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1. A
PROJECT REPORT ON
Preparation of a financial report to be
submitted to a bank for availing credit facility
FOR
KASTURI PROPERTIES
PUNE.
WITH
MANTRI MARU & CO.
PUNE.
SUBMITTED TO UNIVERSITY OF PUNE
IN PARTIAL FULFILLMENT OF FULL TIME COURSE
MASTER IN BUSINESS ADMINISTRATION (M.B.A.)
SUBMITTED BY
ABHISHEK.L.MUNSHI
(2005-2007)
UNDER THE GUIDANCE OF
Prof. Mr. Mahesh Halale
THROUGH
THE DIRECTOR OF
Vishwakarma Institute of Management
Pune.

2. CERTIFICATE
This is certify that Mr.Abhishek L Munshi has successfully completed
his project, titled Preparation of a financial report to be submitted to
a bank for availing credit facility for Kasturi Properties, Pune with
Mantri Maru & Co., a financial management consultancy firm, during
the academic year 2005-2007 for partial fulfillment of Master in
Business Administration (MBA) from Vishwakarma Institute of
Management, Pune. under our guidance.
Dr. Sharad Joshi Prof. Mahesh Halale
Director, VIM Project Guide

3. ACKNOWLEDGEMENT
I have a great pleasure to present the project report on Preparation of a financial
report to be submitted to a bank for availing credit facility for Kasturi Properties,
with financial management consultants Mantri Maru & Co. (Chartered Accountants),
in partial fulfillment of Master of Business Administration course of University of
Pune, at Vishwakarma Institute of Management, Pune.
I would like to place on record deepest sense of gratitude to Mr. Sachin P. Mantri,
Chartered Accountant and Mr. Chetan Maru, Chartered Accountant for their inspiring
and able guidance which made it possible to bring the best of my efforts on the
project.
I am desirous of placing on record profound indebtedness to Mr. Mahesh Halale,
faculty member of Vishwakarma Institute of Management, Pune, for his valuable
advice, guidance and support he offered.
I also acknowledge the gratitude to Dr. Sharad Joshi, Director of Vishwakarma
Institute of Management, Pune, who motivated us a lot in carrying out this project.
Mr. Abhishek Laxmikant Munshi

4. INDEX
Sr.no Particulars Page no.
1 Executive Summary 1
2 Objective and Scope of the Project 2
3 Consultancy and Client Profile 3
4 Theoretical Background 5
5 Research Methodology 27
6 Data Analysis 28
7 SWOT Analysis 44
8 Conclusions 45
9 Bibliography 46

5. EXECUITVE SUMMARY
I have done this project with Mantri Maru & Co. (Chartered Accountants) in the
course of providing financial management consultancy for our client Kasturi
Properties. The respected client is engaged in construction business. Presently Kasturi
Properties is developing a land for the purpose of a commercial project, which it plans
to complete successfully by the year 2009.
This project is titled as Preparation of a financial report to be submitted to a bank for
availing credit facility . To be precise it explains what all financial information is to
submitted primarily to the bank so as to give a birds eye view to the banking
personnel regarding financial viability of the project which is to be financed by the
bank.
I selected this area of work for my project since it is very much relevant in modern
day business. Today, no business can be carried out without the financial support of
banks and other money lending institutions. For a layman it appears that today banks
are financing various businesses. But financing for any project is a systematic job
which requires facts and figures to be presented in form as desired by the banker. In
this project I have studied about what all financial information is to be submitted to
the bank so as to assure the banker that the firm needs credit facility and has enough
funds and future projected profits to repay the borrowed amount after the stipulated
period.
The consultancy firm Mantri Maru & Co. and its client Kasturi Properties are located
in Pune. Firstly financial statements for the client were prepared for the financial year
ended 31st
March 2006. The finance required by the client and its engulfing factors
were studied in depth. Total costs, expenditure and the profits were forecasted for the
construction project to be undertaken. Details of every step taken in this regard are
covered in this project report.
As the end result of this activity as mentioned above, a project report containing the
relevant facts and figures (both actual and projected) of the client was prepared and
submitted to the bank for further appraisal before availing credit as stipulated.

6. OBJECTIVE AND SCOPE OF THE PROJECT
The objectives considered in this project can be summed up as under :
1. To study the process of preparation of financial report to be submitted to a
bank before availing credit.
2. To study the steps involved in project formulation and preparation of
financial statements.
3. To study all related aspects regarding the financing of the project through
cash credit and term loan facility.

7. CONSLUTANCY AND CLIENT PROFILE
Mantri Maru & Co. (Chartered Accountants); a partnership firm was registered in
1996 under the Partnership Act, 1936 having its registered office at Vidyadhar
heights, Laxmi road, Pune. The consultancy firm is headed by Mr. Sachin Mantri and
Mr. Chetan Maru acting as working partners. Both the partners are qualified
Chartered Accountants.
This financial consultancy firm is engaged exclusively in giving consultancy over
Accounting, Audit, Taxation and Finance. The firm has a good presence with business
houses in and around Pune.
Both the partners along with its committed staff, work with the sole focus of giving
better, continuing and professional service to its clients. With this backing, the firm
has emerged to be a promising player in financial consultancy business in Pune.
The firm has also setup a branch at Jalna, Maharashtra. In addition to this, business
networking is one such characteristic for which the firm strives on continual basis. It
believes that networking and brand name creation through good service is the only
way to stay ahead of rest of the competition.
The firm has a good mix of clients consisting of manufacturing companies, trading
enterprises, construction business houses, banks and other small trading concerns. The
firm is always open for new business avenues and is inclined towards growing its
client base in forthcoming years.
With respect to the project which I have carried out, the financial consultancy firm
Mantri Maru & Co. has acted in the capacity of a consultant for its client Kasturi
Properties for the purpose of availing credit facility from a bank.

