Presentation on theme: "Financial feasibility study"— Presentation transcript:
1 Financial feasibility study
Chapter (2) Financial feasibility study Lecturer. Ahmed El Rawas
2 chapter content Purpose and definition of financial study
Financial statements Financial analysis Appraisal methods Lecturer. Ahmed El Rawas
3 (1)Purpose of a Financial Feasibility Study
A financial feasibility study looks at how much cash is needed, where it will come from, and how it will be spent. Lecturer. Ahmed El Rawas
4 What is a Financial Feasibility Study?
A financial feasibility study is an assessment of the financial aspects of something. If this case, for starting and running a business. It considers many things including Expenses &Revenues. Assets &liabilities Cash in & cash out. Other portions of a complete feasibility study will also contribute data to your basic financial study. Lecturer. Ahmed El Rawas
5 What is a Financial Feasibility Study?
A financial feasibility study can focus on one particular project or area, or on a group of projects (such as advertising campaigns). However, for the purpose of establishing a business or attracting investors, you should include at least three key things in your comprehensive financial feasibility study: Start-Up Capital Requirements, Start-Up Capital Sources, and Potential Returns for Investors. Lecturer. Ahmed El Rawas
6 Start-Up Capital Requirements
Start-up capital is simply how much cash you need to start your business and keep it running until it is self-sustaining. You should include enough capital funds (cash, or access to cash) to run the business for one to two years. Estimated budget should includes all the main components of the project includes fixed assets such land, buildingconstruction, equipment, furniture, investment cost. Lecturer. Ahmed El Rawas
7 Finding Start-Up Capital Funding Sources ( capital structure)
Financing arrangement determine how the value of the firm is sliced up, either by taking loans the person or institutions that buy debt from the firm are called creditors. Or through equity, The holders of equity shares are called shareholders. Lecturer. Ahmed El Rawas
8 This amount will be financed as follows
Item Amount in L.E. Percentage Owner's equity Long Term Debt 255,000,000 130,000,000 67% 33% Total 385,000,000 100% Lecturer. Ahmed El Rawas
9 Legal forms of organizing firms.
Sole proprietorship: is a business owned by one person It is the cheapest business to form, few government regulation. Pays no corporate income taxes, all profit are taxed as individual income. Has unlimited liability. The life is limited by the life of the sole proprietor Lecturer. Ahmed El Rawas
10 Legal forms of organizing firms.
Partnership: any two or more can get together and form a partnership, there are two types of partnership General: the one who manage the business, has unlimited liability for all dept, is terminated when a general partner dies or withdraw. Limited: do not participate in managing business, the liability is usually limited to the contribution each has made to the partnership. Inexpensive and easy to form, taxed as personal income, Lecturer. Ahmed El Rawas
11 Legal forms of organizing firms
Corporation: it is a distinct legal entity There should be an article of incorporation includes name, business purpose, number of shares authorized to issue, nature of the rights granted to shareholders, number of member in the BOD. Has unlimited life because it is separate from its owners. Ownership can be transferred to new owners. Has limited liability. Lecturer. Ahmed El Rawas
12 Requirements for establishing corporation ( IN EGYPT )
Capital must not be less than 500,000 LE. the founders must own 10 % of the authorized shares. The shares authorized should not be less than 49% to Egyptian citizens.. 25% from the par value must be paid at the time of purchase and the rest of the amount should be in installment. ( max period is 10 years from the establishing data of the company.) Lecturer. Ahmed El Rawas
13 Potential Returns for Investors Feasibility Study
Investors can be a friends, family members, client, partners, share holders, or investment institutions. Any business or individual willing to give you cash can be a potential investor. Investors give you money with the understanding that they will receive “returns” on their investment, that is, in addition to the amount that is invested they will get a percentage of profits. Lecturer. Ahmed El Rawas
14 Potential Returns for Investors Feasibility Study
In order to entice investors you need to show how your business will make profits, when it will begin to make profits, how much profit it will make, and what investors will gain from their investment. The investment return section should offer both a description of how investors will be involved and discuss different variables that will affect the profitability of your business, offering more than one scenario. Lecturer. Ahmed El Rawas
15 (2)Financial statements
Financial statements provide an overview of a business or person's financial condition in both short and long term. All the relevant financial information of a business enterprise, presented in a structured manner and in a form easy to understand, are called the financial statements. There are three basic financial statements: Balance sheet Income statement Statement of cash flow Lecturer. Ahmed El Rawas
16 Purpose of financial statements
