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p. 65 of 203 BACK | NEXT Foreword 1. Introduction to the Guidelines 2. User Instructions 3. Preparing and Appraising Investment Project 4. Financial Management of Executing Agencies 4.1. Financial Management Overview 4.2. Institutions and Systems 4.3. Financial Analysis 4.3.1. Introduction to Financial Analysis 4.3.2. Financial Analysis Objectives 4.3.3. Linkages with Cost Recovery and Tariffs 4.3.4. Preparing Financial Tables 4.3.5. Determining Fiscal Period Coverage 4.3.6. Forecasting and Financial Projections 4.3.7. Forecasting Assumptions 4.4. Measuring Performance 5. Reporting and Auditing 6. Financial Institutions 7. Knowledge Management

Financial Management and Analysis of Projects : 4. Financial Management of Executing Agencies : 4.3. Financial Analysis

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4.3.4. Preparing Financial Tables

4.3.4.1. Introduction

4.3.4.1.1. As a reminder, reference should be made to the Glossary of Terms and Definitions when preparing presentational material for ADB reports involving financial data. This will ensure consistent presentation across ADB, and also encourage borrowers to use such terms and their interpretations in the interests of improving financial management.

4.3.4.1.2. Footnotes should be used to explain infrequently-used terms or terms of an ambiguous nature. Cross-referencing should be used within any report, and between the document and any attachments or appendixes.

4.3.4.2. Preparing Summary Financial Tables

• Balance Sheet,
• Income Statement,
• Cash Flow Statement, and
• Financial Summary.

4.3.4.2.6. The examples provided are for a service-type organization and for a manufacturing organization. The examples should be modified appropriately to reflect the nature of each project or EA.

4.3.4.3. Preparing Detailed Financial Tables

4.3.4.4. Demonstrating Past (Actual) and Future (Forecast) Performance

4.3.4.5. Preparing Income Statements

4.3.4.5.1. Income statements can be presented in summary or in detail, depending on the requirements for the presentation in the form of report (for example, the RRP). The following matters should be considered when preparing detailed income statements:

• data for each year are to be defined as Actual or Forecast;
• presentations normally should follow the accounting and financial reporting format adopted by the EA; and
• operating revenues and operating costs presentations will vary widely by sectors, and should detail the specific forms of revenue and costs typically used in the sector. Significant variations in format may occur:

  -	where an agency has inventories produced and held for sale;
  -	when the operating revenues section should show the gross profit arising from gross sales revenues after meeting the cost of sales; and the operating revenues section should show the gross profit arising from gross sales revenues after meeting the cost of sales; and
  -	where an agency chooses to present the operating expenses under objective headings (e.g., bulk storage of water, transmission, distribution, etc., all of which include labor, materials, transport, fuel, etc.)

4.3.4.5.2. These latter categories are often presented as subjective headings, without reference to the objective headings. Either presentation may be acceptable, depending on the objectives of the agency and the project.

4.3.4.5.3. The following information and analyses should be provided with the income statement:

• unit volume: the basis for volume forecast should be described and related to the EA's output capacity and market demand;
• operating revenues: describe significant past and expected changes in selling prices, tariffs and composition of sales mix;
• operating costs: analyze past trends, and give assumptions for projections in each operating cost category (for example: examination of numbers and types of staff and unit costs; expected costs trends of goods and services; or percentages of revenues or assets where these are the appropriate bases for the forecasts);
• depreciation rates: these may be addressed as balance sheet information;
• nonoperating section: describe any significant past experience and give assumptions for the forecasts of other income and expenses, relate forecast interest expenses to loans outstanding;
• taxes on income: give the basis for income tax charges, in public utilities or other sectors where taxes on income are normally presented as part of operating costs, the presentation shown in the table need not be adhered to; and
• appropriations from new income: state basis for past appropriations and any assumptions on future dividends, etc.

4.3.4.5.4. The following comparators and ratios are useful for analyzing Income statement information:

• Growth rates,
• Working ratio,
• Operating ratio,
• Gross profit as percentage of revenues,
• Net income as percentage of revenues,
• Operating income or net income as percentage of revenues, and
• Return on average invested capital.

