,020 386,400 451,500 501,900 504,000 504,000

CASH OUTFLOW

Pre-operating expenses 2,000 - - - - -

Purchase of fixed assets 34,000 - - - - -
Direct materials - 312,840 351,945 391,050 391,050 391,050
Direct Labour - 19,200 19,200 19,200 19,200 19,200
Factory/operational - 25,200 25,200 25,200 25,200 25,200
overheads**
Inventory of raw material - 26,070 - - -
Inventory of work-in-process - 750 - - - -
Inventory of finished goods - 15,000 - - - -
Marketing expenses - 600 600 600 600 600
Administrative expenses** - 3,400 5,400 5,400 5,400 5,400
Interest expenses - 7,002 5,601 4,201 2,800 1,400
Loan amortisation - 14,004 14,004 14,004 14,004 14,004
Total Cash Outflow 36,000 424,066 421,950 459,655 458,254 456,854

NET CASH INFLOW 61,020 (37,666) 29,550 42,245 45,746 47,146

(OUTFLOW)

CASH BALANCE - 61,020 23,354 52,904 95,149 140,895

BEGINNING

CASH BALANCE ENDING 61,020 23,354 52,904 95,149 140,895 188,041

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* Assumption : 50% of sales is in cash and 50% on 15 days’ credit.

** Excludes depreciation expenses and amortisation of pre-operating expenses which are non-
cash items.

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PROJECTED MONTHLY CASH FLOW STATEMENT

(LC)

Pre- MONTH
Particulars Operati
Period 1 2 3 4 5 6 7 8 9 10 11 12
CASH INFLOW
Equity (step 4.2) 27,000 - - - - - - - - - - - -
Borrowings (step 4.2) 70,020 - - - - - - - - - - - -
Cash Sales (step 1.10) - 16,800 16,800 16,800 16,800 16,800 16,800 16,800 16,800 16,800 16,800 16,800 16,800
Collection of A/R (step - - 16,800 16,800 16,800 16,800 16,800 16,800 16,800 16,800 16,800 16,800 16,800
1.10)
Other Income - - - - - - - - - - - - -
Total Cash Inflow 97,020 16,800 33,600 33,600 33,600 33,600 33,600 33,600 33,600 33,600 33,600 33,600 33,600
CASH OUTFLOW
Pre-operating expenses 2,000 - - - - - - - - - - - -
Purchase of fixed assets 34,000 - - - - - - - - - - - -
Direct materials - 26,070 26,070 26,070 26,070 26,070 26,070 26,070 26,070 26,070 26,070 26,070 26,070
Direct Labour - 1,600 1,600 1,600 1,600 19,200 1,600 1,600 1,600 1,600 1,600 1,600 1,600
Factory/operational - 2,100 2,100 2,100 2,100 25,200 2,100 2,100 2,100 2,100 2,100 2,100 2,100
overheads*
Inventory of raw material - 26,070 - - - - - - - - - -
Inventory of work-in- - 750 - - - - - - - - - - -
process
Inventory of finished - 15,000 - - - - - - - - - - -
goods

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Marketing expenses - 50 50 50 50 50 50 50 50 50 50 50 50
Administrative expenses* - 283 283 283 283 283 283 283 283 283 283 283 283
Interest expenses - - - - - - - - - - - - 7,002
Loan amortisation - 1,167 1,167 1,167 1,167 1,167 1,167 1,167 1,167 1,167 1,167 1,167 1,167
Total Cash Outflow 36,000 73,090 31,270 31,270 31,270 31,270 31,270 31,270 31,270 31,270 31,270 31,270 38,272
NET CASH INFLOW 61,020 (56,29 2,330 2,330 2,330 2,330 2,330 2,330 2,330 2,330 2,330 2,330 (4,672
(OUTFLOW) 0) )
CASH BALANCE - 61,020 4,730 7,060 9,390 11,720 14,050 16,380 18,710 21,040 23,370 25,700 28,030
BEGINNING
CASH BALANCE 61,020 4,730 7,060 9,390 11,720 14,050 16,380 18,710 21,040 23,370 25,700 28,030 23,358
ENDING **
* Excludes depreciation expenses and amortisation of pre-operating expenses which are non-cash items.
** Not equal to 23,354 due to rounding.

