This presentation comes from the HIMALI Local Resource Person (LRP) Training. In this presentation the HIMALI team provided instruction on how to properly prepare grant application tables, profit & loss accounts, balance sheets, and basic cash flow. The Local Resource Person develops the business plans that is acceptable to HIMALI and government officials. Their primary responsibility is to identify proponents and to help them apply for HIMALI grants. LRPs also work to gain grant support. The LRP will cooperate with the district DCCI and District Project Coordinator, based either at the District Agricultural Development Office (DADO) (Solukhumbu, Manang, Dolpa, Mugu and Humla) or at the District Livestock Services Office (DLSO) (Sankhuwasabha, Dolakha, Rasuwa, Mustang, Jumla); and with AEC district planning specialists. They also work closely with the Social mobilizers, as well as with Roster Specialists based in Kathmandu.

1. High Mountains Agribusiness and Livelihood
Improvement Project
(HIMALI)
LRPs & AEC Training
April 2013
1

2. AGENDA
Introduction
Preparing Grant Application Table
Accounting Convention
Preparing Profit & Loss Account
Preparing Balance sheet
Preparing Basic Cash flow
Financial Appraisal
Case Study
Conclusion
Page 2
Training Session-LRP & AEC
HIMALI

3. Introduction
What is a business?
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An organisation which uses economic resources
(capital) to create goods or services which customers
will buy.
A business is an organization providing jobs for people
A
business
invest
money
in
resources
(building, machinery, employees) in order to make
even more money (profit) to its owners.
Legally registered with the Regulatory Bodies
Page 3
Training Session-LRP & AEC
HIMALI

4. Introduction
Objectives of Business
Survival
Growth
Page 4
Profit
Training Session-LRP & AEC
Social
Responsibility
HIMALI

5. Introduction
Type of Business
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Sole Traders
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Partnerships
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Single person working for oneself
Partnership occur when two or more sole traders decide to
share the risks and rewards of a business together
Maximum of 50 people
Limited Liability
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Page 5
Public Limited
Private Limited
• Single Shareholder
• Multi Shareholders
Training Session-LRP & AEC
HIMALI

6. Introduction
Eligible Business for Grant
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Production, processing, value-adding, and manufacture
of finished mountain products;
Collection, storage, grading, quality
management, packing for distribution and marketing;
Agro-tourism including local-produced food
services, handicrafts, and agricultural and natural
resource experience-based tourism services products;
Facilities for aggregating and exporting agro-products
from HIMALI mountain districts, and draft animal
services and way-station facilities;
Page 6
Training Session-LRP & AEC
HIMALI

7. Introduction
Eligible Business for Grant
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Page 7
Tracks, culverts, short road connections that are essential
for agribusiness development and that are co-funded by
the concerned farmer groups or agribusiness (i.e. not
general public tracks and roads);
Small-scale irrigation and water harvesting works that are
owned, managed and maintained by registered farmer
groups;
Nurseries, planting and small civil works for community
forestry and rangeland business resource development,
including for timber, grazing and MAPs.
Training Session-LRP & AEC
HIMALI

8. Introduction
Not Eligible Business for Grants
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Page 8
Purchase or lease of land
Business operating and trading capital (Except for limited
working capital)
Speculative investment
Study tours
Training Session-LRP & AEC
HIMALI

9. Introduction
Finance of business
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Page 9
Share capital from Owners
Loan from Banks
Government
Donors
Bonds
Public
Private Investor
Training Session-LRP & AEC
HIMALI

10. Introduction
Why to Finance?
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Page 10
Return of profit
Dividend
Increase in wealth (Share Price)
Interest
Employment
Development & Welfare
Training Session-LRP & AEC
HIMALI

11. Introduction
Use of Finance for the business?
Entrepreneurship
Land
Labor
Capital
Page 11
Training Session-LRP & AEC
Knowledge
HIMALI