4.3.4.6. Preparing Cash Flow Statements

4.3.4.6.1.A summary cash flow statement should allow users to ascertain how an entity raised the cash it required to fund its activities and the manner in which that cash was used. Cash flow statements classify cash flows during the period from operating, investing, and financing activities. ADB prefers that cash flows are prepared using the Direct Method (i.e., cash flow components are shown directly, such as cash receipts and payments to employees and suppliers, rather than being derived from the income statement and balance sheet). Where the direct method of presenting cash statements is used, a note that reconciles net surplus to net operating cash flows should be provided.

4.3.4.6.2. The following list identifies matters that may need to be considered when preparing cash flow statements.

• data for each year: should be defined as "Actual" or "Forecast";
• a total column: to reconcile the statement with the financing plan, a total column should be inserted to show the aggregate cash flows during project implementation period;
• capital expenditures: for the proposed project, reference should be made to the detailed tables showing project cost by year, or to other supporting data in the Project Costs section of the RRP. The following items should be shown separately:

  - the total expenditures on assets;
  - financial charges during development (FCDD) (from whatever sources); and
  - working capital where significant, and particularly for start-up industrial and manufacturing projects.

4.3.4.6.3. The separation of the first and third items should facilitate reconciliation with the project cost table and the addition of FCDD should be reflected in the financing plan.

• Borrowings: data on the ADB loan should be directly related to the data in the table(s) in the RRP showing the detailed schedule of disbursements. Estimates of funds available from other sources should be consistent with the information contained in the discussion of the financing plan. In more complicated financing, the funds statement should be supported by a supplementary schedule showing the forecast disbursement of other loans and equity investments:
• Short-term loans to finance working capital: working capital requirements may be shown net of short-term loans, in which case a footnote indicating the amount of short- term financing being used should be added. On the other hand, such short-term financing may be shown separately as a source of funds with a corresponding increase in working capital needs:
• Debt service: the actual payments estimates of interest and debt repayment should be consistent with the terms of debt explained by notes attached to the balance sheet. Where several loans are involved, an interest expense and debt repayment schedule could be used. Interest payments should be net of FCDD;
• Equity contributions: these should be classified as amounts contributed by shareholders, the government, and consumers, where appropriate. Reference to retained earnings as part of the resource mobilization and cash generation may be appropriate:
• Cash should contain an amount estimated to reflect operational needs. If cash surpluses are planned, for example, as a result of advance long-term borrowing, the balances may be added to a "short-term investments" account, to distinguish the operational cash needs from the more financially related, tactical funds needs. The use of a short-term investment account is advisable when the surplus cash balances are large and the interest income significantly affects income. If the cash surplus is not planned and not due to fluctuations resulting from management decisions, a separate "cash surplus" account may be used, especially if the balances are large. "Short-term borrowings" may be used as a "balancing liabilities account", if the funding needs temporarily exceed the funds sources.

4.3.4.6.4. The following are typical comparators and ratios for use in a cash flow statement:

• Debt service coverage, based on the total of loan interest and principal repayments, including interest incurred on work in progress if this is to be financed from net income and not from capital receipts (loan/equity);
• Growth rates; and
• Percentage of capital expenditure financed by internal sources.

4.3.4.7. Preparing Balance Sheets

4.3.4.7.1. A summary balance sheet may be included in the text of a report, appropriately referenced to its sources in the appended tables. It should highlight critical features of an entity's financial structure, such as its liquidity position, or trends in the growth of fixed assets, equity, and long-term debt.