The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions."Financial statements should be understandable, relevant, reliable and comparable. Reported assets, liabilities and equity are directly related to an organization's financial position. Reported income and expenses are directly related to an organization's financial performance. Lecturer. Ahmed El Rawas
17 Purpose of financial statements
Financial statements are intended to be understandable by readers who have "a reasonable knowledge of business and economic activities and accounting and who are willing to study the information."Financial statements may be used by users for different purposes: Owners and managers require financial statements to make important business decisions that affect its continued operations. Financial analysis is then performed on these statements to provide management with a more detailed understanding of the figures. These statements are also used as part of management's annual report to the stockholders. Lecturer. Ahmed El Rawas
18 Purpose of financial statements
Employees also need these reports in making collective bargaining agreements (CBA) with the management, in the case of labor unions or for individuals in discussing their compensation, promotion and rankings. Prospective investors make use of financial statements to assess the viability of investing in a business. Financial analyses are often used by investors and are prepared by professionals (financial analysts), thus providing them with the basis for making investment decisions. Lecturer. Ahmed El Rawas
19 Purpose of financial statements
Financial institutions (banks and other lending companies) use them to decide whether to grant a company with fresh working capital or extend debt securities (such as a long-term bank loan ) to finance expansion and other significant expenditures. Government entities (tax authorities) need financial statements to ascertain the propriety and accuracy of taxes and other duties declared and paid by a company. Lecturer. Ahmed El Rawas
20 Purpose of financial statements
Vendors who extend credit to a business require financial statements to assess the creditworthiness of the business. Media and the general public are also interested in financial statements for (transparency in front of the community ) Lecturer. Ahmed El Rawas
21 Balance sheet: Balance sheet: referred to as statement of financial position or condition, reports on a company's assets, liabilities, and net equity as of a given point in time. Another definition: is an accountant snapshot of the firms accounting value on a particular date, as through the firm stood momentarily still. The balance sheet shows what assets the firm controls at a point in time and how it financed the assets. Assets= Liabilities + owners equity Lecturer. Ahmed El Rawas
22 Balance sheet Assets are economic resources that are expected to produce economic benefits for their owner. Liabilities are obligations the company has to outside parties. Liabilities represent others' rights to the company's money or services. Examples include bank loans, debts to suppliers and debts to employees. Shareholders' equity is the value of a business to its owners after all of its obligations have been met. This net worth belongs to the owners. Shareholders' equity generally reflects the amount of capital the owners have invested, plus any profits generated that were subsequently reinvested in the company. Lecturer. Ahmed El Rawas
23 Balance Sheet Assets Cash in hand Cash in bank Account Receivables
Notes receivables Total Inventory( raw materials, finished goods, spare parts) Total Current Assets Land, Plant, Equipment and Furniture (-)Accumulated Depreciation Total fixed Assets Total assets Lecturer. Ahmed El Rawas
24 Balance sheet Liabilities Accounts Payable short term loans
Bank over draft Notes payable current term liabilities Long Term Loans, Owner's Equity Capital +Net profit or – net loss (-)drawing Total Liabilities and Equity Lecturer. Ahmed El Rawas
25 BALANCE SHEET COMPONENTS - ASSETS
Total Assets Total assets on the balance sheet are composed of: 1. Current Assets – These are assets that may be converted into cash, sold or consumed within a year or less. These usually include: Cash – This is what the company has in cash in the bank. Cash is reported at its market value at the reporting date in the respective currency in which the financials are prepared. (Different cash denominations are converted at the market conversion rate. Lecturer. Ahmed El Rawas
26 BALANCE SHEET COMPONENTS - ASSETS
Accounts receivable – This represents the money that is owed to the company for the goods and services it has provided to customers on credit. Every business has customers that will not pay for the products or services the company has provided. Management must estimate which customers are unlikely to pay and create an account called allowance for doubtful accounts. Variations in this account will impact the reported sales on the income statement. Accounts receivable reported on the balance sheet are net of their realizable value (reduced by allowance for doubtful accounts). Lecturer. Ahmed El Rawas
27 BALANCE SHEET COMPONENTS - ASSETS
Notes receivable – This account is similar in nature to accounts receivable but it is supported by more formal agreements such as a "promissory notes" (usually a short term-loan that carries interest). Furthermore, the maturity of notes receivable is generally longer than accounts receivable but less than a year. Notes receivable is reported at its net realizable value (what will be collected). Inventory – This represents raw materials and items that are available for sale or are in the process of being made ready for sale. These items can be valued individually by several different means - at cost or current market value - and collectively by FIFO (first in, first out), LIFO (last in, first out) or average-cost method. Inventory is valued at the lower of the cost or market price to preclude overstating earnings and assets. Lecturer. Ahmed El Rawas