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4.6 Balance Sheet

PROJECTED BALANCE SHEET
(As of ______ )

Pre- YEAR
Particulars Operatin
g
Period 1 2 3 4 5

ASSETS
Current Assets
Cash 61,020 23,354 52,904 95,149 140,89 188,04
5 1
Raw Materials Inventory - 26,070 26,070 26,070 26,070 26,070
Work-in-Process Inventory - 750 750 750 750 750
Finished Goods Inventory - 15,000 15,000 15,000 15,000 15,000
Accounts Receivable - 16,800 18,900 21,000 21,000 21,000
Total Current Assets 61,020 81,974 113,62 157,96 203,71 250,86
4 9 5 1
Fixed Assets
Land 4,000 4,000 4,000 4,000 4,000 4,000
Building 20,000 20,000 20,000 20,000 20,000 20,000
Equipment 9,000 9,000 9,000 9,000 9,000 9,000
Vehicles - - - - - -
Office Equipment 1,000 1,000 1,000 1,000 1,000 1,000
Less: Accumulated - 3,400 6,600 9,400 12,200 15,000
Depreciation
Net Fixed Assets - 26,600 23,400 20,600 17,800 15,000
Total Fixed Assets 34,000 30,600 27,400 24,600 21,800 19,000
Other Assets
Pre-operating expenses 2,000 - - - - -
Goodwill - - - - - -
Patents - - - - - -
TOTAL ASSETS 97,020 112,57 141,02 182,56 225,51 269,86
4 4 9 5 1
LIABILITIES
Current Liabilities
Accounts Payable - - - - - -
Loans Payable - 14,004 14,004 14,004 14,004 -
Total Current Liabilities - 14,004 14,004 14,004 14,004 -
Long Term Liabilities

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Loans Payable 70,020 42,012 28,008 14,004 - -

Total Long Term Liabilities 70,020 42,012 28,008 14,004 - -
OWNER’S EQUITY
Capital Beginning 27,000 27,000 27,000 27,000 27,000 27,000
Accumulated Capital - 27,000 56,558 99,012 154,56 211,51
1 1
Add: Net Profit after Tax - 29,558 42,454 55,549 56,950 58,350
Less: Withdrawal/Dividends - - - - - -
Total Owner’s Equity - 56,558 99,012 154,56 211,51 269,86
1 1 1
TOTAL LIABILITIES AND 97,020 112,57 141,02 182,56 225,51 269,86
EQUITY 4 4 9 5 1

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4.7 Loan Repayment Schedule

The loan of LC69,500 will be paid over a 5 - year period. The repayment schedule is as
follows:

Year Amount of Instalment Interest Amount Total

Principal Due
Outstanding at 10%

1 70,020 14,004 7,002 21,006

2 56,016 14,004 5,601 19,605
3 42,012 14,004 4,201 18,205
4 28,008 14,004 2,800 16,804
5 14,004 14,004 1,400 15,404

Total 70,020 21,004 91,024

4.8 Break-even Point (BEP)

The break-even point can be calculated as follows LC

 Annual Sales (step 4.4) 403,200

 Annual Fixed Costs:

Owner’s salary LC 800/month 9,600

Assistant’s salary LC 600/month 7,200
Annual interest 7,002
Annual factory depreciation 2,800
Other overheads LC 700/month 8,400
Marketing and administrative cost 6,600
41,602 41,602
 Annual Variable Costs:

Raw materials 312,840

Direct labour at LC 1,600/month 19,200
332,040 332,040

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Annual Sales x Annual Fixed Costs

= BEP (Annual Sales)
Annual Sales - Annual Variable Costs

403,200 x 41,602
= LC235,721
403,200 - 332,040

Dividing this figure by the selling price per unit or kg gives the BEP (Annual
Production).

235,721
= 16,84 kg of soap
14

or, 70 kg per day (16,84 kg/240 days).

