MGT601 SME MANAGEMENT

Lesson 17

Financial Feasibility of SMEs

Chapter Learning Objectives

This lecture deals with; The financial feasibility, short term loans, long term loans, cash flow analysis and financial cost.

Financial Feasibility
A financial feasibility is an assessment of the financial aspects of something. If this case, for starting and running a business. It considers many things including start-up capital, expenses, revenues, and investor income and disbursements.

Financial Feasibility
A study on whether a project is viable after taking into consideration its total costs and probable revenues. If the revenues cover the costs of the project, then the project is visible.

Financial Feasibility
For instance, The cost of expanding production will entail $500,000; however, the expected increase in revenue will be $1,000,000. Thus, the project is feasible as its revenue more than cover its costs.

Financial Feasibility
In case of a new project, financial viability can be judged on the following parameters: Total estimated cost of the project Financing of the project in terms of its capital structure, debt equity ratio and promoter's share of total cost Existing investment by the promoter in any other business Projected cash flow and profitability

Financial Feasibility It covers the following:

1. Determination of total financial requirements
It can be done by preparing a financial statement. In making of it the 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 Statement
A financial statement is a formal record of the financial activities of a business, person, or other entity. For a business enterprise, all the relevant financial information, presented in a structured manner and in a form easy to understand, are called the financial statements

Financial Requirement Statement:

Initial Expense 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 --------------------------------------------Period 1 ------------------------------------Period 2 -------------------------------------

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2. 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.

Financial resources and other costs.

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.

Financial resources and other costs.

Long-term

loans Long-term loans are those from banks, equity capital and investments of earnings.

Financial resources and other costs.

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.

Cash Flow Analysis

Cash flow is essentially the movement of money into and out of your business; it's the cycle of cash inflows and cash outflows that determine your business' solvency.

Cash Flow Analysis.

Cash flow analysis is the study of the cycle of your business' cash inflows and outflows, with the purpose of maintaining an adequate cash flow for your business, and to provide the basis for cash flow management.

Financial Cost
Financial costs incorporate expenses that a company incurs through operations, from factory costs to surcharges down the supply chain. Examples include the cost of raw materials, semi finished products and completely finished goods along with administrative expenses, such as rent, salaries, insurance and utilities.

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