8. The client Kasturi Properties is engaged in the business of construction (Builders
and developers) since June 2005. It is a registered partnership firm under the
Partnership Act, 1936 having its registered office at Budhwar Peth, Opp. City Post,
Pune. The names of the partners are: Mr. Bharat Agarwal, Mr. Dilip Agarwal, Mr.
Vinay Bhutada and Kasturi Housing Pvt.Ltd. The partners are highly qualified and
having an experience of 10-12 years, in the real estate and property management
business.
Presently, the client is carrying out a proposed commercial project at Baner, Pune
with a total saleable area of 24000 Sq.ft. It is expected to be completed by March
2009. One of the partners in this firm Kasturi Housing Pvt.Ltd. is a leading
company engaged in the business of construction. It has carried out various projects in
and around Pune city. Most of its projects are working out of own funds i.e without
loan from any bank or financial institutions.
Looking at the present scenario of the construction industry s growth and future
prospects in Pune, Kasturi Properties is trying hard to grab the business opportunities
and to come up with the better projects in near future. Basically, Pune has become the
obvious choice for all the aspirants due to the industrial growth in all segments
(automobile, IT etc), education hub for all types of courses, backing of beautiful
nature and easy access to the financial capital Mumbai. We are also aware that,
government is also seriously trying to develop and provide best infrastructure to the
public at large. All this will lead to a constant growth of construction business in
Pune, in future also.

9. THEORETICAL
BACKGROUND

10. BACKGROUND
Today, in modern age the crust of development of a progressive society is achieved
by a healthy co-operation of agrarian and industrial economies. With the basics in
economics giving weightage to unending human wants, its but natural that if the
output from any thing is to be achieved the inputs must be in accordance with it. If the
same thing is to be pin pointed to the current business scenario today, then if business
house wants optimum output then it has to give in substantial input too.
For any business the output may be its sales through production or lending of
services to the society, out of which profits are earned by it. The input invariably for
all kinds of business is the money poured in. As the saying goes nothing is free in
this world , every business house, be it a large multi national company or a small
scale factory operating in a local market, finance is the lifeblood of all the activities.
Hence every organization has to look into the matter of finance with utmost
seriousness. If finance is managed well then the business is half well done.
No business entity is self sufficient. It has to take help of external sources in
an array of different activities that it indulges in. Similar is the case for financing of
business activities. Thus businesses are financed in numerous ways.
In this project report, preparation of financial report and its submission to the
bank for availing the Cash Credit and Term Loan is discussed in detail. Banks
require the financial viability of any project before it lends money to the applicant
party. The details to be covered in such submission are organization profile, details of
the project, and financial details of the project, projected profitability statement (both
consolidated and yearly), projected balance sheet, and projected cash flow statement,
ratio analysis, schedule for working capital and its finance.

11. Before we start with the actual theory base of the concepts used in this project first we
will see what is project. Project, simply stated, A project presupposes commitment of
tasks to be performed with in well designed objectives, schedules and budget .
Similarly project can be defined as an organized unit dedicated to the attainment of a
goal successful completion of a development project on time, within budget, in
conformance with predetermined programmed specification.
While project differs in size, nature, objectives and complexity, they must all part take
of three basic attributes.
1) Course of action
2) Specific objectives
3) Definite time
The work plan must be laid down in a clear and unambiguous manner in which the
predetermined project objectives are sought to be achieved, the resources which will
be consumed in this process of achieving objectives. A project can also be considered
as proposal involving capital investment for the purpose of as the basis for
classification.
The project covered in this report needs finance in the form of cash credit and term
loan. Project financing may be defined as the raising of funds required to finance an
economically separable capital proposal in which the lenders mainly rely on
established cash flow from the project to service their loan. The financing process
here differs from conventional financing in the following aspect:
1. Cash flows from the project related assets alone are considered for assessing
the repaying capacity.
2. The creditors ensure proper utilization of funds and creation of assets as
envisaged in the project proposal. Funds are also released in stages as and
when assets are created.
3. The financers are keen to watch the performance of the enterprise and suggest/
take remedial measures as and when required to ensure that project repays the
debt out of its cash generation.