This is 50% (60/120 kg per day) of the planned production capacity of 120 kg per day.
Or, it can also be calculated by BEP Percentage as the following:

Annual Fixed Costs x 100

= BEP (Percentage)
Annual Sales - Annual Variable Costs

41,602 x 100
= 58.46%
403,200 - 332,040

BEP in annual sales = BEP % x annual sales LC

= 58.46% x 403,200

= LC235,721

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4.9 What is the return on investment (ROI)?

The ROI for this project is as follows:

Annual Net Profit 29,558 (step 4.4)

= x 100
Total Capital Requirement 97,020 (step 4.1)

= 30.5%

ROI is, therefore, 30.5%.

The return on owner’s investment (ROI) is:

Annual Net Profit 29,558

= x 100 = 109.5%
Owner’s Investment 27,000

ROI is, therefore, 109.5%.

4.10 Is the project feasible?

Considering the product’s better features, the conservative estimates in sales, realistic
cost estimates, the entrepreneur’s proven track record, and the sound financial
projections, the project is considered very viable.

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Bank Evaluation

The proposed project (CEFE Soap Manufacturing Project) is technically and

financially viable. The entrepreneur has demonstrated his entrepreneurial competence
in his existing grocery business, possesses sufficient knowledge of soap making and is
familiar with the market and has come up with an effective and realistic plan of
operation and strategies. The market share has been conservatively estimated at 20%,
and even if only the business operates at 50% of its planned capacity (70 kg out of 120
kg per day) or 10% of the estimated market share, the business will still operate at
break even. A proposed loan of LC70,020, or 72% of project cost, is considered
reasonable and safe. The projected financial statements show a sufficient balance to
meet loan principal and interest repayment to the bank during the five year loan period.

Loan Sanctioned:

Signature: ____________________ Date: __________________

(Name)

_____________________
(Designation)

_____________________
(Bank)

PART III - WORKBOOK

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Business Plan
EXECUTIVE SUMMARY

1. Brief Description of the Project

2. Brief Profile of the Entrepreneur

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3. Project's Contributions to the Local/National Economy

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PART III - WORKBOOK

Section 1
MARKETING PLAN

1.1 Description of the Product

1.2 Comparison of the Product with It’s Competitors

Competitive Analysis of Product

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Features Proposed Competitor Competitor Competitor

Business 1 2 3

Product Quality

Price

Delivery Lead time

Brand Name

Multiple Use

Taste

etc.

1 - Outstanding

2 - Very Satisfactory

3 - Good

4 - Fair

5 - Poor

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1.3 Location

<Location Map>

1.4 Market Area

<List of Market Areas And Size of Market>

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1.5 Main Customers

<List of major Customers and Their Requirements>

1.6 Total Demand

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Table 1.6 Table of Projected Demand

Year Quantity Amount (LC)

___________________ ___________________ ___________________

___________________ ___________________ ___________________

___________________ ___________________ ___________________

___________________ ___________________ ___________________

___________________ ___________________ ___________________

___________________ ___________________ ___________________

1.7 Market Share

<Table of Projected Supply and Sources of Supply>

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1.8 Selling Price

Table 1.8 Comparison of Competitors’ Selling Prices

Project’s Project’s Prices of Competitors Competitors’

Product(s) Selling Average
Price Price

Competitor Competitor Competitor

1 2 3

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1.9 Sales Forecast

Table 1.9 Projected Sales by Year, Sales Volume and Amount.

Year Sales Volume (units) Sales Amount (LC)

___________________ ___________________ ___________________

___________________ ___________________ ___________________

___________________ ___________________ ___________________

___________________ ___________________ ___________________

___________________ ___________________ ___________________

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1.10 Promotional Measures

1.11 Marketing Strategy

<Table of competitors’ Marketing Strategy>

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1.12 Marketing Budget

Table 1.12 Marketing Budget

Item MONTHS

1 2 3 4 5 6 7 8 9 10 11 12

Projected Sales

Marketing Expenses:

Promotion
(Specify)

Distribution
(Specify)

Advertising
(Specify)

Selling
(Specify)

