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MGT601 - SME Management - Lecture Handout 17

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FINANCIAL FEASIBILITY OF SMES

This lecture deals 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 ------- -------
Sub Total(1) ------- -------
Fixed investments ------- -------
Building ------- -------
Equipment and machinery ------- -------
Patents ------- -------
Other equipments ------- -------
Sub Total(2) ------- -------
Operational expenditure ------- -------
Material ------- -------
Wages ------- -------
Sales promotion, distribution ------- -------
Rent, interest, insurance, taxes ------- -------
Contingency ------- -------
Sub Total(3)    
Total 1+2+3 1+2+3

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.

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MGT604 - Management of Financial Institutions - Lecture Handout 44

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Related Content: MGT604 - VU Lectures, Handouts, PPT Slides, Assignments, Quizzes, Papers & Books of Management of Financial Institutions

Classic Financial Scandals

"Bankers who hire money hungry geniuses should not always express surprise and amazement when some of them turn around with brilliant, creative, and illegal means of making money." “The quotation is from a speech by the financial thriller writer on the Psychology of Risk, Speculation and Fraud, at a conference on EMU in Amsterdam. Barings Bank collapsed when one of the Singapore based employees of London's Barings Bank, Nick Leeson, lost £827 million (US$1.4 billion) - primarily on futures contract speculation. Leeson's actions led the oldest merchant bank to default on its debts. The bank's collapse is considered a pivotal turning point in the history of banking and has become a textbook example of accounting fraud.

• Internal auditing

The way that Barings Bank's activities in Singapore were organized between 1992 and 1995 enabled Leeson to operate effectively without supervision from Barings Bank's head office in London. Leeson acted both as head of settlement operations (charged with ensuring accurate accounting) and as floor manager for Barings' trading on Singapore International Monetary Exchange (SIMEX). Normally the positions would have been held by two employees. This concentration of functions placed Leeson in the position of reporting to an office inside the bank which he himself held. Several observers, including Leeson, placed much of the blame on the bank's own deficient internal auditing and risk management practices.

• Corruption

Because of the absence of oversight, Leeson was able to make seemingly small gambles in the futures market at Barings Futures Singapores (BFS) and cover for his shortfalls by reporting losses as gains to Barings in London. Specifically, Leeson altered the branch's error account, subsequently known by its account number 88888 as the "five-eight account," to prevent the London office from receiving the standard daily reports on trading, price, and
status. Leeson claims the losses started when one of his colleagues bought contracts when she should have sold them. By December 1994 Leeson had cost Barings £200 million but he reported to British tax authorities a £102 million profit. If the company had uncovered his true financial dealings then, collapse might have been avoided as Barings had capital of £350 million

Read more: MGT604 - Management of Financial Institutions - Lecture Handout 44