12. Theoretically, an entrepreneur has an infinitely wide choice with respect to this
project. The important dimension of choice are service, market, technology,
equipment, scale of performance, location, incentive and time phasing. The task of
identifying a feasible and promising project is somewhat difficult. Moreover its is
inter related with government policies, infrastructural development and skills of
people. Project identification is concerned with collection, compilation and analysis of
economic data for the eventual purpose of locating possible opportunities for
investment and with development of such opportunities. Opportunities are of three
kinds:
1. Additive : Additive opportunities are those opportunities which enable the
decision maker to better utilize the existing resources without in any way
involving a change in character of business. These opportunities involve
minimum disturbances to the existing state of affairs and hence the least risk.
2. Complementary : Complementary opportunities involve the introduction of
new ideas and as such do lead to a certain amount of change in the existing
structure.
3. Breakthrough : Breakthrough opportunities, on the other hand involve
fundamental changes in both the structure and character of business.
The element of risk is greater in case of complementary opportunities and greatest in
the case of breakthrough opportunities. As the element of risk increase, it becomes
more and more important to precisely define the scope of and nature of the project
objectives and to select the best possible approach so as to minimize both resources
consumption and risks and to optimize the return or gains.
Project identification is of utmost importance due to :
1. Projects become the catalytic agents of economic development.
2. They initiate the process of development in terms of employment and income
generation.
3. They have beneficial consequences, which are long term in nature.
4. Projects provide the framework of the future pattern of activities and services
of the enterprises.

13. 5. Projects usually involve substantial financial outlay
6. Project identification brings necessary changes in the society in course of time.
7. project accelerates the process of socio cultural development.
The starting point of a project analysis is the establishment of objectives to be
attained. The next stage is the pre selection stage, the advisability of having an in
depth study. The analysis stage consist mainly three factors market, technical and
financial analysis.
Financial analysis is important here from the banking point of view. In this the
emphasis is on preparation of financial statement, so that the project may be evaluated
in terms of different measures of commercial profitability followed by the magnitude
of financing which requires the assembly of the market and also technical cost
estimated in various proforma statements.
Fixing the cost of the project should be done with great care. It is the single most
exercise on the basis of which the subsequent exercise of Means of financing is
done. The calculation of the promoters contribution is also done on the basis of this
particular exercise. Each and every item which can be conceived should be included
at this stage.
If there is some point, which is not considered at this stage, it is likely that the
particular element of the cost is not included in the cost of project . The omission,
when subsequently detected, would have to be financed by the promoters themselves.
Another factor which is important is the fixation of the time schedule or the
implementation period of the project. The help of the Bar chart is recommended
which does not require any specialized knowledge like PERT or CPM.
There is another tendency which has been noted amongst the promoters i.e. to over
invoice certain items. This should be avoided. Almost all the institutions know the
cost of equipments. If there is large variation in the cost of the standard equipment
this may lead to loss of credibility at the initial stages of the project.

14. CONCEPTUAL BASE
In this part we will be discussing some of the important definitions relating to the
financial information submitted to the bank by our client Kasturi Properties for
availing cash credit and term loan facility.
The factual data which is to be submitted to the bank in a form of financial report
contains total financial details of the proposal. Its contents are explained below in
detail :
Financial details of the project :
This part contains the details as cost of the project and means of finance intended for
the project. The total cost of the project includes land cost, direct cost of construction
and indirect cost. Cost of the project is spread over the span of 3 years upto the
completion of project. Land cost and direct cost of construction are self explanatory in
nature but indirect cost must be classified in its minute contents. In a nutshell, indirect
cost consists of administrative and selling expenses, finance charges i.e. interest and
depreciation.
Means of finance include own funds and loan funds. Loan funds are those funds
which the client intends to apply. Own funds include the capital introduced by the
firms partners and re investment of yearly accruals made by the firm. Loan funds
include term loan and cash credit.
Loans are advances of fixed amounts which are credited to the current account of the
borrower or released to him in cash. The borrower is charged with interest on the
entire loan amount, irrespective of how much he draws. In this respect this system
differs markedly from the overdraft or cash credit arrangement wherein interest is
payable only on the amount actually utilized. Loans are payable either on demand or
in periodical installments. When payable on demand, loans are supported by a
promissory note executed by the borrower. There is often a possibility of renewing the
loan.

15. Cash credit Under a cash credit or overdraft arrangement, a pre determined limit for
borrowing is specified by the bank. The borrower can draw as often as acquired
provided the out standings do not exceed the cash credit/overdraft limit. The borrower
also enjoys the facility of repaying the amount, partially or fully, as and when he
desires. Interest is charged only on the running balance, not on the limit sanctioned. A
minimum charge may be payable, irrespective of the level of borrowing, for availing
this facility. This form of advance is highly attractive from the borrowers point of
view because while the borrower has the freedom of drawing the amount in
installments as and when required, interest is payable only on the amount actually
outstanding.
(Table 1 illustrates financial details of the project.)
Projected consolidated profitability statement :
This statement consists total income, project cost, profit from the project, estimated
income tax and net profit after income tax to the Kasturi properties. It also includes
net profit turnover ratio for the firm.
Total income includes income form sale of constructed area, including sale of
parking, electricity and other expenses. Total cost includes direct and indirect cost.
When total cost is deducted from the income we get profit from the project. Income
tax is calculated on the profit less partners remuneration. As the client is a partnership
firm the income tax rate is 33.66%. Net profit ratio is calculated by dividing profit by
the sale of Kasturi properties.
(Table 2 illustrates consolidated profitability statement)

