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FINANCIAL FEASIBILITY:Financial resources and other costs, Cash Flow Analysis

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SME Management (MGT-601)
VU
Lesson 17
Dealing with the financial feasibility, flow sheets, short term and long term loans, cash flow analysis and
financial cost.
FINANCIAL FEASIBILITY
It covers the following:
Determination of total financial requirements
It can be done by preparing a financial statement in the following way:
Financial Requirement Statement:
Initial Expense
Period 1
Period 2
Expense in product development
-------
-------
Legal expense
-------
-------
Product testing expenditure
-------
-------
Marketing and technical feasibility
-------
-------
Expenditure
Miscellaneous expense
-------
-------
Fixed investments
-------
-------
Building
-------
-------
Equipment and machinery
-------
-------
Patents
-------
-------
Other equipments
-------
-------
Operational expenditure
-------
-------
Material
-------
-------
Wages
-------
-------
Sales promotion, distribution
-------
-------
Rent, interest, insurance, taxes
-------
-------
Contingency
-------
-------
TOTAL
In making the above estimation, provision must be made for cost escalation that is inevitable due to price
changes. Besides, appropriate sales forecasts should also be made to have a clear picture of expenditure. The
projection could be weekly or monthly.
Financial resources and other costs
Financial resources could be categorized on the basis of periodicity into:
Short term resources: (those payable in a year). Trade credit supplies, short term loans from
backs or other lending institutions, sales of account receivable etc. belong to this
category.
Term Loans: Intermediate term loans are those available for one to three (sometimes five)
years. It includes terms loans from banks, lease finance, financial assistance from
institutions etc.
Long-term loans are those from banks, equity capital and investments of earnings.
While considering different sources, it is better to consider specific costs as well as advantages
and disadvantages of each. It would be appropriate to compute weighted average cost of funds
as illustrated below:
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SME Management (MGT-601)
VU
4
1
2
3
Weighted Cost
Method of finance
Proportion
Cost
(Assumed)
[2X3]
(Assumed)
Short term debt
20
7%
1.40
Intermediate dept
10
8%
0.80
Long term debt
20
9%
1.80
Equity
20
10%
5.00
Weighted Average Cost of Capital
9.00
On the basis of average cost of capital, it is possible to ascertain whether there is positive
net present value when anticipated cash flow are discounted at average rate of cost of capital.
C) Cash Flow Analysis
If the projected sales associated financial requirements and available financial resources are known, the
anticipated cash flow can easily be determined.
Cash Flow (projected)
Cash flow and financial transactions
Period 1
Period 2
1) Cash flow
Initial expense
Fixed investment
Operating expense
Total cash outflow
2) Cash inflow
Cash sales
Account receivables
Total operating inflow
3) Net cash flow (2-1)
4) Desired minimum cash balance
5) Total amount of funds required
[3 (if negative + 4)]
Source of funds
Short term:
Net trade credit
Commercial loans
·  Intermediate loans
·  Long term loans
·  Equity
Total Financing
Anticipated return on investment
Financial feasibility is adjudged on the basis of satisfactory yield on investment. It can be calculated by
relating the average earnings expected over a given period to either the total amount of investment or
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SME Management (MGT-601)
VU
net worth of organization (Return on equity). Both are compared with potential yield from alternative
investment opportunities to ascertain the acceptability or otherwise of a new venture.
