A

PROJECT REPORT ON

Preparation of a financial report to be

submitted to a bank for availing credit facility

FOR KASTURI PROPERTIES

PUNE.

WITH MANTRI MARU & CO.

PUNE.

SUBMITTED TO UNIVERSITY OF PUNE

IN PARTIAL FULFILLMENT OF FULL TIME COURSE

MASTER IN BUSINESS ADMINISTRATION (M.B.A.)

SUBMITTED BY

ABHISHEK.L.MUNSHI

(2005-2007)

UNDER THE GUIDANCE OF

Prof. Mr. Mahesh Halale

THROUGH

THE DIRECTOR OF

Vishwakarma Institute of Management Pune.

CERTIFICATE

This is certify that Mr.Abhishek L Munshi has successfully completed

his project, titled Preparation of a financial report to be submitted to

a bank for availing credit facility for Kasturi Properties, Pune with

Mantri Maru & Co., a financial management consultancy firm, during

the academic year 2005-2007 for partial fulfillment of Master in

Business Administration (MBA) from Vishwakarma Institute of

Management, Pune. under our guidance.

Dr. Sharad Joshi Prof. Mahesh Halale

Director, VIM Project Guide

ACKNOWLEDGEMENT

I have a great pleasure to present the project report on Preparation of a financial

report to be submitted to a bank for availing credit facility for Kasturi Properties,

with financial management consultants Mantri Maru & Co. (Chartered Accountants),

in partial fulfillment of Master of Business Administration course of University of

Pune, at Vishwakarma Institute of Management, Pune.

I would like to place on record deepest sense of gratitude to Mr. Sachin P. Mantri,

Chartered Accountant and Mr. Chetan Maru, Chartered Accountant for their inspiring

and able guidance which made it possible to bring the best of my efforts on the

project.

I am desirous of placing on record profound indebtedness to Mr. Mahesh Halale,

faculty member of Vishwakarma Institute of Management, Pune, for his valuable

advice, guidance and support he offered.

I also acknowledge the gratitude to Dr. Sharad Joshi, Director of Vishwakarma

Institute of Management, Pune, who motivated us a lot in carrying out this project.

Mr. Abhishek Laxmikant Munshi

INDEX

Sr.no Particulars Page no.

1 Executive Summary 1

2 Objective and Scope of the Project 2

3 Consultancy and Client Profile 3

4 Theoretical Background 5

5 Research Methodology 27

6 Data Analysis 28

7 SWOT Analysis 44

8 Conclusions 45

9 Bibliography 46

EXECUITVE SUMMARY

I have done this project with Mantri Maru & Co. (Chartered Accountants) in the

course of providing financial management consultancy for our client Kasturi

Properties. The respected client is engaged in construction business. Presently Kasturi

Properties is developing a land for the purpose of a commercial project, which it plans

to complete successfully by the year 2009.

This project is titled as Preparation of a financial report to be submitted to a bank for

availing credit facility . To be precise it explains what all financial information is to

submitted primarily to the bank so as to give a birds eye view to the banking

personnel regarding financial viability of the project which is to be financed by the

bank.

I selected this area of work for my project since it is very much relevant in modern

day business. Today, no business can be carried out without the financial support of

banks and other money lending institutions. For a layman it appears that today banks

are financing various businesses. But financing for any project is a systematic job

which requires facts and figures to be presented in form as desired by the banker. In

this project I have studied about what all financial information is to be submitted to

the bank so as to assure the banker that the firm needs credit facility and has enough

funds and future projected profits to repay the borrowed amount after the stipulated

period.

The consultancy firm Mantri Maru & Co. and its client Kasturi Properties are located

in Pune. Firstly financial statements for the client were prepared for the financial year

ended 31st March 2006. The finance required by the client and its engulfing factors

were studied in depth. Total costs, expenditure and the profits were forecasted for the

construction project to be undertaken. Details of every step taken in this regard are

covered in this project report.

As the end result of this activity as mentioned above, a project report containing the

relevant facts and figures (both actual and projected) of the client was prepared and

submitted to the bank for further appraisal before availing credit as stipulated.

OBJECTIVE AND SCOPE OF THE PROJECT

The objectives considered in this project can be summed up as under :

1. To study the process of preparation of financial report to be submitted to a

bank before availing credit.

2. To study the steps involved in project formulation and preparation of

financial statements.

3. To study all related aspects regarding the financing of the project through

cash credit and term loan facility.

CONSLUTANCY AND CLIENT PROFILE

Mantri Maru & Co. (Chartered Accountants); a partnership firm was registered in

1996 under the Partnership Act, 1936 having its registered office at Vidyadhar

heights, Laxmi road, Pune. The consultancy firm is headed by Mr. Sachin Mantri and

Mr. Chetan Maru acting as working partners. Both the partners are qualified

Chartered Accountants.

This financial consultancy firm is engaged exclusively in giving consultancy over

Accounting, Audit, Taxation and Finance. The firm has a good presence with business

houses in and around Pune.

Both the partners along with its committed staff, work with the sole focus of giving

better, continuing and professional service to its clients. With this backing, the firm

has emerged to be a promising player in financial consultancy business in Pune.

