Finance Unit 3

Financial plan and its components.
A financial plan is a summary of a company’s financial needs or goals for the future and how to achieve them. It is a sequential plan for attaining financial goals of the company in an effective manner.
The components of the financial plan include:
i) Income statement
ii) Balance sheet
iii) Statement of cash flow
The income statement shows the results of operating for a period of time, showing how well an organization performed during the period covered. Hence an income statement can be said to be a statement in which revenues for a period are matched with expenses for the same period. When revenues exceed the expenses, the result is a net income and when expenses exceed revenues it is a net loss. The income statement highlights whether a business is making profits or loss.
Balance sheet shows the financial position of a company. It shows the economic resources of a company, commonly known as assets, claims of creditors and owners against the business; and the economic obligations known as liabilities. The balance sheet shows the financial health of a company.
The statement of cash flows reports the cash generated and used during a specified time interval. If cash from operating activities is less than net income then there must be an explanation as to why the reported net income is not turning into cash. Since the statement of cash flows shows cash generation and usage, if a company is generating more cash than it is using investors will expect a rise in dividends earned.

A pro forma income statement for the first year and second year.

Pro Forma Income Statement
ABC Company
For the year ended XXXX

Year 1 Year 2

Sales 1,000,000 1,184,500
Less:
Variable Cost (300,000) (355350)
Fixed Cost (120,000) (120,000)
Earnings before Interest & Tax 580,000 709,150
Less:
Interest (200,000) (200,000)
Earning before Tax 380,000 509150
Less:
Taxes (57,000) (76372.50)
Net Profit 323000 432777.50

Sustainable Growth
D= 30% ROE=25%
Sustainable growth = ROE * (1- Dividend yield)
0.25* (1-0.3) = 0.175 or 17.5 %

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