Posted: March 24th, 2023

Project Fund: Financial Planning and Forecast

Overview

Financial planning is an immensely important activity to business organizations irrespective of the size and their industry of operation (Shim and Siegel 245). New business enterprises are expected to undertake financial projections as part of the integral business plan. Through the forecast, an organization is in a position to conduct business appraisals and corporate development. The financial plan, in this case, will include important assumptions, risk analysis, breakeven point, cash flow statement, and balance sheet forecast.

Important Assumptions

Financial planning and projection occur in an uncertain environment. Therefore, some assumptions must be considered. The first important assumption in the Project Fund’s financial projection concerns business growth. Business growth takes place from different perspectives, including the augmentation of revenue and assets. The growth in revenue is considered a part of business development because it influences the profits earned and the return on owners’ investments (Dlabay and Burrow 80). The financial projection assumes that the revenue will grow at 10 % from year 1 through year 3. The company’s total assets are expected to grow at 5 % per year, which will assist in building a stronger capacity for the company to raise more revenues and earn profits in the future.

The second assumption in the financial projection is the industry and start-up environment. It is assumed that the online fund industry will grow more in terms of clients. The increased integration among nations, as far as investment and capital flow are concerned, makes it easy for the operators in the industry to serve clients from all over the world. In addition, the only threat to starting up operations in this industry is the presence of the huge amount of capital and technical skills required. The amount of capital required to set up a functional website, purchase of high capacity computers, furniture, and fixtures, and huge legal fees faced by new entrants in the industry.

Pricing and cost control are important tools for financial management and projections. As a new entrant, the project fund intends to keep the fee charged to customers lower than the market price. The aim of this strategy is to attract as many clients as possible and enjoy the benefit of a large pool of customers. Cost control is important because it assists in lowering the costs of operations, and hence relatively high amounts of profits are reported (Keown 426). It is assumed that the company will be able to control and eliminate some costs incurred in the first years.

Risk Analysis

Every business, irrespective of the industry of operation or the size involved, should conduct a risk analysis and develop strategies to mitigate the implications of the risks. Project Fund will likely encounter several risks, including online operation and financial risks. Online fund operations are faced with the threat of fraudulent activities such as hacking, leading to massive losses of funds from either investors, project managers, or the organization. The risk can be managed by adopting online and computer-based security strategies. The other risk facing Project Fund is the introduction of new controls and laws that are likely to limit its operations. Laws concerning online operations are not yet developed in many countries because it is a new phenomenon; currently, existing laws are likely to be reformed due to the industry’s dynamic nature. It is, therefore, a risk if Project Fund will not fulfill the new requirements.

Break-Even Point

The Break-even point represents the point at which the net revenue and total operating expenses tend to be the same. At the break-even point, the net profit is usually equal to zero. The company’s break-even point is not expected at year 1 because the company is expected to operate at a loss. However, the break-even point is realized towards the end of year 2 when a company is expected to report a net profit for the first time.

Chart 1: Break-Even Analysis

Profit and Loss Statement

Project Fund Company

Projected Income Statement for the End of Year 1, Year 2, Year 3

Year 1 Year 2 Year 3 Projected Revenue Revenue 250,000.00 275,000.00 302,500.00 Cost of revenue 11,600.00 12,760.00 14,036.00 Gross profit 238,400.00 262,240.00 288,464.00 Operating expenses Advertising 145,000.00 95,000.00 45,000.00 Telephone 20,000.00 22,000.00 24,200.00 Depreciation 4,890.00 4,890.00 4,890.00 Wages 18,600.00 20,460.00 22,506.00 legal fee 15,000.00 13,000.00 10,000.00 Internet Costs 50,000.00 55,000.00 60,500.00 Repair and maintenance 12,000.00 13,200.00 14,520.00 Utilities 20,000.00 22,000.00 24,200.00 Total Operating expenses 285,490.00 245,550.00 205,816.00 Incomes before interest and tax (47,090.00) 16,690.00 82,648.00 Interest expense 10,900.00 10,900.00 10,000.00 Profit before taxes (57,990.00) 5,790.00 72,648.00 Tax (30% of the profit). – 1,737.00 21,794.40 Net profit (57,990.00) 4,053.00 50,853.60

 

The expected sales for the company in year 1 are $ 250 000, with at least 10 % growth in sales per year. The revenues for year 2 and year 3 are projected to be at $ 275 000 and $ 302, 500 respectively. The growth in revenue is a positive trend; it implies that more clients have developed faith and trust in the services offered.