The firm has also setup a branch at Jalna, Maharashtra. In addition to this, business

networking is one such characteristic for which the firm strives on continual basis. It

believes that networking and brand name creation through good service is the only

way to stay ahead of rest of the competition.

The firm has a good mix of clients consisting of manufacturing companies, trading

enterprises, construction business houses, banks and other small trading concerns. The

firm is always open for new business avenues and is inclined towards growing its

client base in forthcoming years.

With respect to the project which I have carried out, the financial consultancy firm

Mantri Maru & Co. has acted in the capacity of a consultant for its client Kasturi

Properties for the purpose of availing credit facility from a bank.

The client Kasturi Properties is engaged in the business of construction (Builders

and developers) since June 2005. It is a registered partnership firm under the

Partnership Act, 1936 having its registered office at Budhwar Peth, Opp. City Post,

Pune. The names of the partners are: Mr. Bharat Agarwal, Mr. Dilip Agarwal, Mr.

Vinay Bhutada and Kasturi Housing Pvt.Ltd. The partners are highly qualified and

having an experience of 10-12 years, in the real estate and property management

business.

Presently, the client is carrying out a proposed commercial project at Baner, Pune

with a total saleable area of 24000 Sq.ft. It is expected to be completed by March

2009. One of the partners in this firm Kasturi Housing Pvt.Ltd. is a leading

company engaged in the business of construction. It has carried out various projects in

and around Pune city. Most of its projects are working out of own funds i.e without

loan from any bank or financial institutions.

Looking at the present scenario of the construction industry s growth and future

prospects in Pune, Kasturi Properties is trying hard to grab the business opportunities

and to come up with the better projects in near future. Basically, Pune has become the

obvious choice for all the aspirants due to the industrial growth in all segments

(automobile, IT etc), education hub for all types of courses, backing of beautiful

nature and easy access to the financial capital Mumbai. We are also aware that,

government is also seriously trying to develop and provide best infrastructure to the

public at large. All this will lead to a constant growth of construction business in

Pune, in future also.

THEORETICAL

BACKGROUND

BACKGROUND

Today, in modern age the crust of development of a progressive society is achieved

by a healthy co-operation of agrarian and industrial economies. With the basics in

economics giving weightage to unending human wants, its but natural that if the

output from any thing is to be achieved the inputs must be in accordance with it. If the

same thing is to be pin pointed to the current business scenario today, then if business

house wants optimum output then it has to give in substantial input too.

For any business the output may be its sales through production or lending of

services to the society, out of which profits are earned by it. The input invariably for

all kinds of business is the money poured in. As the saying goes nothing is free in

this world , every business house, be it a large multi national company or a small

scale factory operating in a local market, finance is the lifeblood of all the activities.

Hence every organization has to look into the matter of finance with utmost

seriousness. If finance is managed well then the business is half well done.

No business entity is self sufficient. It has to take help of external sources in

an array of different activities that it indulges in. Similar is the case for financing of

business activities. Thus businesses are financed in numerous ways.

In this project report, preparation of financial report and its submission to the

bank for availing the Cash Credit and Term Loan is discussed in detail. Banks

require the financial viability of any project before it lends money to the applicant

party. The details to be covered in such submission are organization profile, details of

the project, and financial details of the project, projected profitability statement (both

consolidated and yearly), projected balance sheet, and projected cash flow statement,

ratio analysis, schedule for working capital and its finance.

Before we start with the actual theory base of the concepts used in this project first we

will see what is project. Project, simply stated, A project presupposes commitment of

tasks to be performed with in well designed objectives, schedules and budget .

Similarly project can be defined as an organized unit dedicated to the attainment of a

goal

successful completion of a development project on time, within budget, in

conformance with predetermined programmed specification.

While project differs in size, nature, objectives and complexity, they must all part take

of three basic attributes.

1) Course of action

2) Specific objectives

3) Definite time

The work plan must be laid down in a clear and unambiguous manner in which the

predetermined project objectives are sought to be achieved, the resources which will

be consumed in this process of achieving objectives. A project can also be considered

as proposal involving capital investment for the purpose of as the basis for

classification.

The project covered in this report needs finance in the form of cash credit and term

loan. Project financing may be defined as the raising of funds required to finance an

economically separable capital proposal in which the lenders mainly rely on

established cash flow from the project to service their loan. The financing process

here differs from conventional financing in the following aspect:

1. Cash flows from the project related assets alone are considered for assessing

the repaying capacity.

2. The creditors ensure proper utilization of funds and creation of assets as

envisaged in the project proposal. Funds are also released in stages as and

when assets are created.

3. The financers are keen to watch the performance of the enterprise and suggest/

take remedial measures as and when required to ensure that project repays the

debt out of its cash generation.

Theoretically, an entrepreneur has an infinitely wide choice with respect to this

project. The important dimension of choice are service, market, technology,

equipment, scale of performance, location, incentive and time phasing. The task of

identifying a feasible and promising project is somewhat difficult. Moreover its is

inter related with government policies, infrastructural development and skills of

people. Project identification is concerned with collection, compilation and analysis of

economic data for the eventual purpose of locating possible opportunities for

investment and with development of such opportunities. Opportunities are of three

kinds:

1. Additive : Additive opportunities are those opportunities which enable the

decision maker to better utilize the existing resources without in any way

involving a change in character of business. These opportunities involve

minimum disturbances to the existing state of affairs and hence the least risk.