16. Projected yearly profitability statement :
This statement shows yearly classification of the profits to be earned by the firm over
a stipulated period. It consists income form sale of flats, direct costs, indirect costs i.e.
out of opening work in progress, operating revenue, indirect cost, profit before tax,
income tax, net profit, cash profit and net profit turnover ratio. All the above
mentioned components are shown on yearly basis so as facilitate the overall flow of
profits over years.
This statement is submitted to the banker so that the banker measures gross profit,
operating profit and profit after tax in income statement. Operating profit is banker s
term to denote pure profits unaffected by results of extraneous activities.
(Table 3 illustrates projected yearly profitability statement)
Projected balance sheet :
The balance sheet here is given for four consecutive financial years. Projections are
made in keeping with consideration overall financial factors of the firm. Balance sheet
constitutes of sources of funds and application of funds.
Sources of funds include partners capital, profits less drawings. It also includes
secured loans from bank. Application of funds include items as fixed assets, current
assets less current liabilities.
Balance sheet is submitted to the banker so that he can measure the liquidity of the
firm. He thereby estimates the extent of immediacy of each liability and currency of
each asset so as to glean overall health of the firm. Capital, revenue and surplus
comprise net worth. Arrears of depreciation, inadequate provisions and claims against
the firm under dispute, are reduced from net worth by the banker. Term loans from
bank form deferred liabilities. They are repayable out of profits and not merely out of
sale proceeds.

17. Assets that possess a long commercial life such as land, building, plant, machinery
and vehicles employed by the firm for its operations comprise fixed assets. Current
assets include debtors, closing work in progress, cash and bank balances and other
current assets. Items locked in one operating cycle at any one point of time are called
current assets. Mere quality of liquidity of the asset does not make it a current asset.
Current liability is one which is repayable out of sales revenue within one operating
cycle. It is not correct to define current liabilities as those that are repayable in one
year. In this report current liabilities include advance against bookings, creditors and
creditors for expenses.
(Table 4 illustrates projected balance sheet)
Projected cash flow statement :
Cash flow statement considers the transactions affecting the movement of working
capital and also movements only in respect of cash. The basic principles for cash
flow statement are any increase in assets involves outflow of funds, any decrease in
assets involves inflow of funds, any increase in liabilities involves inflow of funds and
any decrease in liabilities involves outflow of funds. The way in which cash flow
statement can be prepared, takes the following form.
Opening Cash Balance
Add : Sources of cash
Less : Applications of cash
Closing Cash Balance.
(Table 5 illustrates the projected cash flow statement)
Ratio analysis :
The technique of ratio analysis as technique for interpretation of financial statements
deals with computation of various ratios, by grouping or regrouping the various
figures and/or information appearing on the financial statements with the intention to
draw the fruitful conclusions there from. Ratio analysis helps to appraise the firms in
terms of their profitability and efficiency of performance, either individually or in
relation to those of other firms in the same industry.

18. First of all in profitability ratios, in this report we have net profit turnover ratio and
then the return on investment ratio. Net profit to sales ratio is a direct and simple
measure of the firm s short term profitability on a year to year basis. Net profit means
profit after tax. The net profit ratio indicates that portion of sales available to the
owners after the consideration of all types of expenses and costs either operating or
non operating or normal or abnormal.
Return on investment should be the guiding factor in long run. ROI should at least be
the rate yielded by any other alternative investment. Bank rate can be the minimum
expected ROI but should always be higher to compensate for expertise and adventure.
Moving to the second ratio i.e. Repayment ratio, it covers interest coverage ratio.
Interest coverage ratio indicates the protection available to the lenders of long term
capital in the form of funds available to pay the interest charges i.e. profits. Normally
a high ratio will be desirable.
The third ratio which is covered in this project report is the Liquidity ratio. Ratios
computed under this group indicate the short term position of the organization and
also indicate the efficiency with which the working capital is being used. Current
ratio indicates the backing available to current liabilities in the form of current assets.
(Table 6 illustrates Ratio analysis)
Schedule for working capital and working capital finance :
It consists of working of net working capital for the firm. It also shows the increase or
decrease in net working capital. Net working capital can be arrived by subtracting
current liabilities from current assets. Here current assets do not include cash and
bank balances. Current assets include sundry debtors, work in progress, other current
assets. Current liabilities include advances against bookings, sundry creditors and
provisions and other liabilities. The final calculation arrives by justifying the amount
of cash credit required by the firm.
(Table 7 illustrates Schedule for working capital and working capital finance )

19. FINANCIAL FORECASTING
As an important requirement for a variety of purposes, the financial forecasting is
under new focus these days. Be it for the preparation of a project report or a business
plan, a budgeting exercise, corporate valuation and sometimes just for planning for
the future, the Financial Forecasting is a must. Business forecasting summarizes
future expectations of the business strategy and the accounting and financial analysis.
It projects future expected scenario, keeping the past in view. It is like driving a car
we look at the road ahead, keeping the reflection of the road behind in our line of
sight. While we do not drive keeping our eyes on the rearview mirror alone, we do
occasionally look at it while proceeding ahead. The very nature of forecasting, i.e.
capturing our expectation of the uncertain future, makes the task difficult. The very
process of forecasting for the firm makes one alert to the possible consequences of
actions taken or not taken, decisions made or not made. We cannot afford to neglect
planning for the future in a business environment.
It is the very uncertainty that exists that makes forecasting a challenging task.
Forecasting is not just about putting some numbers in place. Rather it is about having
a believable story about the company, translated into numbers. These numbers should
reflect the strategy of the company and its position compared to its peers and
competition.
Kinds of forecast statements
A well-done forecast will have all three financial statements, the balance sheet, the
profit and loss account and the cash flow statement. It will also provide for different
scenarios, by way of sensitivity analysis. The periodicity of the financial statements
depends on the size and complexity of the organization and the requirement of the
management. Some organizations prepare these on a monthly basis, others on a
quarterly basis; some on an annual basis. In some organizations, there are different
kinds of forecasts with different timeframes for different purposes. To take an
example, the 2003-04 Annual Report of Infosys Technologies Limited makes mention
of three horizons of planning a five year model, a three year business plan and an
yearly budgeting plan which is prepared on a rolling 4-quarter basis. The report