12. Introduction
Need of Projected Financial Statement?
Projected Financial statement helps Investor to make
decision on financing by providing information on:
• Risk of the Business
• Use of Investment (Finance)
• Financial performance of the business over the time
(Return)
• Financial position of the business
• Cash position and cash generation ability of the
business
• Management
• Market & product
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Training Session-LRP & AEC
HIMALI

13. Introduction
Components of Projected Financial Statement
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Profit & Loss Account- performance over a given period
Balance sheet- financial picture on a given day
Cash Flow Statement- performance over a given period
Notes to Accounts- Explain above Statements
Page 13
Training Session-LRP & AEC
HIMALI

14. Introduction
Desirable Qualities of Projected Financial Statement
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Page 14
Relevance
Reliability
Completeness
Timeliness
Comparability
Training Session-LRP & AEC
HIMALI

15. Grant Application Table
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Page 15
A table showing details of eligible business development
cost that are applied for grant to HIMALI Project
Facilitate management of HIMALI Project
Derived from Production Plan
Should clearly show the contribution of business & grant
Should be expressed in NRs and USD as well
For Business development cost below USD 50,000, HIMALI
project will provide grant up to 80% of cost
For Business development cost above USD 50,000, HIMALI
project will provide grant up to 50% of cost
Training Session-LRP & AEC
HIMALI

16. Grant Application Table
The following principles will be applied for HIMALI grant share:
• For business proposals originating from proponents
registered in the respective project district and based on the
priority list of raw material/commodity, the grant share will
be as defined in the Project Administration Manual (PAM);
• For business proposals originating from proponents
registered in the project district but not based on the priority
list of raw material/commodities, the grant share will be 50%;
and
• For business proposals originating from proponents not
registered in the project district but based on the priority list
of raw material/commodity, the grant share will be 50%. The
maximum grant share will be $250,000 in all cases.
Page 16
Training Session-LRP & AEC
HIMALI

17. Grant Application Table
Cost that should not be included
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Purchase or lease of land
Business operating and trading capital (Except for
limited working capital)
Speculative investment
Study tours
Page 17
Training Session-LRP & AEC
HIMALI

18. Grant Application Table
Limited Working Capital
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•
Page 18
HIMALI grant resources may be used to finance limited
“working capital” to cover material inputs which are
required to bring the business in operation and generate
the first cycle of revenue.
However, the eligibility for working capital shall be limited
to a maximum of two years.
Training Session-LRP & AEC
HIMALI

19. Grant Application Table
Business development cost are dependent on:
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Page 19
Business opportunity (Demand of product & services)
Availability of market
Availability of market intermediaries
Environment & resources
Competition
Managerial skills & knowhow
Availability of raw materials
Availability of skilled & unskilled labours
Legislation
Availability of capital
Profitability
Training Session-LRP & AEC
HIMALI

20. Grant Application Table
Trout Farming
Business opportunity:
• More than 10,000 tourist in a year in Mustang
• Around 5000 households in the Mustang
• Demand of around 15 ton in the district which is not
being met
• No competition till date
Page 20
Training Session-LRP & AEC
HIMALI

21. Grant Application Table
Trout Farming
Availability of market and market intermediaries
• Existing fresh houses in each market
• Traders available in district who are willing to distribute
the products
• Accessibility of road to all the market
Page 21
Training Session-LRP & AEC
HIMALI

22. Grant Application Table
Trout Farming
Environment & Resources
• Leased a land 30 km south of Jomsom, the headquarter of
Mustang district and about 50 km north from Beni, the
headquarter of Myagdi district at an altitude of 2013 mt.
• The site is located on the road corridor of Beni–Jomsom
highway which is highly accessible for input supplying and
trout marketing.
• The site contains natural cold springs and waterfalls having
a temperature range of 80C to 180C all round the year and
water flow at the rate of over 50 liters per second which is
favorable for trout farming.
• There is no possibility of flooding at the site
Page 22
Training Session-LRP & AEC
HIMALI