2. Complementary : Complementary opportunities involve the introduction of

new ideas and as such do lead to a certain amount of change in the existing

structure.

3. Breakthrough : Breakthrough opportunities, on the other hand involve

fundamental changes in both the structure and character of business.

The element of risk is greater in case of complementary opportunities and greatest in

the case of breakthrough opportunities. As the element of risk increase, it becomes

more and more important to precisely define the scope of and nature of the project

objectives and to select the best possible approach so as to minimize both resources

consumption and risks and to optimize the return or gains.

Project identification is of utmost importance due to :

1. Projects become the catalytic agents of economic development.

2. They initiate the process of development in terms of employment and income

generation.

3. They have beneficial consequences, which are long term in nature.

4. Projects provide the framework of the future pattern of activities and services

of the enterprises.

5. Projects usually involve substantial financial outlay

6. Project identification brings necessary changes in the society in course of time.

7. project accelerates the process of socio cultural development.

The starting point of a project analysis is the establishment of objectives to be

attained. The next stage is the pre

selection stage, the advisability of having an in

depth study. The analysis stage consist mainly three factors

market, technical and

financial analysis.

Financial analysis is important here from the banking point of view. In this the

emphasis is on preparation of financial statement, so that the project may be evaluated

in terms of different measures of commercial profitability followed by the magnitude

of financing which requires the assembly of the market and also technical cost

estimated in various proforma statements.

Fixing the cost of the project should be done with great care. It is the single most

exercise on the basis of which the subsequent exercise of Means of financing is

done. The calculation of the promoters contribution is also done on the basis of this

particular exercise. Each and every item which can be conceived should be included

at this stage.

If there is some point, which is not considered at this stage, it is likely that the

particular element of the cost is not included in the cost of project . The omission,

when subsequently detected, would have to be financed by the promoters themselves.

Another factor which is important is the fixation of the time schedule or the

implementation period of the project. The help of the Bar chart is recommended

which does not require any specialized knowledge like PERT or CPM.

There is another tendency which has been noted amongst the promoters i.e. to over

invoice certain items. This should be avoided. Almost all the institutions know the

cost of equipments. If there is large variation in the cost of the standard equipment

this may lead to loss of credibility at the initial stages of the project.

CONCEPTUAL BASE

In this part we will be discussing some of the important definitions relating to the

financial information submitted to the bank by our client Kasturi Properties for

availing cash credit and term loan facility.

The factual data which is to be submitted to the bank in a form of financial report

contains total financial details of the proposal. Its contents are explained below in

detail :

Financial details of the project :

This part contains the details as cost of the project and means of finance intended for

the project. The total cost of the project includes land cost, direct cost of construction

and indirect cost. Cost of the project is spread over the span of 3 years upto the

completion of project. Land cost and direct cost of construction are self explanatory in

nature but indirect cost must be classified in its minute contents. In a nutshell, indirect

cost consists of administrative and selling expenses, finance charges i.e. interest and

depreciation.

Means of finance include own funds and loan funds. Loan funds are those funds

which the client intends to apply. Own funds include the capital introduced by the

firms partners and re investment of yearly accruals made by the firm. Loan funds

include term loan and cash credit.

Loans are advances of fixed amounts which are credited to the current account of the

borrower or released to him in cash. The borrower is charged with interest on the

entire loan amount, irrespective of how much he draws. In this respect this system

differs markedly from the overdraft or cash credit arrangement wherein interest is

payable only on the amount actually utilized. Loans are payable either on demand or

in periodical installments. When payable on demand, loans are supported by a

promissory note executed by the borrower. There is often a possibility of renewing the

loan.

Cash credit Under a cash credit or overdraft arrangement, a pre determined limit for

borrowing is specified by the bank. The borrower can draw as often as acquired

provided the out standings do not exceed the cash credit/overdraft limit. The borrower

also enjoys the facility of repaying the amount, partially or fully, as and when he

desires. Interest is charged only on the running balance, not on the limit sanctioned. A

minimum charge may be payable, irrespective of the level of borrowing, for availing

this facility. This form of advance is highly attractive from the borrowers point of

view because while the borrower has the freedom of drawing the amount in

installments as and when required, interest is payable only on the amount actually

outstanding.

(Table 1 illustrates financial details of the project.)

Projected consolidated profitability statement :

This statement consists total income, project cost, profit from the project, estimated

income tax and net profit after income tax to the Kasturi properties. It also includes

net profit turnover ratio for the firm.

Total income includes income form sale of constructed area, including sale of

parking, electricity and other expenses. Total cost includes direct and indirect cost.

When total cost is deducted from the income we get profit from the project. Income

tax is calculated on the profit less partners remuneration. As the client is a partnership

firm the income tax rate is 33.66%. Net profit ratio is calculated by dividing profit by

the sale of Kasturi properties.

(Table 2 illustrates consolidated profitability statement)

Projected yearly profitability statement :

This statement shows yearly classification of the profits to be earned by the firm over

a stipulated period. It consists income form sale of flats, direct costs, indirect costs i.e.

out of opening work in progress, operating revenue, indirect cost, profit before tax,

income tax, net profit, cash profit and net profit turnover ratio. All the above

mentioned components are shown on yearly basis so as facilitate the overall flow of

profits over years.

