Tuesday, May 5, 2020

Financial Plan

Question: Income Statement Proforma Operating Section: Revenue From the sale of goods or services. Expenses Incurred in selling the goods or providing the services. Cost of Goods Sold (COGS) / Cost of Sales In general revenues less expenses. Selling, General and Administrative Expenses Depreciation / Amortization Research Development (RD) Expenses Expenses incurred in research and development. Non-Operating Section: Other Revenues or Gains Income from activities other than primary business activities (e.g. rent or income from patents). Other Expenses or Losses These are expenses that are not incurred in relation to the primary business operations (e.g. foreign exchange loss). Finance Costs Costs of borrowing from banks and other creditors (e.g. interest expenses, bank charges). Income Tax Expense Sum of the amount of tax payable to tax authorities in the current reporting period. Irregular Items These are reported separately because this way users can better predict future cash flows; irregular items most likely will not recur. These are reported net of taxes. Answer: Financial Plan This is a financial report discussing about the funding and the arrangement of fund details for the innovative project idea discussed earlier. The idea is to set up technology business by building a platform for the registered users to buy and sell their second hand electronic goods and devices. Every registered user is provided services to use the platform for one year and the charges that are assumed are at 100 AED per registration with an annual escalation in price assumed at 5%. It is assumed that the development of this advanced platform and bringing it live would take a development period of 12 months i.e., 1 year. The sources of the project cost estimates are assumed in the ratio of 75% to 25% for debt to equity. An interest rate of 10% is assumed on the debt raised and is assumed to be repaid in 3 years after 1 year of successful implementation. The operating budget as per given proforma has been developed as shown below but is made on a quarterly basis. From the 2nd year the projections or budgeted estimates may be observed from the income statement as shown below as per proforma given. For revenues, no of registrations during that year are assumed and multiplied with the registration fee is considered as the operating revenue. The other source of income is assumed to be from the patenting rights obtained on the second hand products technology platform which is assumed as a minimum percentage of sales (Pinson, 2008; Greene, 2008). The interest and preliminary expenses during development period are capitalized under project cost. The details are as below: Project Cost Sources of Funds Particulars in AED Web Space 10000 Office Space 120000 IT Infrastructure - - Computer/ Laptops 48000 -S/w purchases 24000 -Server room requisites 10000 Development Cost 80000 Preliminary Expenses Patent rights 14600 Contingencies 14600 IDC 40000 TOTAL COST 361200 Sources of Funds Equity 90300 Debt 270900 TOTAL SOURCES 361200 Thus it is assumed that the initial equity to the tune of 90300 AED should be available to develop the project raising balance 0.28 million AED from external financial institutions or banks. The operating budget made and the sources and uses of cash are as shown below during the construction phase: OPERATING BUDGET Year 1 Year 1 Year 1 Year 1 Year 2 Year 2 Year 2 Year 2 Particulars Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Opening Cash 0 2500 5000 7500 10000 -365323 -740645 -1115968 Sources of Funds Equity 209213 161673 158943 153483 - - - - Debt 627638 485018 476828 460448 - - - - Operating Revenues - - - - 472500 472500 472500 472500 Non-Operating Revenues 2500 2500 2500 2500 9450 9450 9450 9450 Total sources of funds 839351 649191 638271 616431 481950 481950 481950 481950 Infrastructure procurement costs 212000 - - - - - - - Development phasing 20% 40% 30% 10% - - - - Development Other costs 21840 43680 32760 10920 - - - - Operating Expenses - - - - 47250 47250 47250 47250 Non-operating expenses incl. taxes 603011 603011 603011 603011 810023 810023 810023 810023 Total Uses 836851 646691 635771 613931 857273 857273 857273 857273 Net Cash 2500 2500 2500 2500 -375323 -375323 -375323 -375323 Closing Cash Balance 2500 5000 7500 10000 -365323 -740645 -1115968 -1491290 The income statement following the development year 1 for next 3 years is as below: Income Statement Year 1 Year 2 Year 3 Year 4 Operating Revenues No of Registrations # no 0 18000 60000 100000 Registration fee in AED 100 105.00 110.25 115.76 Total operating revenues 0 1890000 6615000 11576250 Operation Expenses Cost of Sales 0 189000 661500 1157625 Operating Profit 0 1701000 5953500 10418625 Non-operating Revenues Revenues from patent in AED 10000 37800 132300 231525 Total non-operating revenues 10000 37800 132300 231525 Non-operating Expenses Salaries Manpower Expense 1980000 2079000 2182950 2292098 Web space renewal expense 5000 5000 5000 Office Rent expense 120000 126000 132300 138915 Office Maintenance expenses 15000 15750 16538 17364 Total Selling, Admin Gen Expenses 2115000 2220750 2331788 2448377 R D Expenses 283500 992250 1736438 2062020 Earnings before interest, tax, depreciation EBITDA -2105000 -481950 3754013 8201773 Interest Expense 13545 27090 22575 13545 Depreciation/ Amortization 8200 8200 8200 8200 Profit before taxes PBT -2126745 -517240 3723238 8180028 Taxes -638023.5 -155172 1116971 2454008 Profit After Taxes PAT -1488722 -362068 2606266 5726020 Add: Depreciation/ Amortization 8200 8200 8200 8200 Cash Profit -1480522 -353868 2614466 5734220 Cumulative Cash Balance -1480522 -1834390 780077 6514296 From the table it is clear that the company will be cash rich from the very first year of operations recovering all the losses made during year 1 and year of development assuming the above sales being generated. The cash available with the company with our idea implementation would be to the tune of 0.78 million AED by the end of year 3 which is projected to reach 6.52 million AED by end of year 4. Thus the proposal which indeed is a high capital intensive project, but is feasible to recover them within a year of implementation and the project is innovative in its nature facilitating the customers to sell or buy any second hand electronic good. References Greene, C. L. (2008). Entrepreneurship: Ideas in Action. Cengage Learning. Pinson, L. (2008). Anatomy of a Business Plan: A Step-by-step Guide to Building the Business and Securing Your Company's Future. Aka associates.

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