28 BALANCE SHEET COMPONENTS - ASSETS
2. Long-term assets – These are assets that may not be converted into cash, sold or consumed within a year or less. The heading "Long-Term Assets" is usually not displayed on a company's consolidated balance sheet. However, all items that are not included in current assets are long-term Assets. These are: Lecturer. Ahmed El Rawas
29 Fixed assets Fixed assets – These are durable physical properties used in operations that have a useful life longer than one year. This includes: Land – The land owned by the company on which the company's buildings or plants are sitting on. Land is valued at historical cost and the only fixed asset that has no depreciation. Lecturer. Ahmed El Rawas
30 Fixed assets Machinery and equipment – This category represents the total machinery, equipment and furniture used in the company's operations. These assets are reported at their historical cost less accumulated depreciation. Lecturer. Ahmed El Rawas
31 Fixed assets Buildings (plants) – These are buildings that the company uses for its operations. These assets are depreciated and are reported at historical cost less accumulated depreciation. Lecturer. Ahmed El Rawas
32 BALANCE SHEET COMPONENTS - LIABILITIES
Total Liabilities Liabilities have the same classifications as assets: current and long-term. Current liabilities – These are debts that are due to be paid within one year or the operating cycle, whichever is longer; further, such obligations will typically involve the use of current assets, the creation of another current liability or the providing of some service. Lecturer. Ahmed El Rawas
33 BALANCE SHEET COMPONENTS - LIABILITIES
Accounts payable – This amount is owed to suppliers for products and services that are delivered but not paid for. Notes payable (short-term loans) – This is an amount that the company owes to a creditor, and it usually carries an interest expense. Long-term Liabilities – These are obligations that are reasonably expected to be liquidated at some date beyond one year or one operating cycle. Long-term obligations are reported as the present value of all future cash payments. Lecturer. Ahmed El Rawas
34 SHAREHOLDERS' (STOCKHOLDER'S) EQUITY BASICS
Components of Shareholder’s Equity Also known as “equity” and “net worth”, the shareholders’ equity refers to the shareholders’ ownership interest in a company. Usually included are: Preferred stock – This is the investment by preferred stockholders, which have priority over common shareholders and receive a dividend that has priority over any distribution made to common shareholders. This is usually recorded at par value. Has no right to vote in the BOD. Common stock – This is the investment by stockholders, and it is valued at par or stated value. Has the right to vote in the BOD. Retained earnings – This is the total net income (or loss) less the amount distributed to the shareholders in the form of a dividend since the company’s initiation. Lecturer. Ahmed El Rawas
35 Income statement: Income statement: also referred to as Profit and Loss statement reports on a company's income, expenses, and profits over a period of time. Profit & Loss account provide information on the operation of the enterprise. These include sale and the various expenses incurred during the processing state. The income statement indicates the flow of sales, expenses, and earnings during a period of time. Revenues- Expenses= Income Lecturer. Ahmed El Rawas
36 INCOME STATMENT Sales Revenue (-)Cost of Goods Sold (COGS)
Gross Profit ( the real activity of the company) (-)Operating Expenses (-)Depreciation (-)General and Administrative Expenses (-) maintenance (-) bad debt Earnings Before Interest and Taxes (EBIT) (-)Interest ( 10% %) Earnings Before Taxes (EBT) (-)Taxes ( 40%) Net Income (Loss) Lecturer. Ahmed El Rawas
37 Statement of cash flows
Statement of cash flows: reports on a company's cash flow activities, particularly its operating, investing and financing activities. This statement helps to explain the change in accounting cash and equivalents. The statement of cash flows shows the effect on the firm's cash flows of earnings and changes in the assets, current liabilities, long-term liabilities and net worth. Cash inflow- cash outflow = net Cash flow The statement of cash flow reports the impact of a firm's operating, investing and financial activities on cash flows over an accounting period. The cash flow statement is designed to convert the accrual basis of accounting used in the income statement and balance sheet back to a cash basis. Lecturer. Ahmed El Rawas
38 Statement of cash flows
1. Cash Flow from Operating Activities (CFO) CFO is cash flow that arises from normal operations such as revenues and cash operating expenses net of taxes. This includes: Cash inflow (+) Revenue from sale of goods and services Cash outflow (-) Payments to suppliers Payments to employees Payments to government Payments to lenders Payments for other expenses Lecturer. Ahmed El Rawas
39 Statement of cash flows
