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FINANCIAL FEASIBILITY
6.1. Financing
This chapter will help determine how much capitalization will be needed to finance the
project. Who will be the project financiers, and to determine the most adoptable
financing scheme based on the financiers terms and conditions. In this particular
stage, it should always be assumed that all alternative sources of capital have ready
resources and that all external and internal conditions proposed are already
incorporated in the total project cost.
o State the total investment costs by presenting all the project costs
requirements from the previous aspects. Itemize them using the following
categories:
Note: The last two columns could be both divided into Local or foreign if it needs a
detailed presentation.
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etc.
c. Recruitment and Training of
Personnel
d. Arrangements for Suppliers
e. Arrangements for Marketing &
Promotion
f. Building-up of Connections/Networks
g. Procurement of Legal Permits
h. Others (Specify)
1.
2.
3. Other Pre-Operating Capital
Expenditures
a.
b.
4. Contingencies
Total Pre-Operating Capital
Expenditures
6.1.2. Financiers
1. Sources of Capital
o Enumerate your sources of capital in detail
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Total 100%
6.2. FINANCIAL
Present by enumeration, all the financial assumptions summarized from all the
previous aspects and new ones that will clearly explain how the projection figures
were obtained. Under this topic, consider the following:
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2. Operating Period Projected Financial Statements
Present the projects operating financial statements: Balance Sheet,
Cash Flow and Income Statement and all their corresponding
schedules, if any, for all the projection years. The following pro-forma
statements are guides in the preparation of the statements:
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Schedule 1: Cash Disbursements Table:
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Schedule 2: Cost of Goods Manufactured and Sold
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6.2.3. Financial Analysis
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Present the Financial Ratios, Rates of Return and Cash Payback Period for each of the
projection years and the entire projected operations. State also the averages over n
years, if possible.
The following table could be used for the presentation of these items:
For each of the computed figures in the table above, explain their significance to the
project.
Present the projects Break-Even Points (BEPs) and an analysis for each figure
computed. You could use the following tables for presentation.
Product No. 2
...
Present a Sensitivity Analysis of the project. For the proposed product/s, computations
can be summarized using the table below:
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PRODUCT Year 1 Year 2 ... Year n
I. On Selling Prices:
( ) % increase as computed
( ) % decrease as computed
Try looking for the effects of changes for other financial and/or production items to see
how sensitive the project is. Explain the effects of these changes as they affect
departments/sections of the project or of the entire operations. If the project is part or
related to an existing entity, a side-by-side comparison of present and projected
figures of these same items will be a good presentation for the justifications of the
feasibility of proposals.
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There are two types of capital: equity capital and creditors capital. These two and the
possible forms/sources are detailed as follows:
1. Equity Capital capital put into the business from the investors personal
resources. These may be in the form of:
1. Retained Earnings for existing business, these are the undeclared profits
rolled-over from the companys operations.
2. Advance Payment from Customers which may be used to fill-in the needed
capital in the business operations
3. Sale of Stocks whether common or preferred, may also be used to bring in or
increase your operations capital.
4. Accounts Receivables especially in the form of promissory notes may be used
as collaterals or rediscounted (like in the case of post-dated cheques and
converted into additional equity capital.
5. Investors personal resources include capital sources from the proponents
personal funds.
2. Creditors Capital capital or equity sourced from outside sources. These may be
either short-term (those with less than one years maturity), medium term (one
year but less than five years) and long term (more than five years) loans. Some of
the most common sources are:
1. Banks most common sources. Todays borrowers have a large array of banks
to choose their requirements: universal banks, commercial banks, rural banks,
thrift banks, private development banks, merchant banks, etc.
2. Merchant Creditors once, or if one had established a good credit reputation,
suppliers may allow to purchase the needs on account normally on a 30, 60 or
90-day credit. These credit privileges usually are used to offset goods on
account made to the customers in return. Other forms of this type are lease
privileges of goods, installment payments from sources or consignments from
sources.