Total Marketing Expenses

Marketing Expenses over Sales (%)

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PART III - WORKBOOK

Section 2
Production PLAN

2.1 Production Process

<List of Production Steps>

<Process Flow Chart>

2.2 Fixed Assets

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Table 2.2-A List of Machinery, Number, Specifications and Purpose

Machines, Tools and Fixtures Number Specifications Purpose

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Table 2.2-B List of Machinery, Suppliers and Price

Machines, Tools and Fixtures Suppliers Price Per No. of Total Terms of
Unit Units Cost Purchase

Total Cost:

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2.3 Life of Fixed Assets

<Cost, Schedule of Useful Life and Depreciation Rate>

2.4 Maintenance and Repairs

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2.5 Sources of Equipment

<List of Equipment and Suppliers>

2.6 Planned Capacity

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Table 2.6 Projected Production Volume by Year

Year Volume

________________ ________________________________

________________ ________________________________

________________ ________________________________

________________ ________________________________

________________ ________________________________

2.7 Future Capacity

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2.8 Terms and Conditions of Purchase of Equipment

2.9 Plant Location and Layout

<Plant Location>
<Plant Layout>

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2.10 Raw Materials Needed

211 Cost of Raw Materials

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Table 2.11 List of Materials, Quantity Needed and Cost

Unit Price Quantity Total

Raw Materials of Materials Needed Cost Remarks

A. Direct Materials

B. Indirect Materials

Total Material Cost

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2.12 Raw Materials Availability

Table 2.12 List of Raw Materials, Sources and Price

Type of Materials Suppliers Unit Price

2.13 Labour

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Table 2.13-A Job Position, Qualifications and Experience of Direct Labour

Direct Labour
Job Title of Worker Qualifications Experience

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Table 2.13-B Job Position, Qualifications and Experience of Indirect Labour

Direct Labour
Job Title of Worker Qualifications Experience

2.14 Cost of Labour

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Table 2.14-A Labour Cost

Total Fringe
Number of Total Salary Benefits Total Labour
Yea Type of Labour Workers Per Month Per Month Cost Per Year
r

Direct Labour

1 Indirect Labour

Total

Direct Labour

2 Indirect Labour

Total

Direct Labour

3 Indirect Labour

Total

Direct Labour

4 Indirect Labour

Total

Direct Labour

5 Indirect Labour

Total

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Table 2.14-B Direct Labour Cost

Production Time Direct Labour Cost

Product Per Product Unit Direct Labour Rate Per Product Unit

2.15 Labour Availability

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2.16 Labour Productivity

2.17 Factory Overhead Expenses

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Table 2.17 Factory Overhead Expenses

Overhead Item YEAR

1 2 3 4 5

Total Factory Overhead Per Year

Factory Overhead per Product Unit

2.18 Production Cost

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Table 2.18 Production Cost

Product Planned Direct Direct Factory Total Cost

Production Materials Labour Overhead
Volume

Per Per Per Per

Unit Total Unit Total Unit Total Unit Total

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PART III - WORKBOOK

Section 3
ORGANISATION & MANAGEMENT PLAN

3.1 Form of Business

3.2 Organisational Structure

<Organisation Chart.>

3.3 Business Experience and Qualifications of the Entrepreneur

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<Annex Entrepreneur's Bio-data>

3.4 Pre-Operating Activities

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Table 3.4 Gantt Chart

Pre-Operating Activities

Activities Timetable (In Weeks)

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

1. Registering the
Business

2. Preparing the
Business Plan

3. Applying/
Approval of
Loan

4. Contacting
Equipment
Suppliers

5. Constructing
the Factory

6. Hiring Labour

7. Installing the
Equipment

8. Purchasing
Raw Materials

9. Trial
Production

3.5 Pre-Operating Expenses

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Table 3.5 Pre-Operating Expenses

Pre-Operating Expenses Amount

Total Pre-Operating Expenses

3.6 Office Fixed Assets and Equipment

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<List of Office Fixed Assets and Equipment, Number Required, Cost and Depreciation
Rate>

