Entrepreneurship: Developing a Financial Plan with Ratio Analysis

This report presents a financial plan for a new entrepreneurial venture, detailing the sources of investment, including owner's capital, bank borrowing, and loans from financial institutes. It outlines crucial assumptions related to sales, cost of goods sold, salary increases, and interest rates. The report includes a ratio analysis covering gross profit margin, net profit ratio, current ratio, and debt-equity ratio, providing insights into the company's profitability, liquidity, and leverage. Furthermore, it discusses the critical role of financial information in shaping business strategy, emphasizing its importance in performance analysis, goal setting, capital structure optimization, and meeting financial obligations. Desklib provides access to similar reports and solved assignments for students.

Running head: ENTREPRENEURESHIP
Entrepreneurship
Name of the student
Name of the university
Student ID
Author note

1ENTREPRENEURSHIP
Table of Contents
Financial plan.............................................................................................................................2
Source of investment..................................................................................................................2
Crucial assumptions...................................................................................................................2
Ratio analysis.............................................................................................................................3
Role of financial information in business strategy.....................................................................3
References..................................................................................................................................5

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Financial plan
Source of investment
The company will require AED 5,00,000 initially for start-up expenses and
investment in the business. The business is expected to earn profit from 5th months of
operation. However, initially it will able to earn very lower amount of profit and at the end of
the 1st year it is expected to earn only AED 43,000 as profit. Initial requirement of ARD
500,000 will be required for purchasing capital assets like plant and equipment, machinery,
furniture and fixtures. Out of total requirement of AED 500,000, amount of AED 200,000
will be contributed by the founder and partners of the business (Verbeke 2013). Their
contribution will be invested in common stock. On the other hand, balance requirement that is
AED 300,000 will be obtained through bank loan and loan from financial institutes. 60% that
is (300000 *60%) = 180,000 will be borrowed from bank and balance AED 120,000 will be
borrowed from financial institutes. Both the borrowings are expected to be repaid in a period
of 5 years. Therefore, the source of investment will be as follows –
Source Amount Percentage
Owner’s capital AED 200,000 40%
Bank borrowing AED 180,000 36%
Borrowing from financial institutes AED 120,000 24%
Total investment requirement AED 500,000 100%
Crucial assumptions
The financial plan has been prepared based on some crucial assumptions regarding the
sales, interest rate, payment period and various expenses. The assumptions are as follows –
 Sales for the 1st year will be for AED 12,00,000. For the next 2 years it will increase
at the rate of 20%
 Cost of goods sold will be 40% of the sales for all the 3 years
 Salary to the employees will be increased at 10% from 2nd year
 Rent for the 1st year will be AED 2,000 per month and will increase by AED 1000 per
month in each year.

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 Rate of interest for bank borrowing will be 3.5% and for financial institute borrowing
will be 4.5%
 Payment for interest and payment towards loan repayment will be made quarterly.
Other assumptions regarding the environment and industry condition are as follows –
 It is assumed that there will be no unexpected changes in the customer’s demand or
quality of the product.
 The economy is expected to b strong, stable and no major changes in inflation
Ratio analysis
Ratio Formula Year 1 Year 2 Year 3
Gross profit margin Gross profit/sales*100 60 60 60
Net profit ratio Net profit/Sales * 100 5.67 16.18 17.22
Current ratio Current assets /current Liab 1.60 2.17 1.76
Debt equity ratio Total liab / Equity 0.77 0.58 0.52
It can be identified from the above key ratio calculation that the company is expected
to maintain 60% gross profit ratio all throughout the period of 3 years if no unforeseen event
takes place. If the net profit is considered it can be observed that during the 1st year the net
profit is only 5.67%. However, the company is expected to earn more than 15% both during
the 2nd year as well as 3rd year. If the liquidity aspect is considered, current ratio has been
computed to analyse the liquidity position of the company (Sharda, Delen and Turban 2013).
It evaluates the ability of the company to pay off the short-term obligation with the short-term
assets. It is observed that for all the 3 years the current ratio of the company is more than 1
that is it is expected to pay off its current obligation efficiently. Finally the debt equity ratio
that states the leverage position of the company is stating that the company is lower leveraged
as the debt of the company is lower than its equity. Moreover, from 2nd year the company has
made an improvement in its leverage position (Klettner, Clarke and Boersma 2014).
Role of financial information in business strategy
Financial information plays crucial role while planning strategies for the business.
Financial metrics are used for analysing the performance of the firm (Bentley, Omer and
Sharp 2013). It helps in monitoring and establishing measurable and specific strategic goals
on integrated and coordinated basis which in turn enables the business to operate effectively

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and efficiently. It helps in preparing the optimal capital structure and various financial
decisions based on the borrowing capacity of the firm. The financial information also
evaluates the capability of the firm to meet its short-term as well as long-term obligations.
Further, the business can be failed if the financial information is not appropriate or the
financial plan is not efficient (Blackburn, Hart and Wainwright 2013).

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References
Bentley, K.A., Omer, T.C. and Sharp, N.Y., 2013. Business strategy, financial reporting
irregularities, and audit effort. Contemporary Accounting Research, 30(2), pp.780-817.
Blackburn, R.A., Hart, M. and Wainwright, T., 2013. Small business performance: business,
strategy and owner-manager characteristics. Journal of small business and enterprise
development, 20(1), pp.8-27.
Klettner, A., Clarke, T. and Boersma, M., 2014. The governance of corporate sustainability:
Empirical insights into the development, leadership and implementation of responsible
business strategy. Journal of Business Ethics, 122(1), pp.145-165.
Sharda, R., Delen, D. and Turban, E., 2013. Business intelligence: a managerial perspective
on analytics. Prentice Hall Press.
Verbeke, A., 2013. International business strategy. Cambridge University Press.