Assignment 2: Creation of a Financial Plan
Assignment overview This assignment has a management accounting orientation. It draws on management accounting topics that include budgeting, sensitivity analysis, cost volume profit analysis and decision-making. The assignment is designed to develop the student's ability to develop a well-reasoned financial plan. The plan is to be written from the perspective of a small start-up business that is seeking to document its worthiness to a bank in order to secure a loan. Students have the choice of working on their own, or in teams of up to four people.
Assignment details
You have approached a bank and asked for a loan in connection with a small business you are planning to start. The bank has requested that you prepare a detailed financial plan in support of your loan application
Assumptions/Criteria
- To simplify the analysis, this is a one product merchandising or retail business.
Assume the following cash receipts pattern: 40% collected in month of sale; 55% in month after sale; 5% bad debts.
Assume the following cash payments pattern for inventory purchases: 30% paid in month following the purchase, 70% paid two months after the purchase.
Ignore GST and any other taxes.
The loan you seek will result in a debt / equity ratio of 1.5.
Part 2) A one year plan (individual budgets can be broken up by month or quarter) which includes:
One page dedicated to each of the following:
- Data Input sheet
- Sales budget
- Inventory purchases budget
- Other operational budgets
- Budgeted Income statement in contribution format
- Cash flow budget
- Budgeted Balance Sheet
- Capital expenditure budget
- Sensitivity analysis of profit and cash flows:
a. If sales volume increases / decreases 10% from that expected
b. If variable costs increase by 20%
Total length of part 2: nine pages
Part 3) A long term plan (5 years) which includes:
One page dedicated to each of the following:
- Sensitivity analysis of income statement (in contribution format)
- Sensitivity analysis of cash flow budget
- Capital expenditure plan.
Sensitivity analysis is to document profitability and cash flow under three sales volume scenarios: best case, most likely, and worst case scenarios.
Total length of part 3: three pages
Part 4) Cost volume profit assessment
One page dedicated to:
Breakeven analysis and margin of safety analysis (in units and sales dollars). The margin of safety analysis should assess three sales volume scenarios: best case, most likely, and worst case scenarios.
Total length of part 4: one page