Cash Flow from Investing Activities (CFI) CFI is cash flow that arises from investment activities such as the acquisition or disposition of current and fixed assets. This includes: Cash inflow (+) Sale of property, plant and equipment Sale of debt or equity securities (other entities) Collection of principal on loans to other entities Cash outflow (-) Purchase of property, plant and equipment Purchase of debt or equity securities (other entities) Lending to other entities Lecturer. Ahmed El Rawas
40 Statement of cash flows
Cash flow from financing activities (CFF) CFF is cash flow that arises from raising (or decreasing) cash through the issuance (or retraction) of additional shares, short-term or long-term debt for the company's operations. This includes: Cash inflow (+) Sale of equity securities Issuance of debt securities Cash outflow (-) Dividends to shareholders Redemption of long-term debt Repayment of Loans Installments Interests Taxes Lecturer. Ahmed El Rawas
41 CASH FLOW Cash In Sales Loans Total Cash In Cash Out Investment Costs
Operating Expenses Repayment of Loans Installments Interests Taxes Buying new fixed assets Total Cash Out Net Cash Flow Lecturer. Ahmed El Rawas
42 (3)Financial analysis Financial ratios can be used to estimate systematic risk. Financial analysis often assess the firm's: 1. Profitability - its ability to earn income and sustain growth in both short-term and long-term. A company's degree of profitability is usually based on the income statement, which reports on the company's results of operations; 2. Solvency or effeciency. - its ability to pay its obligation to creditors and other third parties in the long-term. Lecturer. Ahmed El Rawas
43 Financial analysis 3.Liquidity - its ability to maintain positive cash flow, while satisfying immediate obligations; Both 2 and 3 are based on the company's balance sheet, which indicates the financial condition of a business as of a given point in time. 4. Stability- the firm's ability to remain in business in the long run, without having to sustain significant losses in the conduct of its business. Assessing a company's stability requires the use of both the income statement and the balance sheet, as well as other financial and non-financial indicators. Lecturer. Ahmed El Rawas
44 Financial ratios A. Liquidity Ratios: Ratios that show the relationship of a firm's cash and other current assets to its current liabilities. 1. Current Ratio: Indicates the extent to which current liabilities are covered by assets expected to be converted into cash in the near future. Current Ratio= Current Assets / Current Liabilities 2. Quick (Acid Test) Ratio: It is a measure of the firm's ability to pay off short-term obligations without relying on the sale of inventories. Quick Ratio= Current Assets – Inventories / Current Liabilities 3. Working Capital: A firm's investment in short term assets. Working Capital= Current Assets – Current Liabilities Lecturer. Ahmed El Rawas
45 Lecturer. Ahmed El Rawas
46 Financial ratios B. Profitability Ratios: Ratios showing the effect of liquidity, asset management and debt management on operating results. 1. Return On Equity (ROE): Ratio of net income to equity measuring the rate of return on investment. Return On Equity= Net Income / Owner's Equity x 100 2. Net Profit Margin on Sales: Measures net income per pound of sales. Net Profit Margin on Sales= Net Income / Sales x 100 3. Return on asset (ROA): this ration measure net income to total asset Return on asset= Net income / total assets Lecturer. Ahmed El Rawas
47 Financial ratios C. solvency, Asset Management Ratios or efficiency ratios: Ratios that measure how effectively a firm is managing its assets. 1. Receivables Collection Period: It is the average length of time required to convert the firm's receivables into cash. Receivables Collection Period= Receivables / Sales x 365 2. Inventory Conversion Period: It is the average length of time required to convert materials into finished goods and then to sell these goods. Inventory Conversion Period= Inventory / Cost of Goods Sold x 365 stability, D. Capitalization Ratio: Determines how much is a project relying on internal forces (owner's equity) compared to external resources (loans) Capitalization= Long Term Liabilities / Owner's Equity x 100 Lecturer. Ahmed El Rawas
48 Current Ratio ( Example)
This ratio measures how much current liabilities is covered by current assets, For our project: each L.E 1 current liabilities is covered by 0.91 current assets in year 2004 and 0.8 current assets in year 2005 and 1.05 current assets in year It decreases in 2008,2009 then it goes up again in 2010, and that’s a good sign. Lecturer. Ahmed El Rawas
49 Appraisal methods Pay back period Net present value
Internal rate of return Lecturer. Ahmed El Rawas
50 Pay back period The payback, also called pay-off period, is defined as the period required to recover the original investment outlay through the accumulated net cashflow earned by the project. Year+ cumulative net cash flow in previous period\ Net cash flow in the next period Lecturer. Ahmed El Rawas
51 Net present value The net present value of a project is defined as the value obtained by discounting, at a constant interest rate and separately for each year, the differences of all annual cash outflows and inflows accruing throughout the life of a project. NPV= ∑NCFn\ (1 + r)n Accept a project if the NPV is greater than Zero Reject a project if the NPV is less than Zero Lecturer. Ahmed El Rawas
52 Internal rate of return
The internal rate of return is the discount rate at which the present value of cash inflows is equal to the present value of cash outflows. Lecturer. Ahmed El Rawas
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