3. Insurance Companies usually offer loans but only on some conditions and
mostly not exceeding the cash value of the policies.
4. Mortgage Bankers these companies help finance the projects by bringing to
the sources of capital with mortgage requirements, usually in the form of real
estate, motorized vehicles or jewelry.
5. Finance Companies these companies also provide numerous financing and
leasing services. They deal mostly on secured loans to persons usually refused
by banks, but give relatively higher interest rates.
6. Pawnshops especially when personal properties are offered as collaterals,
these firms offer capital to small businessmen. These firms are restricted from
doing banking activities other than their authorized activities.
7. Individual Money Lenders these are unlicensed money lenders who lend
capital as friends for business, at an agreed interest. Sometimes, these sources
require also collaterals from their borrowers.
8. Private Voluntary Organizations (PVOs) these are intermediary agents, mostly
between government agencies (with programmed loan budgets but who are
supposed to make money) and certain organizations. These entities receive an
allocation of the budget from main sources and re-lend the capital to individual
borrowers or small groups of persons. They usually charge lower rates than all
above-mentioned sources. These sources are civic, religious or private
organizations or foundations accredited by the main sources to act as re-
lending conduits.
9. Savings and Loan Associations, Credit Cooperatives and Credit Unions these
are usually exclusive organizations where memberships entitle members to
obtain loans for capitalization requirements. The SSS for private employees and
the GSIS for government workers, may be classified under this type of source.
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Annex 2. LOAN CONSIDERATIONS, REQUIREMENTS AND PROCEDURES
A. Considerations
When obtaining a loan, it is very important that one should consider the
following as they will be very valuable in the financial capability computations:
1. Source of funds/suppliers terms and conditions in the procurement of
machineries and all other equipment and accessories
2. Debt-Equity Requirements of the project
3. Funding sources collateral requirements and assessment/appraisal
methods/rates.
4. In case of foreign funding, the currency of repayment.
5. Interest Rates
6. Maturity (Repayment) date/amortization and date(s)
7. Application and Processing Fees
8. Withholding Taxes and Tax Exemptions of the proposed project
9. Processing Time from filing of application up to loan release
10.Deposit requirements
B. Requirements
Requirements of financial institutions normally mean collaterals. The most
accepted forms are:
1. Real Estate Properties
2. Motorized vehicles
3. Machineries and Equipment/Accessories
4. Jewelry
5. Merchandise (good, crops, etc.)
6. Stocks and Bonds (Corporate Securities)
7. Instruments of Ownerships of commodities like Bills of Lading, Advance
Payment Receipts, Post-dated cheques, etc.
8. Personal belongings (for pawnshops)
C. Procedures
Banking procedures vary from sources. It is thus advised that depending on the
most suited/practical financing scheme for the project, one must get a copy of
the sources borrowing guidelines and suit the requirements especially in the
projects financial computations.
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Annex 3. List of Financial Ratios
1. Measures of Profitability
a. Sales and Profits comparison Ratios
Net Income After Taxes to Net Sales
Total Raw Materials Cost to Net Labor Costs
Direct Labor Costs to Net Sales
b. Profits Compared to Assets Ratios
Net Income to Total Assets (Return on Over-all Assets)
Net Operating Income to Total Assets
Income Before Taxes to Total Assets
Income After Taxes to Total Assets
The Return on Assets Ratios will help analyze the total earnings with the
projects assets. Compare the companys total earnings with the other types of
Assets (Current Assets, Fixed Assets, Intangible Assets, etc.).
Net Income
-----------------------------
Total Owners Equity
Another method is the Payback Period, which refers to the time needed for
stockholders to fully recover their initial investments. This method may be computed
by means of any of the following:
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A good measure of asset use is given by the formula:
Year-end Receivables
-------------------------------
Average Days Sales
Average Receivables
------------------------------
Average Daily Sales
Merchandise
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