23. Grant Application Table
Trout Farming
Environment & Resources
• A feasibility of trout farming in Mustang District, completed
in 2012 by a Government technical team from 'Rastriya
Prakritik Tatha Kritim Jalasya Matsya Bikas Karyakaram' ,
Kendriya Matsya Bahawan, Balaju', Kathmandu, described
the potential for rainbow trout farming in Mustang District
and confirmed that rainbow trout farming can be
successfully done at sites below Kobang VDC where the cold
water temperature ranges from 8-18 degrees Celsius and the
dissolved oxygen content in the water is >7 ppm.
Page 23
Training Session-LRP & AEC
HIMALI

24. Grant Application Table
Trout Farming
Managerial skills & knowhow
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Taken training of rearing trout fish
Have toured numbers of trout farms
Trout Expert and Entrepreneurs available for advice
Page 24
Training Session-LRP & AEC
HIMALI

25. Grant Application Table
Trout Farming
Competition
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No competition till date
Trout farm only in Pokhara who sells all its trouts in
Pokhara (Current situation: Demand not met by supply
in Pokhara)
Page 25
Training Session-LRP & AEC
HIMALI

26. Grant Application Table
Trout Farming
Availability of raw materials
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•
The trout fry will be supplied from the trout breeding
farm of Sardi Khola, Pokhara
Trout feed will be purchased from a feed company in
Pokhara or Butwal.
Page 26
Training Session-LRP & AEC
HIMALI

27. Grant Application Table
Trout Farming
Availability of skilled & unskilled labours
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2 person available with past experience of working in trout
farm
2 unskilled person available who will attend the training on
trout farming
1 person available skilled in administrating and account
keeping of the business
Page 27
Training Session-LRP & AEC
HIMALI

28. Grant Application Table
Trout Farming
Availability of capital
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•
Page 28
Bank balance of NRs. 25,00,000 for initial investment and
running the business
Rest will be financed by HIMALI project
Training Session-LRP & AEC
HIMALI

29. Grant Application Table
Trout Farming
Legislation
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Page 29
Confirmation that Annapurna Conservation will give the
permission
The business will be registered in Small Cottage and
Industry Development Centre
The business will be registered in tax office
Confirmation on Approval from Community
Confirmation on Approval from VDC
Training Session-LRP & AEC
HIMALI

30. Grant Application Table
Trout Farming
Decision- Considering all the factors
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Produce & sell ard. 7.5 ton of trout fish each year
Page 30
Training Session-LRP & AEC
HIMALI

31. Grant Application Table
Identify all the business develop cost that are required to
bring the business into operation
• Land Lease Cost
• Business Registration Cost
• Civil Works
• Raceway Construction Site Leveling
• Concrete Raceway
• Inlet canal construction
• Construction of equipment and feed store room
Page 31
Training Session-LRP & AEC
HIMALI

32. Grant Application Table
Identify all the business develop cost that are required to
bring the business into operation
• Machineries & Equipments
• Water supply pipes, valves, and fittings
• Hand nets
• Buckets (50 L)
• Defreeze machine
• Electric meter, Coil and Parts set
• Fries of Trout
• Feeding Cost
• Medical Cost
• Labour Cost
Page 32
Training Session-LRP & AEC
HIMALI

33. Grant Application Table
Quantify the business development cost in money & units
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Page 33
The units/quantity should be based on the size of
production plan.
The purchase rate of civil construction should be based
on Engineering valuation.
The purchase rate of machineries, equipments, raw
materials should be based on 3 competitive quotations.
Training Session-LRP & AEC
HIMALI

34. Grant Application Table
•
Fill up the template of grant application table
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•
Page 34
Only eligible cost should be included
In this case:
• Land lease cost will not be included
• Proponent has decided that he will cover the
business registration cost
• The proponent has decided that he will apply for
grant for civil cost, machinery & equipment cost.
• He will bear other cost from his own capital
Training Session-LRP & AEC
HIMALI