20. highlights the different needs served by these three, the five year plan is for long term
impact analysis, the three year plan is to ensure the preservation of the strategic intent
and the yearly rolling plan is to ensure the predictability of the short term.
A business needs to plan for short term, as well as for long term. The short term has
more predictability as compared to the long term. It is easy to lose sight of the long
term potential or constraint in trying to manage short-term issues. One can, with some
effort, have a reasonable prediction of sales in the next three months. One would have
some idea of existing orders and expected orders from existing customers and
possible new orders from new customers. It is much more difficult to predict where a
firm will be getting orders from five years in the future. So the forecast for revenue
five years later, will draw from items such as expected market position in five years,
growth target of the company and expected market share. In such cases, one must
develop a forward-looking approach. It is not uncommon to find persons expecting
the future to be a continuation of the present. Insufficient thought given to anticipate
the future can lead to some costly mistakes. To give an example, an entrepreneur
decided to develop a product, based on existing IT technology. Two years down the
road, the entrepreneur had a trial product ready, but found to his dismay, that the
requirements of the users of the technology, i.e. his potential customers, had totally
changed.
Assumptions behind forecast
Fancy spreadsheet generated numbers are of no use if the underlying assumptions
behind them have no foundation. Sometimes managers give insufficient thought as
to how the sales projected can be generated and also as to whether all elements of cost
have been captured. In fact this is the crucial element in forecasting. Managers need to
spend time to ensure that, as far as possible, they have captured all revenue and
expenditure heads. Numbers can then be plugged in and spreadsheets can generate the
final statements.
There should be a believable story about the future performance of the company. For
e.g. Sales is expected to grow at more than average industry expected rate of growth
in this BPO company. This is because of the quality of the management team, the

21. investors and the past track record of the company in getting and retaining
customers.
While the statements would show numbers, explanations for assumptions made,
should be separately shown. This could be by way of notes or points. It is useful to
have a separate document in which the assumptions made are listed. This will
facilitate verification and clarification, if and when required. This also helps whenever
some changes in assumptions are to be made and when numbers are to be verified or
cross checked with other data and information. The forecasts will also then become
self speaking documents. If key persons who have prepared the statements are
unavailable, reader friendly spreadsheets and notes can be a substitute.
Wherever possible, one should have historical data and comparable data from other
organizations. Some examples would be comparable items of expenditure in the
industry such as salary, per diem cost on travel, selling and general administration
costs etc. This would help one in arriving at reasonable forecast numbers, which are
comparable with those in the industry.
The strategic perspective
The financial forecast statement is a translation of the expectation of the management
of the business. Management will have some view of how they would like to see the
business progress. This expectation is what is captured in the numbers. In other
words, the business forecast statement is all about capturing the strategy of the
company in the form of numbers. The person or persons preparing the forecast will
benefit from understanding the strategy of the business going forward. The strategic
rationale should be based on careful understanding of the company, industry and the
general economic scenario. Tom Copeland, Tim Koller, Jack Murrin in their book
Valuation: Measuring and Managing the Value of Companies, have highlighted the
need to develop a strategic perspective for business. This means developing a
plausible story about the company s future performance.
Analytical frameworks can help one understand the competitive advantages of a
business. To illustrate, a commonly used framework is the SWOT analysis (Strength,
Weakness, Opportunity, and Threat). It forces one to think about where advantages
and disadvantages could come from. The analysis can help one try to pinpoint key

22. drivers of value in the business, as well as key constraints. Value in a business is
driven by the excess of returns over cost of invested capital. This excess is in turn
driven by the quality of products or service, cost controls and utilization of assets.
Putting the numbers in place
Once one gets a fair understanding of the future expectations from the business and
the strategy of the key management, one can make a start on the financial forecasts.
Projections typically start with revenues, which can come from a variety of sources,
such as from products sold, from services rendered, from license fees etc. In all cases,
one should closely examine assumptions for both the volume of sales and the rates, as
both will impact the earnings. The assumptions for the target customers (e.g. number
and details of possible customers) should also be stated in the explanations. Sale
contracts on hand, if any, are to be examined to understand if there are any clauses in
the contract which may impact expected revenues. Other income, if any, such as
dividend income, interest income and income from miscellaneous sale such as scrap
sale or sale of by products must also be included.
The business must also try to analyze and understand quality of revenues. For
example a software services firm could identify expected sales for onsite and offshore
business and revenues in terms of geographies, ie. in USA, in countries in Europe etc.
A manufacturing company may perhaps look at the expected product lines, prices and
sales in different regions in the country.
Next would follow an analysis of various expenses. The expense heads would vary
depending on the nature of business. While a manufacturing company would have
raw material cost, a services company may have no inventory costs. The nature of all
costs and their drivers must be understood while making the forecasts. Employee
costs should be projected keeping in mind the number of employees and their salaries.
It is reasonable to expect different salary structures for different offices, India & US,
for example. These have to be explained in the assumptions. Care should be taken to
include all salary costs, such as those of the key management team, managers,
engineers, administration and clerical staff, driver cost if on company rolls etc. In