Key Terms
Feasibility study
a detailed study about judging the future of a commercial project/product
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Table of Contents:
  1. THE HISTORY:Cottage Industry, CONCEPT OF SMALL BUSINESS
  2. THE RELATIONSHIP BETWEEN SMALL AND BIG BUSINESS:The SME’S in Pakistan
  3. THE ROLE OF ENTREPRENEURSHIPS IN SMEs:Focus and Perseverance Guide the Entrepreneur
  4. THE ROLE OF ENTREPRENEURSHIPS IN SMEs:Kinds of Entrepreneurs
  5. SMALL ENTREPRENEURS IN PAKISTAN:National Approaches
  6. THE DEVELOPMENT OF SMES IN PAKISTAN:The Industrial History of Pakistan
  7. GOVERNMENT’S EFFORT TOWARDS SME DEVELOPMENT:Financing Programs
  8. THIS LECTURE DEFINES THE ROLE OF NGOS AND SMEDA:Mission Statement
  9. ISSUES AND POLICY DEVELOPMENT FOR SME:Monitoring Developments
  10. ISSUES IN SME DEVELOPMENT:Business Environment, Taxation Issues
  11. LABOR ISSUES:Delivery of Assistance and Access to Resources, Finance
  12. HUMAN RESOURCE DEVELOPMENT:Market and Industry Information, Monitoring Developments
  13. MARKET AND INDUSTRY INFORMATION:Measuring Our Success, Gender Development
  14. LONG TERM ISSUES:Law and Order, Intellectual Property Rights, Infrastructure
  15. THE START UP PROCESS OF A SMALL ENTERPRISE:Steps in Innovative Process
  16. TECHNICAL FEASIBILITY:Market Feasibility, Market Testing
  17. FINANCIAL FEASIBILITY:Financial resources and other costs, Cash Flow Analysis
  18. ASSESSMENT OF PERSONAL REQUIREMENTS AND ORGANIZATIONAL CAPABILITIES:Analysis of Competition
  19. Post Operative Problems of a New Enterprise:Environmental Causes
  20. HOW TO APPROACH LENDERS:Bank’s Lending Criteria, Specific Purpose, Be Well Prepared
  21. WHAT A BANK NEEDS TO KNOW ABOUT YOU:General Credentials, Financial Situation
  22. COMMERCIAL INFORMATION:Checklist for Feasibility Study, The Market
  23. GUARANTEES OR COLLATERAL YOU CAN OFFER:Typical Collateral
  24. Aspects of Financial Management:WINNING THE CASH FLOW WAR, The Realization Concept
  25. MEANING OF WORKING CAPITAL:Gross Working Capital, Net Working Capital
  26. RECRUITMENT, SELECTION AND TRAINING:Job Description, Job Specification
  27. SELECTION AND HIRING THE RIGHT CANDIDATE:Application Blank, Orientation
  28. TRAINGING AND DEVELOPMENT:Knowledge, Methods of Training
  29. CONDITIONS THAT STIMULATE LEARNING:Limitations of Performance Appraisal, Discipline
  30. QUALITY CONTROL:Two Aspects of Quality, Manufactured Quality
  31. QUALITY CONTROL:International Quality Standards, MARKETING
  32. MARKETING:Marketing Function, MARKETING PROCESS - STEPS
  33. MARKETING:Controllable Variable, Marketing Uncontrollable, Marketing Mix
  34. MARKETING:Demerits of Product Mix, Development of new product, SMEDA
  35. ROLE OF TECHNOLOGY:Training programmes, Publications
  36. ROLE OF TECHNOLOGY:Measure to Undertake for Promoting Framework.
  37. EXPORT POTENTIAL OF SME IN DEVELOPING COUNTRIES I:Commonly Seen Assistance Programme
  38. EXPORT POTENTIAL OF SME IN DEVELOPING Countries. II:At the national level
  39. WORLD TRADE ORGANIZATION (WTO):WTO Agreements: Salient Features
  40. WTO MINISTERIAL CONFERENCES:PAKISTAN AND WTO
  41. WORLD TRADE ORGANIZATION (WTO) PAKISTAN & WTO. II:International Treaties
  42. WORLD TRADE ORGANIZATION (WTO) PAKISTAN & WTO. III:Agriculture
  43. WORLD TRADE ORGANIZATION (WTO):PAKISTAN & WTO. III
  44. WORLD TRADE ORGANIZATION (WTO):CONCLUSIONS AND RECOMMENDATIONS
  45. SUMMARY & CONCLUSIONS:Financing Tool, Financing Tool