Chart 2: The Trend in Revenue

There has been a significant reduction in advertising experiences from year 1 to year 2 and then to year 3. In year 1, the company spends more on the advertisement to create awareness of services offered to the potential clients; there is no need to spend such a huge amount in subsequent years.

The reported loss in year 1 is a result of a huge amount of spending while the revenue remains low. The company is at the conception, and hence not many clients are aware of its operation, while much of its funds would be spent to kick-start the operations. In year 2, the company makes a small profit margin as the revenue amount slightly surpasses the expenses incurred (Graham and Smart 464). At the end of year 3, the company is expected to report an appealing amount of profits due to increased revenue and reduced operating expenses.

Balance Sheet Forecast

A balance sheet represents the financial position of an organization by showing the balances in assets, liabilities, and owner’s capital at a given time.

Project Fund Company

Projected Balance Sheet as at the end Year 1, Year 2, Year 3

Pro forma balance sheet Year 1 Year 2 Year 3 Current assets Cash and cash equivalent                150,000.00        157,500.00           165,375.00 Inventory                  10,000.00          10,500.00              11,025.00 Prepaid expenses                  20,000.00          21,000.00              22,050.00 Consumables                  15,000.00          15,750.00              16,537.50 Total current assets                195,000.00        204,750.00           214,987.50 Fixed assets Furniture and fittings                  45,000.00          47,250.00              49,612.50 Computers                  35,000.00          36,750.00              38,587.50 Motor vehicles                  10,000.00          10,500.00              11,025.00 Total fixed assets                  90,000.00          94,500.00              99,225.00 Total Assets                 285,000.00        299,250.00           314,212.50 Current liabilities Accounts payable                        500.00          13,750.00              28,712.50 Payroll liabilities                    1,000.00            1,000.00                1,000.00 Long term debt                208,500.00        209,500.00           209,500.00 Total liabilities                210,000.00        224,250.00           239,212.50 owners equity                  75,000.00          75,000.00              75,000.00 Total liabilities  and equity                285,000.00      299,250.00           314,212.50

 

Assets in a company are essential because they are used in operations to raise revenue and profits. The growth in total assets indicates that the company is growing stronger, and its ability and capacity to raise revenue and profits are guaranteed. The liabilities of a company should be less than the value of the assets to ensure that a company stands at favorable liquidity and leverage status (Les and Burrow, 66).

Cash Flow Statement

A cash flow statement shows how cash flows in and out of an organization over a given time. The cash flow takes place in three categories: operations, investment, and financing. Negative net cash indicates that there are more cash flows out of an organization compared to cash inflow. It is projected that the net cash flow balance will keep on improving from year 1 through year 3.

Project Fund Company

Clash Flow Statement for Year 1, Year 2, Year 3

Cash flow statement Year 1 Year 2 Year 3 Net reported profits                (57,990.00)            4,053.00              50,853.60 Changes in current  assets                195,000.00            9,750.00              10,237.50 Net Cash Flow From Operations             (252,990.00)          (5,697.00)              40,616.10 Investment cash flow changes in fixed assets                (90,000.00)          (4,500.00)              (4,725.00) Add depreciation charged                    4,890.00            4,890.00                4,890.00 Net cash flow from investing activities                (85,110.00)                390.00                    165.00 Cash from financing  activities changes in liabilities                210,000.00          14,250.00              14,962.50 Interest paid                  10,900.00          10,900.00              10,000.00                199,100.00            3,350.00                4,962.50 Total Net Cash Flow             (139,000.00)          (1,957.00)              45,743.60

Chart 5: Cash Flow Statement

 

Works Cited

Dlabay, Les and Jim Burrow. Business Finance. Mason, Ohio: South Western, 2007. Print.

Graham, John and Scott Smart. Introduction to Corporate Finance. Mason, Ohio: South-Western Cengage Learning, 2012. Print.

Keown, Arthur. Foundations of Finance: The Logic and Practice of Financial Management

Beijing: Qinghua University Press, 2004. Print.

Shim, Jae and Joel Siegel. Handbook of Financial Analysis, Forecasting, and Modeling. Chicago, IL: Wolters Kluwer/CCH, 2007. Print.