23. Year 2 and 3, expected salary increment (perhaps 10% or 15%) should be considered
in the calculations.
Some other items of cost would be communication costs for connectivity, internet
and telephone costs (including rentals, running costs, based on the number of land
lines and number of cell phones and deposits which will appear in the balance
sheet), travel (in India, in other countries) here the number of trips for different
employees should be estimated and costs input, based on approximate travel costs and
per diem) and rent (the deposits for rent will appear in the balance sheet in India, in
other countries etc.). If any service apartments or guest houses are expected to be
hired, these costs are to be included. Such costs should be calculated, based on the
location and area of the place rented which would again depend on the number of
persons expected to utilize these facilities.
It is important to get comparative numbers from other sources, to the extent available.
Information is available from a variety of sources, including databases, the internet
and networks of colleagues, friends and family members. The reliability of the source
is important and the users have to make a judgment call on whether the information is
authentic. In some cases data may be accurate, but dated. For example, if a company
wants to open an office in Netherlands and cost inputs are obtained from someone
who was living in Netherlands two years back, the information may be accurate and
reliable. However, it cannot be directly used, since cost levels are expected to have
changed in the past two years.
Other standard expenses in any running organization include postage and courier
charges, cost of stationery and other office supplies, books, newspapers, periodicals,
professional fees such as consultancy charges, legal charges, tax consultancy charges,
audit fees, repairs and maintenance expenses, freight charges, insurance and risk
cover, office security charges, finance charges, depreciation and taxes if any. Most
organizations also incur expenditure on PR and marketing, rental, lease or hire
charges on office equipment, recruitment costs, training charges, food and staff
welfare costs, entertainment expenses and other miscellaneous costs.

24. The balance sheet gives a picture of the shareholders funds and other sources of funds
such as loan and advances. The items in the balance sheet are to be input based on the
assumptions made in the profit and loss account. Investment in fixed assets such as
land and building owned if any, plant and machinery, computers, furniture and
fixtures etc. are to be based on requirement projected. For example, capital
expenditure (capex) is calculated based on the area of land purchased, plant and
machinery requirement, number of workstations, furniture, research tools and
equipment etc. which are assumed to be required. Due care should be taken in arriving
at the capex as it is closely linked to various phases planned in the project and the
numbers must reflect basic assumptions made. For example if 30% of the cost is
required to be paid upfront in the form of an advance, this will be reflected as an
advance paid in the balance sheet, till such time the item is received and
commissioned, when it will move to an asset. Here also as far as possible, spreadsheet
links should be used.
The cash flow statement should be carefully prepared, based on actual cash received
and paid out, from and to various accounts respectively. This is where one really sees
the benefit in the links in the spreadsheets. Some of these accounts are creditors for
capex and items of revenue expenditure, debtors for advances paid for capex and for
income earned but not received till close of the credit period in invoice. Payments for
deposits for rent, telephone etc. are also to be input along with other payments for
expenses. Receipts from investors and promoters, from sales and other income such
as interest earned from bank if any etc. are also to be calculated, based on
assumptions.
In these times, many firms incur product development costs, research costs and other
IP (intellectual property) related costs. Managers must try to quantify such costs to the
extent possible.
These heads are illustrative. The key management team in a business should
understand the business well and try to convey the company s vision and ideas
through the financial forecasts. The managers should be consistent and convincing in
what they are putting down.

25. Factoring in the uncertainties
There are many uncertainties in the business environment. While managers may take
due care while making the forecast, it is a fact that they have to make some
assumptions, which get reflected in the financial statements.
Once the basic financial statements are prepared, it is advisable to look at other
scenarios. In one case, the pessimistic scenario, assume that the company does not
perform as well as projected in the normal scenario. In another case, the optimistic
scenario, assume that the company performs better than expected. In the pessimistic
scenario, revenues will be reduced and it is safe to assume that some costs will be cut
as the company tries to make ends meet. In the optimistic scenario, both revenues and
certain expenses will be on the higher side. Managers should have the financial
projections available for these two scenarios. One way of computing these would be
by doing a sensitivity analysis. For example one could calculate the impact of a
decrease (or increase) in sales of say 10% and some key elements of cost, such as
salary costs or marketing expenses. These would again be based on the nature of
business and the key value drivers and costs in the industry.
The final steps
Once the financial forecasts statements are prepared, some basic tests are to be carried
out. Just as one performs a financial statement analysis with historical data, an
analysis can be done with the forecast numbers. This would include a trend analysis
as well as ratio analysis. To give some examples of changes observed, the cash
balance may be very high in year four of the forecast as compared to the first three
years in the forecast and the historical data. Sales and general administration (SGA)
expenses in the first year of forecast may be 23% of sales as compared to an average
of 18% in the previous five years. By looking into trends, ratios and comparing
actuals with forecast numbers, one can get a good control on the finances of the
organization. Unusual patterns and trends could be due to either a change in the
business model or due to computational error. This needs to be analysed and either
justified or rectified as appropriate.