This statement is submitted to the banker so that the banker measures gross profit,

operating profit and profit after tax in income statement. Operating profit is banker s

term to denote pure profits unaffected by results of extraneous activities.

(Table 3 illustrates projected yearly profitability statement)

Projected balance sheet :

The balance sheet here is given for four consecutive financial years. Projections are

made in keeping with consideration overall financial factors of the firm. Balance sheet

constitutes of sources of funds and application of funds.

Sources of funds include partners capital, profits less drawings. It also includes

secured loans from bank. Application of funds include items as fixed assets, current

assets less current liabilities.

Balance sheet is submitted to the banker so that he can measure the liquidity of the

firm. He thereby estimates the extent of immediacy of each liability and currency of

each asset so as to glean overall health of the firm. Capital, revenue and surplus

comprise net worth. Arrears of depreciation, inadequate provisions and claims against

the firm under dispute, are reduced from net worth by the banker. Term loans from

bank form deferred liabilities. They are repayable out of profits and not merely out of

sale proceeds.

Assets that possess a long commercial life such as land, building, plant, machinery

and vehicles employed by the firm for its operations comprise fixed assets. Current

assets include debtors, closing work in progress, cash and bank balances and other

current assets. Items locked in one operating cycle at any one point of time are called

current assets. Mere quality of liquidity of the asset does not make it a current asset.

Current liability is one which is repayable out of sales revenue within one operating

cycle. It is not correct to define current liabilities as those that are repayable in one

year. In this report current liabilities include advance against bookings, creditors and

creditors for expenses.

(Table 4 illustrates projected balance sheet)

Projected cash flow statement :

Cash flow statement considers the transactions affecting the movement of working

capital and also movements only in respect of cash. The basic principles for cash

flow statement are any increase in assets involves outflow of funds, any decrease in

assets involves inflow of funds, any increase in liabilities involves inflow of funds and

any decrease in liabilities involves outflow of funds. The way in which cash flow

statement can be prepared, takes the following form.

Opening Cash Balance

Add : Sources of cash

Less : Applications of cash

Closing Cash Balance.

(Table 5 illustrates the projected cash flow statement)

Ratio analysis :

The technique of ratio analysis as technique for interpretation of financial statements

deals with computation of various ratios, by grouping or regrouping the various

figures and/or information appearing on the financial statements with the intention to

draw the fruitful conclusions there from. Ratio analysis helps to appraise the firms in

terms of their profitability and efficiency of performance, either individually or in

relation to those of other firms in the same industry.

First of all in profitability ratios, in this report we have net profit turnover ratio and

then the return on investment ratio. Net profit to sales ratio is a direct and simple

measure of the firm s short term profitability on a year to year basis. Net profit means

profit after tax. The net profit ratio indicates that portion of sales available to the

owners after the consideration of all types of expenses and costs

either operating or

non operating or normal or abnormal.

Return on investment should be the guiding factor in long run. ROI should at least be

the rate yielded by any other alternative investment. Bank rate can be the minimum

expected ROI but should always be higher to compensate for expertise and adventure.

Moving to the second ratio i.e. Repayment ratio, it covers interest coverage ratio.

Interest coverage ratio indicates the protection available to the lenders of long term

capital in the form of funds available to pay the interest charges i.e. profits. Normally

a high ratio will be desirable.

The third ratio which is covered in this project report is the Liquidity ratio. Ratios

computed under this group indicate the short term position of the organization and

also indicate the efficiency with which the working capital is being used. Current

ratio indicates the backing available to current liabilities in the form of current assets.

(Table 6 illustrates Ratio analysis)

Schedule for working capital and working capital finance :

It consists of working of net working capital for the firm. It also shows the increase or

decrease in net working capital. Net working capital can be arrived by subtracting

current liabilities from current assets. Here current assets do not include cash and

bank balances. Current assets include sundry debtors, work in progress, other current

assets. Current liabilities include advances against bookings, sundry creditors and

provisions and other liabilities. The final calculation arrives by justifying the amount

of cash credit required by the firm.

(Table 7 illustrates Schedule for working capital and working capital finance )

FINANCIAL FORECASTING

As an important requirement for a variety of purposes, the financial forecasting is

under new focus these days. Be it for the preparation of a project report or a business

plan, a budgeting exercise, corporate valuation and sometimes just for planning for

the future, the Financial Forecasting is a must. Business forecasting summarizes

future expectations of the business strategy and the accounting and financial analysis.

It projects future expected scenario, keeping the past in view. It is like driving a car

we look at the road ahead, keeping the reflection of the road behind in our line of

sight. While we do not drive keeping our eyes on the rearview mirror alone, we do

occasionally look at it while proceeding ahead. The very nature of forecasting, i.e.

capturing our expectation of the uncertain future, makes the task difficult. The very

process of forecasting for the firm makes one alert to the possible consequences of

actions taken or not taken, decisions made or not made. We cannot afford to neglect

planning for the future in a business environment.

It is the very uncertainty that exists that makes forecasting a challenging task.

Forecasting is not just about putting some numbers in place. Rather it is about having

a believable story about the company, translated into numbers. These numbers should

reflect the strategy of the company and its position compared to its peers and

competition.