3.7 Administrative Expenses

<Items and Cost>

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PART III - WORKBOOK

Section 4
FINANCIAL PLAN

4.1 Capital Requirement (Project Cost)

see Table 4.1 Capital Requirement

4.2 Financing Plan and Loan Requirement

see Table 4.2 Financing Plan

4.3 Security for loan

see Table 4.3 Particulars of Collateral Offered

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Table 4.1 Capital Requirement

Investment Item Amount (LC) Percent

1. Fixed Assets
1.1
1.2
1.3
1.4
1.5
1.6
1.7

Sub-Total

2. Pre-Operating Expenses
2.1
2.2
2.3

Sub-Total

3. Working Capital
3.1
3.2
3.3
3.4
3.5
3.6

Sub-Total

Total

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Table 4.2 Financing Plan

Items Cost Sources

Bank Equity Other Total

Loan Creditors

1. Fixed Assets

1.1 Land
1.2 Building
1.3 Machinery
1.4 Vehicles
1.5 Furniture
1.6 Office Equipment
1.7 Others

2 Pre-Operating Expenses

3. Working Capital

3.1 Raw Materials

3.2 Work in Process
3.3 Finished Goods
3.4 Accounts Receivable
3.5 Permanent Working Capital

Total (LC)

Total (%)

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Table 4.3 Particulars of Collateral Offered

Particulars of Security Year of Purchase Estimated Value *

Total Value of Security

* Specify whether purchase, book or market value

4.4 Profit and Loss Statement

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Profit & Loss Statement

(For the Year Ended December 31, .........)

(All LC Figures are in Thousands)

Table 4.4

Gross Sales

Less: Returns & Allowances

Net Sales

Less: Cost of Goods Sold

Direct Materials

Direct Labour

Factory Overheard

Gross Profit

Less: Administrative and Selling Expenses

Operating Profit

Less: Interest Expense

Net Profit before Tax

Less: Estimated Income Tax

Net Profit After Tax

COST OF GOODS SOLD FOR MANUFACTURING

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1. Direct Materials

1.1. Beginning Inventory

1.2. Add: Purchases

1.3. Cost of materials available

1.4. Less: Ending inventory

1.5. Total cost of materials used for production

2. Direct Labour

3.1. Depreciation

3.2. Rental

3.3. Indirect labour

3.4. Maintenance and repair

3.5. Indirect materials (e.g. packaging mat., oil)

3.7. Insurance

3.8. Others

3.9. total manufacturing overhead (3.1 - up to 3.8)

4. Total manufacturing cost (1.5. + 2. + 3.9.)

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5. Work in process

5.1. Work-in-process, beginning

5.2. Less: Work-in-process, ending

5.3. Net Work-in-process

6. Cost of goods manufactured (4. + 5.3.)

7. Add: Finished goods inventory, beginning

8. Cost of goods available for sale (6. + 7.)

9: Less: Finished goods inventory ending

10. COST OF GOODS SOLD(8. - 9.)

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COST OF GOODS SOLD FOR SERVICES

1. Direct Materials

(e.g. food (restaurant), fuel (petrol station), paper (photo-copying), room supplies
(hotel))

1.1. Beginning materials inventory

1.2. Add: Purchases + Freight -in

1.3. Total cost of materials purchased and used

2. Direct Labour

(e.g. cooks and waiters for restaurant, technicians for repair services, teachers for
language centres, washers for laundry service)

3. Operational Overhead

3.1. Depreciation

- Building
- Equipment
- Furniture & fixtures
- Vehicles
- Others

3.2. Rental

3.3. Indirect labour

3.4. Maintenance and repair

3.5. Indirect materials (e.g. flowers for hotel, restaurant)

3.6. Utilities (e.g. electricity, water)

3.7. Insurance

3.8. Others (e.g. transport)

3.9. Total operational overhead (3.1 + up to 3.8)

4. COST OF SERVICES SOLD

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COST OF GOODS SOLD FOR TRADING