26. Forecasting is an ongoing exercise. It is important to regularly compare forecast
numbers and situations with actuals. Deviations may be positive, negative or neutral.
One needs to look into the reason for the deviation, whether it is due to external
factors, not in control of the management of the company or whether it is on account
of internal factors, or a combination of the two. Further, when it is due to internal
factors some questions are to be answered. Could this have been avoided or
anticipated? Have we learnt something from this, which will help us develop a future
action plan?
While financial forecasting is a time consuming exercise, the end result of having a
robust forecast is worth the trouble.

27. BANKING PROCESS
Working capital advance by commercial banks represents the most important source
for financing current assets. This source of finance has following aspects :
1) Application and processing
2) Sanction and terms of condition
3) Forms of bank finance
4) Nature of security
5) Margin amount
1) Application and processing :
A customer seeking an advance is required to submit an appropriate application form
- there are different types of application forms for different categories of advances.
The information furnished in the application covers, inter alias, the following: the
name and address of the borrower and his establishment; the details of the borrower s
business; the nature and amount of security offered. The application form has to be
supported by various ancillary statements like the financial statements and financial
projections of the firm.
The application is processed by the branch manager or his field staff. This primarily
involves an examination of the following factors:
a) ability, integrity and experience of the borrower in the particular business
b) general prospects of the borrower s business
c) purpose of advance
d) requirement of the borrower and its reasonableness
e) adequacy of the margin
f) provision of security and
g) period of repayment.

28. 2) Sanction, Terms and Conditions :
Once the application is duly processed, it is put up for sanction to the appropriate
authority. The sanctioning powers of various officials like Branch Manager,
Regional Manager, General Manager, etc. are defined by virtue of the position they
occupy.
If the sanction is given by the appropriate authority, along with the sanction of
advance the bank specifies the terms and conditions applicable to the advance. These
usually cover the following:
a) the amount of loan or the maximum limit of the advance
b) the nature of the advance
c) the period for which the advance will be valid
d) the rate of interest applicable to the advance
e) the primary security to be charged
f) the insurance of the security
g) the details of the collateral security, if any, to be provided
h) the margin to be maintained and
i) other restrictions or obligations on the part of the borrower.
It is a common banking practice to incorporate important terms and conditions on a
stamped document to be executed by the borrower. This helps the bank to create the
required charge on the security offered and also obligates the borrower to observe the
stipulated terms and conditions.

29. 3) Forms of Bank Finance:
Working capital advance is provided by commercial banks in three primary ways :
a) cash credits/overdrafts
b) loans and
c) purchase/discount of bills.
In addition to these forms of direct finance, commercial banks help their customers in
obtaining credit from other sources through the letter of credit arrangement.
Cash credit/Overdrafts Under a cash credit or overdraft arrangement, a pre
determined limit for borrowing is specified by the bank. The borrower can draw as
often as acquired provided the out standings do not exceed the cash credit/overdraft
limit. The borrower also enjoys the facility of repaying the amount, partially or fully,
as and when he desires. Interest is charged only on the running balance, not on the
limit sanctioned. A minimum charge may be payable, irrespective of the level of
borrowing, for availing this facility. This form of advance is highly attractive from the
borrowers point of view because while the borrower has the freedom of drawing the
amount in installments as and when required, interest is payable only on the amount
actually outstanding.
Loans These are advances of fixed amounts which are credited to the current account
of the borrower or released to him in cash. The borrower is charged with interest on
the entire loan amount, irrespective of how much he draws. In this respect this system
differs markedly from the overdraft or cash credit arrangement wherein interest is
payable only on the amount actually utilized. Loans are payable either on demand or
in periodical installments. When payable on demand, loans are supported by a
promissory note executed by the borrower. There is often a possibility of renewing the
loan.
Purchase/Discount of bills A bill arises out of a trade transaction. The seller of goods
draws the bill on the purchaser. The bill may be either clean or documentary (a
documentary bill is supported by a document of title to goods like a railway receipt or
a bill of lading) and may be payable on demand or after a usance period which does

30. not exceed 90 days. On acceptance of the bill by the purchaser, the seller offers it to
the bank for discount/purchase. When the bank discounts/ purchases the bill it
releases the funds to the seller. The bank presents the bill to the purchaser ( the
acceptor of the bill) on the due date and gets its payment.
The Reserve Bank of India launched the new bill market scheme in 1970 to encourage
the use of bills as an instrument of credit. The objective was to reduce the reliance on
the cash credit arrangement because of its amenability to abuse. The new bill market
scheme sought to promote an active market for bills as a negotiable instrument so that
the lending activities of a bank could be shared by other banks. It was envisaged that a
bank, when short of funds, would sell or rediscount the bills that it has purchased or
discounted. Likewise a bank which has surplus funds would invest in bills. Obviously
for such a system to work, there has to be a lender of last resort which can come to the
succour of the banking system as a whole. This role naturally has been assumed by
the Reserve Bank of India which rediscounts bills of commercial banks up to a certain
limit. Despite the blessings and support of the Reserve Bank of India, the new bill
market scheme has not functioned very successfully in practice.
Letter of Credit A letter of credit is an arrangement where by a bank helps its
customer to obtain credit from its (customer s) suppliers. When a bank opens a letter
of credit in favour of its customer for some specific purchases, the bank undertakes
the responsibility to honour the obligation of its customer, should the customer fail to
do so. To illustrate, suppose a bank opens a letter of credit in favour of A for some
purchases that plans to make from B. If A does not make payment to B within the
credit period offered by B, the bank assumes the liability of A for the purchases
covered by the letter of credit arrangement. Naturally, B would hardly have any
hesitation to extend credit to A when a bank opens a letter of credit in favour of A. It
is clear from the preceding discussion that under a letter of credit arrangement the
credit is provided by the supplier but the risk is assumed by the bank which opens the
letter of credit. Hence, this is an indirect form of financing. One should note that in
direct financing the bank assumes the risk as well as provides financing.