35. Grant Application Table
•
Page 35
Filled up Grant Application Table
Training Session-LRP & AEC
HIMALI

36. Break of 5 minutes
36

37. Accounting Convention
Accounting practice has developed gradually over a matter of
centuries. The following concepts & assumption are used for
preparing the accounts.
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Business Entity
Going Concern
Accruals or Matching
Prudence
Consistency concept
Materiality
Substance over form
Money Measurement
Historical Cost Convention
Stable Monetary Unit
Page 37
Training Session-LRP & AEC
HIMALI

38. Accounting Convention
The following concepts & assumption are used for preparing the
accounts.
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Objectivity
Realisation
Duality
Time Interval
Page 38
Training Session-LRP & AEC
HIMALI

39. Accounting Convention
Business Entity Concept
• States that a business is treated as a separate entity from its
owners for accounting profit
Going Concern
• Assumes that business will continue to exist for the foreseeable
future while preparing financial statements
Accrual Basis
• Under accrual basis, the effects of transactions and other
events are recognized when they occur (and not as cash or its
equivalent are received or paid)
Page 39
Training Session-LRP & AEC
HIMALI

40. Accounting Convention
Matching Concept
• The profit & loss account has to match the revenue earned to
the cost of earning that revenue
– Cost of Goods sold (Production less sales= closing stock)
– Prepayments
– Accrual Expenses
Prudence Concept
• The inclusion of a degree of caution in the exercise of the
judgements needed in making the estimates required under
conditions of uncertainty, such that assets or income are not
overstated and liabilities or expense are not understated
Page 40
Training Session-LRP & AEC
HIMALI

41. Accounting Convention
Consistency
• The presentation and classification of the items on the financial
statements should stay the same from one period to the next.
Materiality and aggregation
• All material items should be disclosed in the financial
statements
• Amounts which are immaterial can be aggregated with amounts
of similar nature or function and need not be presented
separately.
Page 41
Training Session-LRP & AEC
HIMALI

42. Accounting Convention
Substance over form
• The principle that transactions and other events are accounted
for and presented in accordance with their substance and
economic reality and not merely their legal form
Money Measurement
• States that accounts will only deal with those items to which a
monetary values can be attributed
Historical Cost Convention
• Means that transactions are recorded at the cost when they
occur
Page 42
Training Session-LRP & AEC
HIMALI

43. Accounting Convention
Stable Monetary Unit
• It is assumed that the value of the monetary unit to express financial
statements remains constant over the time
Objectivity
• Means that accountant must be free from bias
Realisation
• Means that revenue and profits are recognized when realised
Duality
• Every transaction has two effects. i.e. Double entry bookkeeping
Time Interval
• Must be prepared covering time. i.e. One year
Page 43
Training Session-LRP & AEC
HIMALI

44. Profit & Loss Account
A Profit and Loss Account shows the following information for a
business over a period of time (norm. one yr):
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Page 44
Sales Revenue earned by the business
Costs of Production that the business has paid
Shows other expenses incurred for earning revenue
Profit/ (loss) earned by the business
HIMALI require 5 years of projected profit & loss account
Prepared under Accrual Basis & Matching Concept
Training Session-LRP & AEC
HIMALI

45. Profit & Loss Account
Sales
Less Cost of Sales
= Gross Profit
Less Expenses / Overheads
X
x
x
x
Less Tax
x
=Net Profit/ (loss)
x
Page 45
Training Session-LRP & AEC
HIMALI

46. Profit & Loss Account
Sales
– Revenue earned from sales of goods/products or services even
though cash may not have been received by the business
– Number of items sold X selling price per item.
Cost of Sales / Cost of Goods Sold
– costs directly involved in producing product eg. materials, direct labour.
Gross Profit
– Highly significant figure as it represents the profit made from sale of
goods/services
– Sales revenue – cost of sales .
Page 46
Training Session-LRP & AEC
HIMALI

47. Profit & Loss Account
Other Expenses
• indirect / fixed costs / overheads, i.e. costs that are not directly
involved with producing and are not included in cost of goods
sold.
Gross Profit -Other expenses-Tax = Net Profit.
Page 47
Training Session-LRP & AEC
HIMALI

