SMART TASK-02

MODULE 2 – “BASIC FINANCIAL MODEL”

Question 1) While preparing a financial model what are the assumptions

we need to take. Please list down the list of assumptions with the values,
assuming the project will be setup in India.

Answer :-

ASSUMPTIONS

A financial model is a set of assumptions about future business

conditions that drive projections of a company's revenue, earnings, cash
flows and balance sheet accounts. ... Like financial statements, one
generally reads the model from the top to the bottom, or revenue through
earnings and cash flows.

This can be better understood using an example.

Let us consider a financial model with basic assumptions. It is given to us

that we are buying a condo for commercial use.

Let’s say we use the commercial space for opening a café in India. As the
purpose of opening a café is to make profits, and profits are given by the
difference between revenue and costs.

Thus we make basic assumptions regarding the related revenue and costs.

Revenue assumptions

Based on your study of other cafes in the area, you expect the following
assumptions for your business’s revenue:

 You’ll sell an average of 120 cups of coffee per day throughout the
year.
  Forty percent of coffees sold will be in large cups; 60 percent will be
in small cups.

 You’ll charge ₨ 200 for a large cup of coffee and Rs 150 for a small
cup of coffee.

These are your expectations for the business’s sales; they represent your
base case revenue assumptions. You aren’t really sure whether you have
the daily number of sales right — you’re just estimating — so you’ll adjust
this number when you run the scenarios. You’ll address the best- and
worst-case assumptions later on.

Expense assumptions

In your analysis, you’ve also researched the operating costs of running a

cafe, which are the following:

 You think the rent expense will most likely be Rs 40000 per month.
This is just an estimate, though — you’ll enter some potential
fluctuations into the scenario analysis later on.

 Consumables — including coffee beans, cups, filters, and so on —

will cost you Rs 65 per cup. This amount has been averaged over
both large and small cups, so you won’t need to distinguish between
size for the purpose of this model.

 The barista’s salary is Rs 300000 per year, plus 25% in other staff
costs and benefits.

 Monthly utilities, such as electricity, heat, and water, will cost Rs 7000
per month.

 The company income tax rate is 30 percent.

These are your expectations for the business’s costs; they represent your
base case expense assumptions.

Question 2) Explain the function of revenue, cost and debt sheet of

financial model.

Answer :-

FUNCTION OF VARIOUS SHEETS/STATEMENTS IN A FINANCIAL

MODEL

The Financial Statements Module Area is comprised of three Module

Types, representing each of the three financial statements. Each of these
financial statements has the purpose of summarising a different component
of an entity’s financial position. The three different Module Types within the
Financial Statements Module Area are:

1) Income Statement;
2) Balance Sheet; and
3) Cash Flow Statement.

Income Statement

 Provides a summary of the revenues, costs and expenses of an entity

during an accounting period.
 An Income Statement is generally used to calculate the Net Profit
After Tax (NPAT) of an entity.
 Also referred to as a Statement of Financial Performance or a “Profit
& Loss Statement”.

Balance Sheet

 Shows the status of an entity’s assets, liabilities and owner’s equity at

a point in time, usually the close of a month.
  A Balance Sheet provides a snapshot of the entity‟s financial
position, including the cumulative results of the Income Statement
and Cash Flow Statement, at a point in time.
 Also referred to as a “Statement of Financial Position‟.

Cash Flow Statement

 Shows how changes in Income Statement and Balance Sheet

accounts affect cash and cash equivalents during an accounting
period.
 A Cash Flow Statement breaks the analysis down according to
operating, investing and financing activities.
 Also referred to as a “Statement of Cash Flows‟.

Question 3) Explain in detail the various steps involved (with the

importance) in the finflows sheet. Why and what the bank need to check
before financing the project.

Answer :-

Layout for Assumptions & Inputs

Creating a layout which can help you record the cash and its timing in a
structured manner can help you eliminate the possibility of errors in your
model. Typically you can categorize the recording of information in the
following heads:
o Initial investment that would be required to start the project (Investment
decision)
o How much of money is locked in the business apart from the plant and
machinery (Working capital as investment)

o How are you going to get your cash back (The operations)

o How are you going to mix your equity and debt and what are the costs
you pay for each

Once you have recorded the relevant information, you should draw out the
timing of cash as well to figure out the valuation.

ROLE OF BANKS IN FINANCING A PROJECT

Project Financing is a long-term, non-recourse or limited recourse financing

scheme that is used to fund massive projects which can be repaid using
the project cash flow obtained after the completion of the project. This
scheme offers financial aid off balance sheet, therefore, the credit of the
shareholder and Government contracting authority does not get affected. In
Project Financing, multiple participants are allowed to handle the project
while the ownership of the project is entitled according to the terms of the
loan only after the project is completed. This financial scheme offers better
credit margin to lenders while shifting some of the risk from the sponsors to
the lenders.
As the Indian Government continues to investment on the infrastructure of
the country, it is expected that there will be massive developments in future
in terms of power, transportation, bridges, dams etc. Most of these projects
will be using the Public Private Partnership (PPP) method indicating a rise
in Project Financing during the upcoming years. This entire cycle will
further help improve the economic condition of India.