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

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SME Management (MGT-601)

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:

SME Management (MGT-601)

Weighted Cost

Method of finance

Proportion

Cost

(Assumed)

[2X3]

(Assumed)

Short term debt

1.40

Intermediate dept

0.80

Long term debt

1.80

Equity

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

SME Management (MGT-601)

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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