48. Profit & Loss Account
Trout Farm
• Estimate the revenue for five years
Annual Revenues
Trout (200 gm)
Unit
Kg
2013
7,480
2014
7,480
2015
7,480
2016
7,480
2017
7,480
• Quantify the revenue in term of money
Product
Trout (200 gm)
Page 48
Unit Rate
Kg
2013
Amount (NRs.)
2014
2015
2016
2017
700 5,236,000 5,236,000 5,236,000 5,236,000 5,236,000
Training Session-LRP & AEC
HIMALI

49. Profit & Loss Account
Trout Farm
• Identify the cost of sales (Raw materials, and other inputs)
Raw material, and other
inputs
Trout fry
Feed
Antibiotics and other vet
medicines
Page 49
Unit
No.
Kg
NRs.
2014
2015
2016
2017
2018
46,750
18,990
46,750
18,990
46750
18,990
46,750
18,990
46,750
18,990
1
1
1
1
1
Training Session-LRP & AEC
HIMALI

50. Profit & Loss Account
Trout Farm
• Trout Fry
– Based on the size of Raceway
– Of the 46,750 trout fry that are stocked, about 20 % mortality will be
expected before the trout reach 200 grams (marketable size).
– Technical Parameter: 1 cubic meter of the raceway can stock about 300400 fry (1-2 gm size) and the same volume can stock 150-200 developing
fry (> 50 gm and < 150 gm size), and the same volume of raceway can
stock about 50-80 gram trout (>150 gm and < 250 gm).
– The 16 raceways totaling about 744 cubic meters of water will be
stocked with 46,750 trout fry (each 1-2 grams) and will be used to
produce about 7480 kilograms of trout (that is, about 10.05 kg per cubic
meter).
Page 50
Training Session-LRP & AEC
HIMALI

51. Profit & Loss Account
Trout Farm
• Trout Feed
Month
Month #1
Month #2
Month #3
Month #4
Month #5
Month #6
Month #7
Month #8
Month #9
Month #10
Month #11
Month #12
Total Feed Fed
Page 51
Average Weight of Number of Fish Quantity of Fish % Body Weight Quantity of Feed
Trout (grams)
to be Fed
to be Fed
Fed/Day
Fed per Month
(kg)
(kg)
1.5
10
20
40
60
80
100
120
140
160
180
200
46,750
39,738
39,270
38,802
38,335
37,868
37,400
37,400
37,400
37,400
37,400
37,400
Training Session-LRP & AEC
70
397
785
1,552
2,300
3,029
3,740
4,488
5,236
5,984
6,732
7,480
5%
5.00%
2.00%
2.00%
2.00%
2.00%
1.50%
1.50%
1.25%
1.50%
1.25%
1.25%
105
596
471
931
1,380
1,818
1,683
2,020
1,964
2,693
2,525
2,805
18,990
HIMALI

52. Profit & Loss Account
Trout Farm
• Quantify the cost of sales in term of money
Raw material, and
other inputs
Unit Rate
Trout fry
No.
Feed
Kg
Antibiotics and other
vet medicines
L/S 50,000
Total Cost
8
2013
Amount (NRs.)
2014
2015
2016
2017
374,000
374,000
374,000
374,000
374,000
120 2,278,784 2,278,784 2,278,784 2,278,784 2,278,784
50,000
50,000
50,000
50,000
50,000
2,987,632 2,987,632 2,987,632 2,987,632 2,987,632
*Note: The above cost include transportation cost of raw materials
Page 52
Training Session-LRP & AEC
HIMALI

53. Profit & Loss Account
Trout Farm
• Calculate Gross Profit (Revenue less Cost of Goods Sold)
Description
Total Annual Revenues
Cost of Revenue
(Operating Cost)
Gross Profit
Page 53
2013
2014
Value (NRs.)
2015
2016
2017
5,236,000
5,236,000
5,236,000 5,236,000 5,236,000
2,702,784
2,702,784
2,702,784 2,702,784 2,702,784
2,533,216
2,533,216
2,533,216 2,533,216 2,533,216
Training Session-LRP & AEC
HIMALI