Kinds of forecast statements

A well-done forecast will have all three financial statements, the balance sheet, the

profit and loss account and the cash flow statement. It will also provide for different

scenarios, by way of sensitivity analysis. The periodicity of the financial statements

depends on the size and complexity of the organization and the requirement of the

management. Some organizations prepare these on a monthly basis, others on a

quarterly basis; some on an annual basis. In some organizations, there are different

kinds of forecasts with different timeframes for different purposes. To take an

example, the 2003-04 Annual Report of Infosys Technologies Limited makes mention

of three horizons of planning

a five year model, a three year business plan and an

yearly budgeting plan which is prepared on a rolling 4-quarter basis. The report

highlights the different needs served by these three, the five year plan is for long term

impact analysis, the three year plan is to ensure the preservation of the strategic intent

and the yearly rolling plan is to ensure the predictability of the short term.

A business needs to plan for short term, as well as for long term. The short term has

more predictability as compared to the long term. It is easy to lose sight of the long

term potential or constraint in trying to manage short-term issues. One can, with some

effort, have a reasonable prediction of sales in the next three months. One would have

some idea of existing orders and expected orders from existing customers and

possible new orders from new customers. It is much more difficult to predict where a

firm will be getting orders from five years in the future. So the forecast for revenue

five years later, will draw from items such as expected market position in five years,

growth target of the company and expected market share. In such cases, one must

develop a forward-looking approach. It is not uncommon to find persons expecting

the future to be a continuation of the present. Insufficient thought given to anticipate

the future can lead to some costly mistakes. To give an example, an entrepreneur

decided to develop a product, based on existing IT technology. Two years down the

road, the entrepreneur had a trial product ready, but found to his dismay, that the

requirements of the users of the technology, i.e. his potential customers, had totally

changed.

Assumptions behind forecast

Fancy spreadsheet generated numbers are of no use if the underlying assumptions

behind them have no foundation. Sometimes managers give insufficient thought as

to how the sales projected can be generated and also as to whether all elements of cost

have been captured. In fact this is the crucial element in forecasting. Managers need to

spend time to ensure that, as far as possible, they have captured all revenue and

expenditure heads. Numbers can then be plugged in and spreadsheets can generate the

final statements.

There should be a believable story about the future performance of the company. For

e.g. Sales is expected to grow at more than average industry expected rate of growth

in this BPO company. This is because of the quality of the management team, the

investors and the past track record of the company in getting and retaining

customers.

While the statements would show numbers, explanations for assumptions made,

should be separately shown. This could be by way of notes or points. It is useful to

have a separate document in which the assumptions made are listed. This will

facilitate verification and clarification, if and when required. This also helps whenever

some changes in assumptions are to be made and when numbers are to be verified or

cross checked with other data and information. The forecasts will also then become

self speaking documents. If key persons who have prepared the statements are

unavailable, reader friendly spreadsheets and notes can be a substitute.

Wherever possible, one should have historical data and comparable data from other

organizations. Some examples would be comparable items of expenditure in the

industry such as salary, per diem cost on travel, selling and general administration

costs etc. This would help one in arriving at reasonable forecast numbers, which are

comparable with those in the industry.

The strategic perspective

The financial forecast statement is a translation of the expectation of the management

of the business. Management will have some view of how they would like to see the

business progress. This expectation is what is captured in the numbers. In other

words, the business forecast statement is all about capturing the strategy of the

company in the form of numbers. The person or persons preparing the forecast will

benefit from understanding the strategy of the business going forward. The strategic

rationale should be based on careful understanding of the company, industry and the

general economic scenario. Tom Copeland, Tim Koller, Jack Murrin in their book

Valuation: Measuring and Managing the Value of Companies, have highlighted the

need to develop a strategic perspective for business. This means developing a

plausible story about the company s future performance.

Analytical frameworks can help one understand the competitive advantages of a

business. To illustrate, a commonly used framework is the SWOT analysis (Strength,

Weakness, Opportunity, and Threat). It forces one to think about where advantages

and disadvantages could come from. The analysis can help one try to pinpoint key

drivers of value in the business, as well as key constraints. Value in a business is

driven by the excess of returns over cost of invested capital. This excess is in turn

driven by the quality of products or service, cost controls and utilization of assets.

Putting the numbers in place

Once one gets a fair understanding of the future expectations from the business and

the strategy of the key management, one can make a start on the financial forecasts.

Projections typically start with revenues, which can come from a variety of sources,

such as from products sold, from services rendered, from license fees etc. In all cases,

one should closely examine assumptions for both the volume of sales and the rates, as

both will impact the earnings. The assumptions for the target customers (e.g. number

and details of possible customers) should also be stated in the explanations. Sale

contracts on hand, if any, are to be examined to understand if there are any clauses in

the contract which may impact expected revenues. Other income, if any, such as

dividend income, interest income and income from miscellaneous sale such as scrap

sale or sale of by products must also be included.

The business must also try to analyze and understand quality of revenues. For

example a software services firm could identify expected sales for onsite and offshore

business and revenues in terms of geographies, ie. in USA, in countries in Europe etc.

A manufacturing company may perhaps look at the expected product lines, prices and

sales in different regions in the country.