31. 4) Security:
For working capital advances, commercial banks seek security either in the form of
hypothecation or in the form of pledge.
Hypothecation Under this arrangement, the owner of the goods (hypothecator)
borrows money against the security of movable property, usually inventories. The
owner does not part with the possession of property. The rights of the lender
(hypothecatee) depend upon the agreement between the lender and the borrower.
Should the borrower default in paying his dues, the lender can file a suit to realize his
dues by selling the goods hypothecated.
Pledge In a pledge arrangement, the owner of the goods (pledgor) deposits the goods
with the lender (pledgee) as security for the borrowing. Transfer of possession of
goods is a precondition for pledge. The lender is expected to take reasonable care of
goods pledged with him. The pledge contract gives the lender the right to sell goods
and recover dues, should the borrower default in paying debt.
5) Margin amount :
Banks do not provide hundred per cent finance. They insist that the customer should
bring a portion of the required finance from other sources. This portion is known as
the margin amount. How is the margin amount established? While there is no fixed
formula for determining the margin amount, the following guideline is broadly
observed: The margin is kept lowest for raw materials and highest for accounts
receivable.

32. RESEARCH METHODOLOGY
Stage 1 : Initially I understood and analyzed the objective of my project.
Stage 2 : Detailed meeting with the principal financial consultant of the firm and one
of the partners of the client for determining and understanding the financial
requirement at various stages.
Stage 3 : Determining the type of data required for the project.
Stage 4 : Actual data collection and analysis of collected data.
In preparation of this project report I have used documents provided by the client firm
itself as well as related information is extracted from the clients financial books.

33. DATA
ANALYSIS

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SWOT ANALYSIS FOR THE CLIENT KASTURI PROPERTIES
Strengths :
The client has a good constitution of partners who are of good reputation. Since the
client is comparatively a new construction business house it can have innovative
concepts working for them. One of the partners in this firm Kasturi Housing Pvt. Ltd
is a leading company engaged in the business of construction since past 7 years. It has

35. carried out various projects in and around Pune city and has built up a good faith
amongst its customers.
Weaknesses :
As the client has commenced its business from the year 2005 and is working with
limited funds it cannot take up projects on large scale and at multiple locations. The
client firm does not have a good reach within the customers due to lack of publicity.
Hence it will have to depend on its own networking for grabbing customers.
Opportunities :
Looking at the present scenario of the construction industry s growth and future
prospects in Pune, Kasturi Properties is trying hard to grab the business opportunities
and to come up with the better projects in near future. Basically, Pune has become the
obvious choice for all the aspirants due to the industrial growth in all segments
(automobile, IT etc), education hub for all types of courses, backing of beautiful
nature and easy access to the financial capital Mumbai. We are also aware that,
government is also seriously trying to develop and provide best infrastructure to the
public at large. All this will lead to a constant growth of construction business in
Pune, in future also.
Threats :
Kasturi Properties will be facing a severe competition from big established names in
the construction business in Pune. Customers today are inclined more towards big
township plans with modern amenities. Kasturi properties may have to bear on this
front. Also currently the interest rates on housing loans extended by the banks have
increased, which may lead to a slowdown in overall housing market.
CONCLUSION
After completing this project titled Preparation of a financial report to be submitted
to a bank for availing credit facility , it can be concluded that :
As the client carries out construction business, the Cash Credit facility and
working capital term loan shall give it the flexibility in operation that will

36. smoothen growth of the organization and business. In construction industry
funds are required immediately when any project or opportunity knocks.
Repayment may not be possible through installments, but ample funds may be
available after certain time span, which can be deposited in the cash credit
account. Thus such flexibility would give the client real advantage of financial
leverage/ management.
As the project report is on a client involved in construction business, which is
known to have low margins ranging. That is due to the high capital-intensive
nature of the business and its long-gestation period.
After completion of this project it can be learned through the process of
project formulation, projection of profits and making an application to the
bank that it is a process that involves a detailed study of the nature of clients
business and its other financial aspects. Other aspects such as good rapport
with the banker, credibility with the bank make this process faster and
smoother.
BIBLIOGRAPHY
Books referred :
1. Finance for Business and Industries; CR Rao.
2. Financial Management Theory and practice; Prasanna Chandra

37. Websites referred :
1. www.icai.org for June 2005 issue of The Chartered Accountant journal
Volume 53 No.12.

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