54. Profit & Loss Account
Trout Farm
• Identify the other costs to run the business
–
–
–
–
–
–
–
–
–
–
Page 54
Salaries
Land Lease Cost
Selling & Distribution
Marketing Cost
Depreciation of Fixed Assets
Insurance Cost
Maintenance cost
Utility Cost (Electricity)
Stationeries Cost
Miscellaneous Cost
Training Session-LRP & AEC
HIMALI

55. Profit & Loss Account
Trout Farm
Quantify the Other Costs
Salaries Cost
Name of Personnel
Unit
Gita Pun
Month
Shyam Gurung
Month
Hari Gurung
Month
Dan Bahadur
Month
Faruk
Month
Rate
Quantities (Months)
2013 2014 2015 2016 2017
2017
12000
13
13
13
13
13 156,000 156,000 156,000 156,000 156,000
8000
13
13
13
13
13 104,000 104,000 104,000 104,000 104,000
8,000
13
13
13
13
13 104,000 104,000 104,000 104,000 104,000
8,000
13
13
13
13
13 104,000 104,000 104,000 104,000 104,000
8,000
13
13
13
13
13 104,000 104,000 104,000 104,000 104,000
Total Cost
Page 55
2013
Amount (NRs.)
2014
2015
2016
Training Session-LRP & AEC
572,000 572,000 572,000 572,000 572,000
HIMALI

56. Profit & Loss Account
Trout Farm
Quantify the Other Costs
Depreciation:
Particular
2013
Opening Balance
Civil Work
1,854,320
Machinery and Equipment
99,000
Less: Depreciation
Depreciation on Civil Work (10%- 10 years)
185,432
Depreciation on Machinery & Equipment (20%19,800
5 years)
Less: Scrap Value
Closing Balance
Civil Work
1,668,888
Machinery and Equipment
79,200
2014
2015
2016
2017
1,668,888
79,200
1,483,456
59,400
1,298,024
39,600
1,112,592
19,800
185,432
185,432
185,432
185,432
19,800
19,800
19,800
19,800
927,160
1,483,456
59,400
1,298,024
39,600
1,112,592
19,800
-
Note:
Depreciation is the useful allocation of fixed assets over the useful life of assets. The useful life of assets should be
determined by the Management.
Page 56
Training Session-LRP & AEC
HIMALI

57. Profit & Loss Account
Trout Farm
Filled up Profit & Loss Account
Page 57
Training Session-LRP & AEC
HIMALI

58. Break
58

59. Balance Sheet
• Simply a list of all the assets owned and all the liabilities and
capital owed by a business at a given moment in time
• A snapshot of the financial position of the business at a
particular moment of time.
• Prepared at the end of the accounting period to which the
financial statements relate.
• The balance sheet is divided into two halves.
– Capital and liabilities in one half and assets in the other
• Statement of the outstanding balances on the ledger accounts
for the capital, liabilities and assets of the business.
• Balance of Items in balance sheet are carried forward each year.
Page 59
Training Session-LRP & AEC
HIMALI

60. Balance Sheet
Page 60
Training Session-LRP & AEC
HIMALI

61. Balance Sheet
Assets
• Resources controlled by the business to earn future economic
benefits for the business
• Assets are divided by two way
– Non Current & Current Assets
– Tangible & Intangible Assets
• Assets in Balance sheet are categorized by non-current and
current assets.
Page 61
Training Session-LRP & AEC
HIMALI

62. Balance Sheet
Assets
Non Current Assets:
• An asset acquired for continuing use within the business, with a
view to earning income or making profits from its use, either
directly or indirectly
Eg. Machineries, Furniture, Vehicles, building etc.
Current Assets:
• Assets that are realizable within one year and are continually
flowing through the business.
• Assets that take one of the following form
– Items owned by the business with the intention of turning
them into cash in a short time
– Cash, including money in the bank owned by the business
Page 62
Training Session-LRP & AEC
HIMALI