Next would follow an analysis of various expenses. The expense heads would vary

depending on the nature of business. While a manufacturing company would have

raw material cost, a services company may have no inventory costs. The nature of all

costs and their drivers must be understood while making the forecasts. Employee

costs should be projected keeping in mind the number of employees and their salaries.

It is reasonable to expect different salary structures for different offices, India & US,

for example. These have to be explained in the assumptions. Care should be taken to

include all salary costs, such as those of the key management team, managers,

engineers, administration and clerical staff, driver cost if on company rolls etc. In

Year 2 and 3, expected salary increment (perhaps 10% or 15%) should be considered

in the calculations.

Some other items of cost would be communication costs for connectivity, internet

and telephone costs (including rentals, running costs, based on the number of land

lines and number of cell phones

and deposits which will appear in the balance

sheet), travel (in India, in other countries)

here the number of trips for different

employees should be estimated and costs input, based on approximate travel costs and

per diem) and rent (the deposits for rent will appear in the balance sheet in India, in

other countries etc.). If any service apartments or guest houses are expected to be

hired, these costs are to be included. Such costs should be calculated, based on the

location and area of the place rented which would again depend on the number of

persons expected to utilize these facilities.

It is important to get comparative numbers from other sources, to the extent available.

Information is available from a variety of sources, including databases, the internet

and networks of colleagues, friends and family members. The reliability of the source

is important and the users have to make a judgment call on whether the information is

authentic. In some cases data may be accurate, but dated. For example, if a company

wants to open an office in Netherlands and cost inputs are obtained from someone

who was living in Netherlands two years back, the information may be accurate and

reliable. However, it cannot be directly used, since cost levels are expected to have

changed in the past two years.

Other standard expenses in any running organization include postage and courier

charges, cost of stationery and other office supplies, books, newspapers, periodicals,

professional fees such as consultancy charges, legal charges, tax consultancy charges,

audit fees, repairs and maintenance expenses, freight charges, insurance and risk

cover, office security charges, finance charges, depreciation and taxes if any. Most

organizations also incur expenditure on PR and marketing, rental, lease or hire

charges on office equipment, recruitment costs, training charges, food and staff

welfare costs, entertainment expenses and other miscellaneous costs.

The balance sheet gives a picture of the shareholders funds and other sources of funds

such as loan and advances. The items in the balance sheet are to be input based on the

assumptions made in the profit and loss account. Investment in fixed assets such as

land and building owned if any, plant and machinery, computers, furniture and

fixtures etc. are to be based on requirement projected. For example, capital

expenditure (capex) is calculated based on the area of land purchased, plant and

machinery requirement, number of workstations, furniture, research tools and

equipment etc. which are assumed to be required. Due care should be taken in arriving

at the capex as it is closely linked to various phases planned in the project and the

numbers must reflect basic assumptions made. For example if 30% of the cost is

required to be paid upfront in the form of an advance, this will be reflected as an

advance paid in the balance sheet, till such time the item is received and

commissioned, when it will move to an asset. Here also as far as possible, spreadsheet

links should be used.

The cash flow statement should be carefully prepared, based on actual cash received

and paid out, from and to various accounts respectively. This is where one really sees

the benefit in the links in the spreadsheets. Some of these accounts are creditors for

capex and items of revenue expenditure, debtors for advances paid for capex and for

income earned but not received till close of the credit period in invoice. Payments for

deposits for rent, telephone etc. are also to be input along with other payments for

expenses. Receipts from investors and promoters, from sales and other income such

as interest earned from bank if any etc. are also to be calculated, based on

assumptions.

In these times, many firms incur product development costs, research costs and other

IP (intellectual property) related costs. Managers must try to quantify such costs to the

extent possible.

These heads are illustrative. The key management team in a business should

understand the business well and try to convey the company s vision and ideas

through the financial forecasts. The managers should be consistent and convincing in

what they are putting down.

Factoring in the uncertainties

There are many uncertainties in the business environment. While managers may take

due care while making the forecast, it is a fact that they have to make some

assumptions, which get reflected in the financial statements.

Once the basic financial statements are prepared, it is advisable to look at other

scenarios. In one case, the pessimistic scenario, assume that the company does not

perform as well as projected in the normal scenario. In another case, the optimistic

scenario, assume that the company performs better than expected. In the pessimistic

scenario, revenues will be reduced and it is safe to assume that some costs will be cut

as the company tries to make ends meet. In the optimistic scenario, both revenues and

certain expenses will be on the higher side. Managers should have the financial

projections available for these two scenarios. One way of computing these would be

by doing a sensitivity analysis. For example one could calculate the impact of a

decrease (or increase) in sales of say 10% and some key elements of cost, such as

salary costs or marketing expenses. These would again be based on the nature of

business and the key value drivers and costs in the industry.

The final steps

Once the financial forecasts statements are prepared, some basic tests are to be carried

out. Just as one performs a financial statement analysis with historical data, an

analysis can be done with the forecast numbers. This would include a trend analysis

as well as ratio analysis. To give some examples of changes observed, the cash

balance may be very high in year four of the forecast as compared to the first three

years in the forecast and the historical data. Sales and general administration (SGA)

expenses in the first year of forecast may be 23% of sales as compared to an average

of 18% in the previous five years. By looking into trends, ratios and comparing

actuals with forecast numbers, one can get a good control on the finances of the

organization. Unusual patterns and trends could be due to either a change in the

business model or due to computational error. This needs to be analysed and either

justified or rectified as appropriate.