1. Direct Materials

1.1. Beginning merchandise inventory

1.2. Add: Purchases + Freight-in

1.3. Total cost of merchandise available for sale

1.4. Less: Ending inventory

1.5. Total cost of merchandise purchased and sold

2. Direct Labour

3. Operational Overhead

3.1 Deprecation

- Building

- Equipment

- Furniture & fixtures

- Vehicles

- Others

3.2. Rental

3.3. Indirect labour

3.4. Maintenance and repair

3.5. Indirect materials (e.g. packaging material, stationery)

3.6. Utilities (e.g. electricity, water)

3.7. Insurance

3.8. Others

3.9. Total operational overhead

4. COST OF GOODS SOLD (1.5. + 2. + 3.9.)

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4.5 Cash Flow Statement

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Table 4.5 Projected Cash Flow Statement

PROJECTED ANNUAL CASH FLOW STATEMENT

Particulars Pre- Year

Operating
Period
1 2 3 4 5

CASH INFLOW
Equity
Borrowings
Cash Sales
Collection of A/R
Other Income
Total Cash Inflow
CASH OUTFLOW
Pre-operating expenses
Purchase of fixed assets
Direct materials
Direct labour
Factory/operational overheads *
Inventory of raw materials
Inventory of work-in-process
Inventory of finished goods
Marketing expenses
Administrative expenses *
Interest expenses
Loan amortisation
Taxes payable
Total Cash Outflow
NET CASH INFLOW
(OUTFLOW)
CASH BALANCE BEGINNING
CASH BALANCE ENDING
* Excludes depreciation expenses and amortisation of pre-operating expenses which are
non- cash items

PROJECTED MONTHLY CASH FLOW STATEMENT

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MONTH
Particulars Pre-
Operating
Period

1 2 3 4 5 6 7 8 9 10 11 12

CASH INFLOW

Equity
Borrowings
Cash Sales
Collection of A/R
Other Income
Total Cash Inflow
CASH OUTFLOW
Pre-operating expenses
Purchase of fixed assets
Direct materials
Direct labour
Factory/operational overheads *
Inventory of raw materials
Inventory of work-in-process
Inventory of finished goods
Marketing expenses
Administrative expenses *
Interest expenses
Loan amortisation
Taxes payable
Total Cash Outflow
NET CASH INFLOW
(OUTFLOW)
CASH BALANCE BEGINNING
CASH BALANCE ENDING
* Excludes depreciation expenses and amortisation of pre-operating expenses which are
non-cash terms

4.6 Balance Sheet

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Table 4.6 Balance Sheet

Projected Balance Sheet

(As of _______________ )

Pre- YEAR
Operating
Period

1 2 3 4 5

ASSETS

Current Assets

Cash

Raw Materials Inventory

Work-in-Process Inventory

Finished Goods Inventory

Accounts Receivable

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Pre- YEAR
Operating
Period

1 2 3 4 5

Prepaid Expenses

Total Current Assets

Fixed Assets

Land

Building

Machinery & Equipment

Vehicles

Furniture and Fixtures

Less: Account. Depreciation

Net Fixed Assets

Total Fixed Assets

Other Assets

Pre-operating expenses

Goodwill

Patents

TOTAL ASSETS

LIABILITIES

Current Liabilities

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Pre- YEAR
Operating
Period

1 2 3 4 5

Accounts Payable

Loans Payable

Total Current Liabilities

Long-Term Liabilities

Loans Payable

Total Long-Term Liabilities

OWNER’S EQUITY

Capital Beginning

Accumulated Capital

Add: Net Profit after Tax

Less: Withdrawal/Dividends

Total Owner’s Equity

TOTAL LIABILITIES AND

EQUITY

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4.7 Loan Repayment Schedule

Table 4.7 Loan Repayment Schedule

Year Principal Yearly Interest Principal Principal

at Beginning Instalment Paid Paid at End

1
2
3
4
5
6
7
8
9
10

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4.8 Break-even Point (BEP

<Calculation of BEP-Production and BEP-Sales>

4.9 Return on Investment (ROI)

<Calculation of ROI and Return on Owner’s Investment (ROI)>

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4.10 Financial Analysis

<Ratio Analysis: Current Ratio, Debt-Equity Ratio; Sensitivity Analysis>

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