63. Balance Sheet
Assets
Current Assets:
Receivable
Cash
Inventory/
Product
Page 63
Training Session-LRP & AEC
HIMALI

64. Balance Sheet
Assets
Quick Quiz:
Asset
Business
Non Current /
Current Assets
Van
Delivery Firm
Non Current Assets
Machine
Manufacturing Company Non Current Assets
Car
Car Traders
Current Assets
Short Investment
Law Firm
Current Assets
Page 64
Training Session-LRP & AEC
HIMALI

65. Balance Sheet
Liabilities
• A liability is defined as an obligation of an entity arising
from past transactions or events, the settlement of which may
result in the transfer or use of assets, provision of services or
other yielding of economic benefits in the future.
• Liabilities are categorized into:
– Non current liability
– Current liability
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66. Balance Sheet
Liabilities
• Non current liability
– A non-current liability is a debt which is not payable within the short
term (One Year)
Eg. Loan, Debenture etc.
• Current Liability
– Debts of the business that must be paid within a short period of time
Eg. Trade payable, bank over draft, tax payable, accrued expenses
payable etc.
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67. Balance Sheet
Capital & Equity
• Capital is the money invested in a business by the
Entrepreneur/Shareholder. Capital is a long-term source of finance.
• In return for their investment, Entrepreneur/shareholders gain a share of the
ownership of the company.
• Once the investment has been made, it is the company that owns the money
provided.
• The shareholder obtains a return on this investment through dividends
(payments out of profits) and/or increases in the value of the company when
it is eventually sold.
• Consist of:
– Share Capital
– Grant
– Retained Earnings (Profit retained by business for further investment)
– Reserves
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68. Balance Sheet
Preparing Balance sheet
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69. Break
69

70. Financial Appraisal
Financial
Performance
measure in private
sector
Objectives
Page 70
Financial
performance
measure
Training Session-LRP & AEC
Long and short term
measure
HIMALI

71. Financial Appraisal
Primary objectives of profit-seeking business
•
•
•
Page 71
Maximizing shareholders wealth
• Current earning, future earning, dividend policy, relative
risk of their investment
Survival & growth
Profits and shareholder value
Training Session-LRP & AEC
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72. Financial Appraisal
Financial Performance Measure
ROCE
Liquidity
&
Gearing
Ratio
EPS
Numerical
Measures
IRR
EBITDA
NPV
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73. Financial Appraisal
Characteristic of good performance measures:
•
•
•
•
•
Measure performance from a financial, nonfinancial,
qualitative and quantitative
Attuned to the needs of decision makers
Attention to the accuracy of data and calculation of
measures
Allow stakeholders to independently judge an organisation’s
performance
Identify where improvements should be made and what
resources are required
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74. Financial Appraisal
General Rule:
These measures are meaningful when compared with:
• Other time period
• Other measures of performance
• Other companies
• Other industries
• budget
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75. Financial Appraisal
Profitability Ratios/Measures
•
•
•
•
•
ROCE: Profit/Capital employed
Gross profit Margin: Gross profit/sales x 100%
Net profit margin: Net profit/sales x 100%
Asset Turnover: Sales/capital employed
EBITDA
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76. Financial Appraisal
Net Present Value
•
•
•
•
Performance measure based on discounted cash flow (DCF)
Looks at the present value (PV) of all cash inflows less the PV
of all the cash outflows of a project
Represents the increase in value of an organization today as
the result of accepting the project being reviewed
Prime decision rule: Any project that generate a positive
NPV is viable.
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77. Financial Appraisal
Net Present Value
Advantages
Disadvantages
Strong correlation with shareholder
value
Difficult to calculate/understand
Consider the time value of money
Does not easily allow two projects of
very different scales to be compared
Risk can be allowed by adjusting cost Based on assumption about cash
of capital
flow, timing of cash flow and
appropriate cost of capital
Shareholders are interested in cash
flows and profit maximization
Cash flow are less subject to
manipulation & subjective than
accounting profit
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78. Financial Appraisal
Net Present Value: Test
DEMAC invest in a new machine at the beginning of year 1
which costs NRs. 15,000. It is estimated that following net cash
will flow to DEMAC. Calculate the NPV assuming 15% cost of
capital.
Year
Net cash flow
1
2
3
4
1,500
2,750
4,000
5,700
5
7,500
Discount Formula: 1/(1+r)^n
Where r= rate of discount and n=number of years
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79. Financial Appraisal
Net Present Value: Answer
Year
Cash flow
DF (15%)
PV
0
-15,000
1
-15,000
1
1,500
0.870
1,305
2
2,750
0.756
2,079
3
4,000
0.658
2,632
4
5,700
0.572
3,260
5
7,500
0.497
3,727
Total
Page 79
Training Session-LRP & AEC
-1,997
HIMALI

