Arvind Mallu, a brass artesian from Moradabad had a stall in the 'Trade Fair' showcasing his range of products made of brass. He manufactures and sells from saree pins to big flower-vases and lamp-shades. He got good response from the public and even enquires from foreign businessmen. He wants to switch from an unorganized unit to a well-planned unit which would be called 'Peetalkari'. For this he needs to know the feasibility of the enterprise and the potential financial commitments for the new venture. He approached Dena Bank for financial assistance. The manager asked him for two documents. I. A comprehensive document that describes the external and internal elements involved in starting his enterprise. II. A sub-part of the above document that will satisfy the following queries of the manager: (i) How will the funds of the enterprise be invested in different assets? (ii) Apart from bank loan, what are the other sources of finance that Arvind Mallu would use? (iii) What is the projected profit for the new unit? (iv) How will Arvind Mallu determine the volume of sale required to cover the total variable and fixed expenses of his unit? Arvind Mallu had to draft the two documents clearly stating the answers for the query raised. (a) By what name is the comprehensive document known as? (b) Which sub-part of the comprehensive document is to be prepared by Arvind Mallu? (c) Identify and explain the different components of the sub-part that Arvind Mallu is required to write in his comprehensive statement to satisfy the queries of the manager

Question

Accepted Answer

(a) The comprehensive document is known as the **Business Plan**. A business plan is a comprehensively written down document prepared by the entrepreneur describing formally all the relevant external and internal elements involved in starting a new venture. It is a formal statement of the business goals, the reasons for their attainability, the plan to reach them, and background information about the organization or team.

(b) The sub-part that Arvind Mallu needs to prepare is the **Financial Plan** — a projection of key financial data about the potential investment commitment and the economic feasibility of the enterprise.

(c) The components of the financial plan that satisfy the queries of the manager are:
(i) **Proforma investment decisions** — how the enterprise's funds will be invested in different assets so as to earn the highest possible returns. It includes estimates of land and building, machinery and plant, installation cost, preliminary expenses, margin for working capital, expenses on research and development, and investment in short-term assets.
(ii) **Proforma financing decisions** — the projected sources of funds for the venture, namely owner's funds and borrowed funds. The entrepreneur selects the best mix of financing to minimize capital cost and financial risk while maximizing return on investment.
(iii) **Proforma income statement** — the projected net profit calculated from projected revenue minus projected costs and expenses. 'Sales by month' must be calculated first using forecasting techniques.
(iv) **Break-even analysis** — the level of production at which total revenue equals total cost. It helps determine the volume of sales required to cover total variable and fixed expenses.