Financial estimates basically refer to the estimates of the financial transactions based on historical data, judgements, understanding and experience.
On the other hand, financial projections are simply forecasting about estimated future expenses and revenues.
It will include both internal data and external data. It is advised to prepare both short term and medium-term financial projections.
Moreover, there are a lot of constituents of financial estimations and projections. We will now discuss them in this post.
Let us now have a look at the following constitutes of financial estimates and projections;
- Cost of project
- Means of finance
- The estimate of sales and production
- Cost of production
- Working capital requirement
- Financing of working capital
- Profitability projections
- Projected cash flow statement
- Projected balance sheet
- Multi-year projections
Cost of Project
In short, the cost of the project refers to the estimated sum total of costs of all the components associated with a project.
The cost of the project, however, depends upon the nature and size of the project with which the company is dealing. The major components to keep in mind while calculating the cost of a project:
- The cost of doing civil works
- Cost of getting plant and machinery
- Machinery costs
- Cost of tools and spare parts
- Engineering costs and fees
- Recruitment and training of technical and non-technical professionals
- Cost of development of land and site
- Cost of construction of a building
- Other expenses
- Contingency expenses
- Initial working capital
- Cost of acquiring technical support fund for initial losses
- Pre-production expenses
Means of Finance
Finance is therefore the heart and soul of any business. Without proper availability of finance, it is not possible to conduct business operations whether big or small. Different types of projects require a different amount of finance at different times during the project.
So, it becomes important to figure out how much is the need for finance and from where will we get the required amount of finance for our project.
It becomes important to decide the source of finance based on the need for the project because of the variety of availability of sources of finance.
For example, if our project requires more liquid funds then we must look and sources with high liquidity whereas if we do not require such liquid funds then choosing a highly liquid source may not prove to be the best decision.
Here are the different means of finance available in general.
In this post, we will only be naming the means and sources of finance because certainly, we got a lot more to discuss here.
But don’t get sad as a special post, especially for means of finance, will soon be on your way.
The Estimate of Sales and Production
In this, we try to estimate our future sales and also our capacity for production to match those sales. Sales and production estimates are a very critical aspect and difficult ones when it comes to estimation of these.
Especially sales revenue estimation has to be done with extra care because of the changing demands in the market and ever-changing situations of the market.
The following points must be kept in mind before conducting sales and production estimates:
- The selling price however to be considered by the firm must not include the excise duty and other charges in it.
- The selling price used must the most recent one because old prices may have hurdles while considering production cost and our final price.
- It is advised to consume that capacity utilization would be low in the and then rise gradually.
Cost of Production
The cost of production certainly refers to the sum total of the all estimated costs that will be associated with production. The areas which however make the cost of production are:
Raw Material cost
The major part of the cost of production is certainly the cost of the raw material involved. However, the cost varies with the size of the product, size of the product, quality of the product, the complexity of the product, nature of the product(perishable or non-perishable) etc.
The cost of labour largely depends upon the amount of labour requires in a particular production process and also the cost of labour in the area of operation. Consequently, several other factors influence the cost like availability of labour, labour laws in our industry, average remuneration of labour in your industry, is the process of production labour intensive or capital intensive.
For instance, utilities are namely power, fuel, water etc. These costs certainly add up to the cost of production and are variable in nature which means that greater the usage the greater the expenses. For example, electricity is a variable cost as the more the usage of electricity the more is the cost involved.
Other overhead costs
These include for example insurance costs, cost of rent, maintenance cost, taxes, cost of repairs, daily expenses, miscellaneous expenses. These costs, however, vary from organisation to organisation and from product type to type.
Working Capital Requirement
Working capital is the further amount of capital required by a business for conducting its day to day operations and trading activities. It is the most important point to be calculated as a part of financial estimates. It is calculated from the following formula.
Working capital= current assets – current liabilities
Working capital is also a key factor when it comes to conducting business. It is the requirement for which we require most liquid funds because most of these requirements are fulfilled by cash.
So it becomes important to estimate the need for working capital. But before estimating we must know the areas in which working capital is required.
- Acquiring raw material
- Maintaining stock of goods
- Operational expenses
- Daily trading expenses
- Transportation costs
- Repairs and maintenance
- Short term obligations
- Planned and unplanned expenses
- Unforeseen emergencies
Financing of Working Capital
We have learnt that working capital is an important factor to consider when it comes to financial estimates and requires to have consisted of highly liquid funds.
We also saw the uses of working capital. But that’s not enough, we must know the sources from where we can gather funds and manage our working capital requirements.
So financing of working capital becomes even more important. So here are a few popular sources of financing working capital:
- Small loans from banks
- Public deposits
- Trade credit
- Retained earnings
- Bills of exchange
- Cash credit
- Bank overdraft
- Advance payments
- Provision for tax
- Amount of depreciation
- Profits from dividends
Profitability Projections/ Profitability Estimates
It takes into account the projections therefore done regarding estimating the profitability of a project. These are hard to execute as the market for a product is dynamic and may change drastically from time to time.
Projected Cash Flow Statement
The cash flow statement is a kind of financial statement that displays the flow of cash in and out of the organisation and its overall net impact on the cash available with the organisation.
Projected Balance Sheet
It is another important part of the financial estimates. In addition, there are two sides to a balance sheet. Firstly the capital and liabilities side and secondly the assets side.
Thus the balance sheet is created in a T shaped format in which on the left side the capital and liabilities are present and on the right side the asset column is present.
The format of the balance sheet is however found in the companies act. The balance sheet is therefore created at the end of the financial year.
The left side or the capital and liabilities side of the balance sheet represents the following items:
- Share capital
- Secured loans
- Unsecured loans
- Reserves and surplus
- Current liabilities
The right side or the assets side of the balance sheet has the following items:
- Fixed assets
- Loans and advances
- Current assets
- Miscellaneous expenses
Multi-year projections are therefore referred to as the projections which are made for a long time over the years. It is considered to be an important document while projections are considered. It takes into account both the internal and external stakeholders of a company.
In short, finance being the blood of business is very important in every business. Thus every business requires to actively arrange for finance during their lifetime.
Before going to the market for raising finance a business must know exactly how much finance it requires and how the business is going to use it. Therefore, the tools of financial estimate and projections help the business with its estimation of financial matters.
Stay with us to get more such amazing stuff from our side. We will be meeting soon. Till then have a look at some FAQs;
Frequently Asked Questions
Financials projections are so important because they provide us with a road map future. They help us estimate financials required in future and also how to arrange those financials.
All projections are based on estimates and are calculated by estimating factors by looking at market conditions and competitors.
It becomes important to manage working capital because it is capital which is needed daily and if we fail to arrange daily finance we will not be able to fulfil our short term and long term goals.
Working capital= current assets – current liabilities