FINANCIAL STRATEGIES

Components of F-Strategies
Estimation of required capital through budgeting Capital structure Financial mechanisms Pro forma financial statements Pro forma cash flow statements Break even analysis

Estimation of required capital

Capital budgeting Helps to evaluating the Fixed capital Capital budgeting may project expenditure for new equipments Cost of make or buy decision in manufacturing or a comparison of leasing, buying used or buying new equipments operating budgeting Sales budget Manufacturing/production budgeting Cost budget
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Capital structure
Important financial decision are

What are the various sources of finance internal sources and external sources 2. What should be the proportion of each source in total capital 3. How much financial leverage should a firm employ? i.e equity, preference, debentures
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Financial mechanisms
It is concerned with how to obtain required capital Issue of shares Issue of debentures Public deposits Inter corporate debt Short term & long term loans from FIs and banks Trade credit

Pro forma income statements

Sales less: COGS Gross profit Operating expenses Selling expenses Advertising Salaries, wages Supplies Rent Utilities Insurance Taxes Interest Depreciation Miscellaneous Total operating expenses Profit (loss) before taxes Taxes 6 Net profit(loss) xxx xxx -------xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx ------------------xxx xxx xxx xxx

Pro forma cash flow

Cash flow only when actual payment are received or

made
Sales may not be regarded as cash Cash payment to reduce the principal on a loan do not

constitute a business expense but do constitute a reduction of cash, Depreciation on capital assets is a expense which reduces profit, not a cash outlay On many occasions, profitable firm fail coz of lack of cash
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 To make monthly projections of cash Disbursements > receipts in any time period, borrow

funds or have cash in a bank a/c

First few months of the starts-up will require external

cash (debt) Negative cash flows is very high for any new venture The most difficult problem with projection cash flow is determining the exact monthly receipts & disbursements

Pro-forma balance sheet

Use of the pro-forma income & cash flow statements to

help justify some of the figures Summarizes the assets, liabilities and new worth Balance sheet is a picture of business at certain moment in time and does not covers a period of time

Break-even analysis
Helpful for the entrepreneur to know when the

profit may be achieved The major weakness in calculating lies determining whether a cost is fixed or variable For more the product breakeven may be calculated for each product Graphically

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Pro forma sources & uses of funds

Summarize statements of all the projected

sources of funds available to the venture & how these funds will be used Major uses or applications of funds are to increase assets, retire long term liabilities, reduce owner or stockholders equity & pay dividends Helps the entrepreneur as well as investor to better understand the financial well- being of company as well as the effectiveness of the f-mgt polices of the company
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