Forecasting is an ongoing exercise. It is important to regularly compare forecast

numbers and situations with actuals. Deviations may be positive, negative or neutral.

One needs to look into the reason for the deviation, whether it is due to external

factors, not in control of the management of the company or whether it is on account

of internal factors, or a combination of the two. Further, when it is due to internal

factors some questions are to be answered. Could this have been avoided or

anticipated? Have we learnt something from this, which will help us develop a future

action plan?

While financial forecasting is a time consuming exercise, the end result of having a

robust forecast is worth the trouble.

BANKING PROCESS

Working capital advance by commercial banks represents the most important source

for financing current assets. This source of finance has following aspects :

1) Application and processing

2) Sanction and terms of condition

3) Forms of bank finance

4) Nature of security

5) Margin amount

1) Application and processing :

A customer seeking an advance is required to submit an appropriate application form

- there are different types of application forms for different categories of advances.

The information furnished in the application covers, inter alias, the following: the

name and address of the borrower and his establishment; the details of the borrower s

business; the nature and amount of security offered. The application form has to be

supported by various ancillary statements like the financial statements and financial

projections of the firm.

The application is processed by the branch manager or his field staff. This primarily

involves an examination of the following factors:

a) ability, integrity and experience of the borrower in the particular business

b) general prospects of the borrower s business

c) purpose of advance

d) requirement of the borrower and its reasonableness

e) adequacy of the margin

f) provision of security and

g) period of repayment.

2) Sanction, Terms and Conditions :

Once the application is duly processed, it is put up for sanction to the appropriate

authority. The sanctioning powers of various officials

like Branch Manager,

Regional Manager, General Manager, etc.

are defined by virtue of the position they

occupy.

If the sanction is given by the appropriate authority, along with the sanction of

advance the bank specifies the terms and conditions applicable to the advance. These

usually cover the following:

a) the amount of loan or the maximum limit of the advance

b) the nature of the advance

c) the period for which the advance will be valid

d) the rate of interest applicable to the advance

e) the primary security to be charged

f) the insurance of the security

g) the details of the collateral security, if any, to be provided

h) the margin to be maintained and

i) other restrictions or obligations on the part of the borrower.

It is a common banking practice to incorporate important terms and conditions on a

stamped document to be executed by the borrower. This helps the bank to create the

required charge on the security offered and also obligates the borrower to observe the

stipulated terms and conditions.

3) Forms of Bank Finance:

Working capital advance is provided by commercial banks in three primary ways :

a) cash credits/overdrafts

b) loans and

c) purchase/discount of bills.

In addition to these forms of direct finance, commercial banks help their customers in

obtaining credit from other sources through the letter of credit arrangement.

Cash credit/Overdrafts Under a cash credit or overdraft arrangement, a pre

determined limit for borrowing is specified by the bank. The borrower can draw as

often as acquired provided the out standings do not exceed the cash credit/overdraft

limit. The borrower also enjoys the facility of repaying the amount, partially or fully,

as and when he desires. Interest is charged only on the running balance, not on the

limit sanctioned. A minimum charge may be payable, irrespective of the level of

borrowing, for availing this facility. This form of advance is highly attractive from the

borrowers point of view because while the borrower has the freedom of drawing the

amount in installments as and when required, interest is payable only on the amount

actually outstanding.

Loans These are advances of fixed amounts which are credited to the current account

of the borrower or released to him in cash. The borrower is charged with interest on

the entire loan amount, irrespective of how much he draws. In this respect this system

differs markedly from the overdraft or cash credit arrangement wherein interest is

payable only on the amount actually utilized. Loans are payable either on demand or

in periodical installments. When payable on demand, loans are supported by a

promissory note executed by the borrower. There is often a possibility of renewing the

loan.

Purchase/Discount of bills A bill arises out of a trade transaction. The seller of goods

draws the bill on the purchaser. The bill may be either clean or documentary (a

documentary bill is supported by a document of title to goods like a railway receipt or

a bill of lading) and may be payable on demand or after a usance period which does

not exceed 90 days. On acceptance of the bill by the purchaser, the seller offers it to

the bank for discount/purchase. When the bank discounts/ purchases the bill it

releases the funds to the seller. The bank presents the bill to the purchaser ( the

acceptor of the bill) on the due date and gets its payment.

The Reserve Bank of India launched the new bill market scheme in 1970 to encourage

the use of bills as an instrument of credit. The objective was to reduce the reliance on

the cash credit arrangement because of its amenability to abuse. The new bill market

scheme sought to promote an active market for bills as a negotiable instrument so that

the lending activities of a bank could be shared by other banks. It was envisaged that a

bank, when short of funds, would sell or rediscount the bills that it has purchased or

discounted. Likewise a bank which has surplus funds would invest in bills. Obviously

for such a system to work, there has to be a lender of last resort which can come to the

succour of the banking system as a whole. This role naturally has been assumed by

the Reserve Bank of India which rediscounts bills of commercial banks up to a certain

limit. Despite the blessings and support of the Reserve Bank of India, the new bill

market scheme has not functioned very successfully in practice.