80. Financial Appraisal
IRR: Internal Rate of Return
•
•
•
•
The IRR is the discount rate when NPV=0
When presented with uncertainty over the cost of capital,
some managers prefer to assess project by IRR
Accept the project if its IRR> business’s cost of capital
Steps to calculate IRR:
• Calculate NPV using any rate close to cost of capital
• Having calculated the NPV using the first rate,
• if NPV is positive, use a second rate that is higher
than first rate
• If NPV is negative, use a second rate that is less than
the first rate.
• Use the two NPV values to calculate IRR
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81. Financial Appraisal
IRR: Internal Rate of Return
•
Formula of IRR: a+ {(A/A-B)(b-a)}%
Where a= the lower of the two rates used
b= the higher of the two rate used
A=the NPV obtained using rate a
B=the NPV obtained using rate b
Page 81
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82. Financial Appraisal
IRR: Test
DEMAC invest in a new machine at the beginning of year 1
which costs NRs. 15,000. It is estimated that following net cash
will flow to DEMAC. Calculate the IRR (cost of capital= 15%)
Year
Net cash flow
1
2
3
4
1,500
2,750
4,000
5,700
5
7,500
Discount Formula: 1/(1+r)^n
Where r= rate of discount and n=number of years
Page 82
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83. Financial Appraisal
IRR: Answer
Year
Cash
flow
DF (15%)
PV @15%
DF (10%)
PV@ 10%
0
-15,000
1
-15,000
1
-15000
1
1,500
0.870
1,305
0.90909091
1363.636364
2
2,750
0.756
2,079
0.82644628
2272.727273
3
4,000
0.658
2,632
0.7513148
3005.259204
4
5,700
0.572
3,260
0.68301346
3893.176696
5
7,500
0.497
3,727
0.62092132
4656.909923
Total
-1,997
191.7094585
Answer: IRR=10.4%
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84. Financial Appraisal
Liquidity & Gearing Indicators
•
•
•
•
Liquidity is the amount of cash a company can obtain quickly
to settle its debts
Companies can be highly profitable but get into trouble
when they run out of cash.
Therefore liquidity needs to be considered alongside
profitability when appraising a company’s situation
Financial gearing is the use of debt finance to increase the
return on equity used. High gearing increases the risk in the
company.
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85. Financial Appraisal
Liquidity Ratio:
•
•
•
•
Current Ratio: Current Asset/Current Liability
Finished goods period: (Average value of finished goods/cost
of sales) x 365
Receivable period: (Av. Receivable/Sales) x 365
Payable period: (Av. Payables/purchases) x 365
Gearing Ratio:
• Gearing=(Long term debt/shareholder capital) x 100%
• Interest Cover= PBIT/Interest Cost
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86. Break
86

87. Financial Appraisal
Practical Work
Please appraise the project “Thami Poultry”
Time: 1 hour
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88. Conclusion
Feedback of the work shop
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