Assignments  Programme Financial Management

#1 Matching the Columns

Answers: A-3, C-1, B-2, D-5, E-6, F-4

#2&3 Multiple Choice

1.    When creating the financial plan, ______________________ have an advantage since they have historical data.

A.   Established organizations

B.    New project/programs

C.   Partnerships

D.   Corporations

2.    Financial statements should include all of the following EXCEPT:

A.    Cash Flow Statement

B.    Balance Sheet

C.   Term Sheet

D.   Income Statement

3.    Modifying key estimates and preparing iterations on the financial plans for a more optimistic scenario and a less optimistic scenario is called ____________:

A.    Common sense

B.    Covering the bases

C.   SWOT analysis

D.   Sensitivity analysis

4.    Revenues, Cost of Goods Sold, and Expenses are all tracked on the _________:

A.    Balance Sheet

B.   Income Statement

C.   Cash Flow Statement

D.   Financial Statement

5.    Assets, Liabilities, and Net Worth are all present on a ________________:

A.   Balance Sheet

B.    Income Statement

C.   Cash Flow Statement

D.   Financial Statement

6.    Young organizations need _____________ to survive.

A.    Investors

B.    Staff

C.   Marketing

D.   Cash

7.    The _________________________ shows the receipt of cash from all sources.

A.    Balance Sheet

B.    Income Statement

C.   Cash Flow Statement

D.   Financial Statement

8.    The current assets divided by the current liabilities is also called the ______________.

A.    Liquidity ratios

B.   Current ratio

C.   Asset management ratio

D.   Inventory turnover

Summary

The financial plan translates all of the information contained in the project/program plan into project financial performance.  It is a crucial element of any plan, because it demonstrates what the managers realistically expect to achieve over the next few years, and what return investors or lenders can expect.  In addition, the financial plan serves as a benchmark for determining how well or poorly the project/program is progressing.  Unlike other areas of the project/program plan, the financial plan follows one prescribed format which includes the following elements:

·          Balance Sheet

·          Income Statement

·          Cash Flow Statement

Module Test

True/False

1.    Financial plans should be extremely accurate and eliminate all guesswork.

True                             False

2.    Financial plans can be completed first, before any other portion of the project/program plan.

True                             False

3.    Lenders want to see that the organization will be growing and providing a return on their equity stake.

True                             False

4.    Balance sheets should be projected for the next three to five years.

True                            False

5.    The cash flow statement represents the organization’s net cash position, rather than the profit.

True                            False

6.    Liquidity ratios show how the organization is capitalized and how highly the organization is leveraged against lenders.

True                             False

7.    Break-even analyses demonstrate the level of sales needed for the organization to meet its obligations.

True                            False

8.    managers should avoid making assumptions in their financial plans.

True                             False

9.    managers must not only have the numbers for their project/program, they must understand them.

True                            False

10.  Financial plans often fail when the managers don’t clarify the reasons behind their assumptions.

True                            False

Bibliography

Siegel, Eric S., Ford, Brian R. and Bornstein, Jay M., “The Ernst & Young project/program Plan Guide – Second Edition,” John Wiley & Sons, Inc., 1993. Pg. 139-166.

O’Donnell, Michael, “The project/program Plan: A State-of-the-Art Guide.” Lord Publishing, Inc, 1988, Pg.  103-119. 

Glossary

Income Statement: Summarizes the profit potential of a new or existing project/program by totaling the revenues, expenses, and cost of goods sold.

Balance Sheet:  Provides a snapshot of the organization’s financial health by totaling the organization’s assets, liabilities, and showing it’s net worth.

Cash Flow Statement: Documents the amount of cash actually flowing into and out of the organization.

Break-even Analysis: The level of sales that are required for a organization to meet its cash obligations and expenses. 
Learning Objectives

·          To understand the issues involved with crafting a financial plan and it’s role within a project/program plan.

·          To understand the elements of the financial plan including the income statement, balance sheet, and cash flow statement.

Q&A

1.    What is the importance of a financial plan?  Why do managers need to craft one?

The prior elements of the project/program plan focus on what the organization will be, what product or service it will create, how it will be organized, and how it will bring the product or service to the market.  The financial plan is the first place in the plan where the managers present an estimate of how well they expect the organization to perform.  The financial plan illustrates the economics of the project/program, so that lenders and investors can decide whether the project/program is worth their capital.  Beyond this, the financial plan is also the yardstick by which the organization’s progress will be judged, as well as the success of the managers in managing the organization.  For these reasons, the managers must careful construct the financial plan to reduce the amount of uncertainty from their estimates.  Clearly, no one can see the future.  However, by using careful planning, reliable cost analysis, and conservative assumptions, managers can increase the likeliness that their financial plan will be achieved.

2.    What are the key elements of the financial plan?

There are three key elements of the financial plan: the income statement, the balance sheet, and the cash flow statement.  These three elements compile the financial statements for any organization – new or established. The income statement is perhaps the most noticeable element of the financial plan since it summarizes the profit potential of a new or existing project/program by looking at revenues and expenses.  The balance sheet lists the organization’s assets and liabilities, enabling the reader to determine the organization’s net worth and see the financial health of the organization at that moment in time.  Finally, the cash flow statement tracks the cash coming into and leaving the organization.  Cash is crucial for young organizations and determining where it is coming or going is essential for determining the organization’s long-term viability.

3.    Aren’t financial statements worthless since they are all based on assumptions?

Financial statements are essentially guesses about what the future will bring.  And while many elements of the financial plan are outside of the organization’s control, there are many areas that the organization can get an accurate estimate.  These include the organization’s fixed and variable costs.  Key assumption include determining the amount of sales generated, the effective response, the adoption rate for customers, and other assumptions that can have a wide impact on the revenues of a organization.  However, by looking at past sector of activity data, market research, and effective history, managers can make assumptions that are based in historical accuracy.  The better the research behind the assumption, the stronger the chance the assumption will be accurate.