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UNIT 11: FINANCIAL ANALYSIS - Coggle Diagram
UNIT 11: FINANCIAL ANALYSIS
3.1 Operating and Capital Budget
Operating Budget
Defintaion
The operating budget focuses on the day-to-day expenses and revenues of a business or organization.
Key Components
Revenue Projections:
Operating Expenses
Fixed Costs
Variable Costs
Net Operating Income
Purpose of the Operating Budget
To manage and allocate resources effectively for routine operations.
To forecast financial performance and identify potential shortfalls.
To serve as a tool for performance evaluation and accountability.
Capital Budget
Key Components of the Capital Budget:
Capital Expenditures:
Buildings
o Machinery
o Vehicles
o IT systems
Funding Sources
Retained earnings
o Loans
o Equity financing
Cost-Benefit Analysis
Purpose of the Capital Budget
To guide strategic decision-making for long-term growth.
• To ensure the availability of funds for critical investments.
• To help in planning debt and equity financing
3.2 Pro Forma Income Statements
Key Components
Revenue Projections
Cost of Goods Sold (COGS)
Gross Profit
Operating Expenses
Operating Income (EBIT)
Interest and Taxes
Net Income
Steps to Create
Estimate Revenue
Estimate Costs
Calculate Gross Profit:
Forecast Operating Expenses
Account for Interest and Taxes
Determine Net Income
Uses of Pro Forma Income Statements
Business Planning
Financial Analysis
Stakeholder Communication
Scenario Planning
3.3 Pro Forma Cash Flow
Steps to Prepare
Estimate Operating Cash Flows
Forecast Investing Cash Flows
Project Financing Cash Flows
Calculate Net Cash Flow
Add Opening Cash Balance
Uses of Pro Forma Cash Flow Statements
Liquidity Management
Decision-Making
Financial Planning
Lender and Investor Confidence
Benefits
Cash Management
Informed Decisions
Stakeholder Confidence:
3.4 Pro Forma Balance Sheet
The necessary categories of the balance sheet
Assets
Fixed Assets
Current Assets
Liabilities
Current Liabilities
Long-term Liabilities
Owner Equity
Benefits
Provides a snapshot of the projected financial position.
• Helps in identifying resource allocation needs.
• Assists in planning for future debt or equity requirements
Uses of
Strategic Planning
Loan and Investment Decisions
Risk Assessment
Stakeholder Communication
3.5 Pro Forma Sources and Uses of Funds
Key Components
Sources of Funds
Debt Financing: Loans, bonds, or other borrowed funds.
▪ Equity Financing: Proceeds from issuing stock.
▪ Operating Cash Flow: Surplus funds generated from business operations.
Asset Sales: Proceeds from selling property, equipment, or other assets.
Grants/Subsidies: Funds received from government programs or other entities.
Uses of Funds
Capital Expenditures (CapEx)
Debt Repayment
Operating Expenses
Dividends
Acquisitions
Working Capital
Uses of
Strategic Planning
Transaction Analysis
Stakeholder Communication
Risk Management
Benefits
Clarity and Transparency
Informed Decisions
Flexibility
3.6 Break-Even Analysis
Purpose:
• To assess the financial feasibility of new projects or business models.
• To evaluate the impact of cost changes on profitability.
• To help businesses set sales targets and pricing strategies.
• To assist in decision-making regarding cost structures and resource allocation.
Key Components of
Fixed Costs (FC)
Variable Costs (VC)
Selling Price per Unit (SP)
Contribution Margin (CM):
Break-Even Point (BEP) Calculation
Importance
Decision-Making
Profitability Planning
Cost Management
Strategic Goals:
Limitations
Assumptions-Based
Simplistic:
Short-Term Focus
Excludes External Factors