Letter of Credit A letter of credit is an arrangement where by a bank helps its

customer to obtain credit from its (customer s) suppliers. When a bank opens a letter

of credit in favour of its customer for some specific purchases, the bank undertakes

the responsibility to honour the obligation of its customer, should the customer fail to

do so. To illustrate, suppose a bank opens a letter of credit in favour of A for some

purchases that plans to make from B. If A does not make payment to B within the

credit period offered by B, the bank assumes the liability of A for the purchases

covered by the letter of credit arrangement. Naturally, B would hardly have any

hesitation to extend credit to A when a bank opens a letter of credit in favour of A. It

is clear from the preceding discussion that under a letter of credit arrangement the

credit is provided by the supplier but the risk is assumed by the bank which opens the

letter of credit. Hence, this is an indirect form of financing. One should note that in

direct financing the bank assumes the risk as well as provides financing.

4) Security:

For working capital advances, commercial banks seek security either in the form of

hypothecation or in the form of pledge.

Hypothecation Under this arrangement, the owner of the goods (hypothecator)

borrows money against the security of movable property, usually inventories. The

owner does not part with the possession of property. The rights of the lender

(hypothecatee) depend upon the agreement between the lender and the borrower.

Should the borrower default in paying his dues, the lender can file a suit to realize his

dues by selling the goods hypothecated.

Pledge In a pledge arrangement, the owner of the goods (pledgor) deposits the goods

with the lender (pledgee) as security for the borrowing. Transfer of possession of

goods is a precondition for pledge. The lender is expected to take reasonable care of

goods pledged with him. The pledge contract gives the lender the right to sell goods

and recover dues, should the borrower default in paying debt.

5) Margin amount :

Banks do not provide hundred per cent finance. They insist that the customer should

bring a portion of the required finance from other sources. This portion is known as

the margin amount. How is the margin amount established? While there is no fixed

formula for determining the margin amount, the following guideline is broadly

observed: The margin is kept lowest for raw materials and highest for accounts

receivable.

RESEARCH METHODOLOGY

Stage 1 : Initially I understood and analyzed the objective of my project.

Stage 2 : Detailed meeting with the principal financial consultant of the firm and one

of the partners of the client for determining and understanding the financial

requirement at various stages.

Stage 3 : Determining the type of data required for the project.

Stage 4 : Actual data collection and analysis of collected data.

In preparation of this project report I have used documents provided by the client firm

itself as well as related information is extracted from the clients financial books.

DATA

ANALYSIS

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SWOT ANALYSIS FOR THE CLIENT KASTURI PROPERTIES

Strengths :

The client has a good constitution of partners who are of good reputation. Since the

client is comparatively a new construction business house it can have innovative

concepts working for them. One of the partners in this firm Kasturi Housing Pvt. Ltd

is a leading company engaged in the business of construction since past 7 years. It has

carried out various projects in and around Pune city and has built up a good faith

amongst its customers.

Weaknesses :

As the client has commenced its business from the year 2005 and is working with

limited funds it cannot take up projects on large scale and at multiple locations. The

client firm does not have a good reach within the customers due to lack of publicity.

Hence it will have to depend on its own networking for grabbing customers.

Opportunities :

Looking at the present scenario of the construction industry s growth and future

prospects in Pune, Kasturi Properties is trying hard to grab the business opportunities

and to come up with the better projects in near future. Basically, Pune has become the

obvious choice for all the aspirants due to the industrial growth in all segments

(automobile, IT etc), education hub for all types of courses, backing of beautiful

nature and easy access to the financial capital Mumbai. We are also aware that,

government is also seriously trying to develop and provide best infrastructure to the

public at large. All this will lead to a constant growth of construction business in

Pune, in future also.

Threats :

Kasturi Properties will be facing a severe competition from big established names in

the construction business in Pune. Customers today are inclined more towards big

township plans with modern amenities. Kasturi properties may have to bear on this

front. Also currently the interest rates on housing loans extended by the banks have

increased, which may lead to a slowdown in overall housing market.

CONCLUSION

After completing this project titled Preparation of a financial report to be submitted

to a bank for availing credit facility , it can be concluded that :

As the client carries out construction business, the Cash Credit facility and

working capital term loan shall give it the flexibility in operation that will

smoothen growth of the organization and business. In construction industry

funds are required immediately when any project or opportunity knocks.

Repayment may not be possible through installments, but ample funds may be

available after certain time span, which can be deposited in the cash credit

account. Thus such flexibility would give the client real advantage of financial

leverage/ management.

As the project report is on a client involved in construction business, which is

known to have low margins ranging. That is due to the high capital-intensive

nature of the business and its long-gestation period.

After completion of this project it can be learned through the process of

project formulation, projection of profits and making an application to the

bank that it is a process that involves a detailed study of the nature of clients

business and its other financial aspects. Other aspects such as good rapport

with the banker, credibility with the bank make this process faster and

smoother.

BIBLIOGRAPHY

Books referred :

1. Finance for Business and Industries; CR Rao.

2. Financial Management Theory and practice; Prasanna Chandra

Websites referred :

1. www.icai.org

for June 2005 issue of The Chartered Accountant journal

Volume 53 No.12.

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