MGT601 - SME Management - Lecture Handout 17

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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.

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

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

1) Method of finance 2 )Proportion (Assumed) 3 ) Cost
4)Weighted Cost
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.

Key Terms

Feasibility study a detailed study about judging the future of a commercial project/product

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