4.3.4.7.2. The detailed balance sheet should include a detailed listing of matters that may need to be referred to in the report and referenced in the summary table. The following should be considered when preparing this detailed financial statement:

• Data for each year should be defined as Actual or Forecast.
• Surplus cash: where it is assumed that material amounts of funds may be accumulated and available for other capital projects or paid as dividends, the forecast balance sheet should show such cash separately.
• Long-term debt: should be shown in detail, if necessary. Distinguish between local and foreign debt. Current maturities of long- term debt should be deducted and shown under Current Liabilities.
• Current assets and liabilities: working capital requirements should be based on the entity's practices, together with any changes due to the project; operational cash requirements should be illustrated; and projected cash surpluses or shortfalls should be explained.
• Intangible assets and long-term investments: the basis of forecasts should be stated - particularly any valuation of goodwill on acquisition of other executing enterprises, or justification for the realization and use of long-term investments.
• Fixed assets: the basis for estimating additions to fixed assets in relation to the construction program, revaluation of assets, and any anticipated property retirements should be in accordance with IASs or otherwise explained.⁹ Transfers of capital expenditures to the "plant under construction" and "plant in service" accounts may be based on the assumption that a certain percentage of capital expenditures is "booked" to plant in service each year. In other instances, the transfers may be based on a detailed completion schedule. It is often useful to provide a subsidiary schedule to the balance sheet, showing the transfers from capital expenditures to plant under construction and plant in service, together with the basis for such transfers.
• Accumulated depreciation: rates and bases for depreciation should be stated. Alternatively, they may be shown with the Income statement or in an Assumptions Appendix. Any substantial changes in accumulated amounts (e.g., due to revaluation of assets) should be explained.

4.3.4.8. Preparing Financial Summaries

4.3.4.8.1. The use of a financial summary is an acceptable alternative to the main statements - Balance Sheet, Income Statement and Cash Flow Statement. It must however, display the vital elements of each of these summary statements.

4.3.4.8.2. The normal size and content of the traditional income and cash flow statement and the balance sheet would not permit the production of a combined detailed statement for all main financial statements, and therefore the financial summary statement has been developed as an alternative.

4.3.4.9. Preparing Financial Tables using Spreadsheet Models

4.3.4.9.1. The Knowledge Management section of the web-based Guidelines provides spreadsheet models that can be used to prepare financial tables. The models include summary and detailed tables, including:

• Balance Sheets,
• Income Statements,
• Cash Flow Statements,
• Financing Plans, and
• Financial Summaries.

4.3.4.9.2. Using these tables requires a working knowledge of financial accounting and financial analysis. The generic or model tables may be modified by users by changing the line item titles and the column titles to reflect the nature and form of the financial statements of the EA with which they are working. However, care should be taken to respect accounting conventions, particularly the use of subtotals and grand totals in each table to ensure that the financial data of line items that should be incorporated therein is appropriate. Each detailed and summary financial statement can be accessed in the model.

4.3.4.9.3. When a user is satisfied with the contents of a statement or statements, these should be saved to the user's own hard disk or floppy disk. When the Page is closed, the tables (templates) revert to their original state.

4.3.4.10. Preparing Financing Plans

4.3.4.10.1. The Cost Estimates table provides as its bottom line, the total financing required for a project. It is essential that the means of financing this total expenditure is specifically defined in the RRP. The illustration and discussion of the financing plan for a project to be implemented by a revenue-earning enterprise usually consists of a summary-all in current terms of: (i) the project financing requirements and the external sources of finance from the cash flow statement; (ii) other capital and incremental working capital expenditures occurring during the project construction period; (iii) incremental and initial operating costs to be incurred during the implementation period, to be financed out of either project capital funding, or from local budgetary provisions; (iv) net income from any ongoing operations; and (v) debt service.

4.3.4.10.2. In a nonrevenue-earning project, where there are rarely any internally generated sources of funds, project financing is usually not related to the future financial performance of the entity. In such cases, the illustration and discussion of the financing plan would be confined to the project only and set out with the discussion on project costs.

4.3.4.10.3. The text of an RRP requires a discussion of a financing plan. In the case of a nonrevenue-earning project, this is normally an extension of the discussion of the Project Cost Estimates. In the case of a revenue-earning project to be implemented by an EA, a summary-financing plan may be included after the Project Cost Estimates table. A detailed discussion on the financing plan (with a table showing a detailed financing plan, where necessary) should be included as part of the Project Chapter in the RRP. The following items should be covered, with detailed explanations, where necessary, in an Appendix to the RRP:

• Any cofinancing arrangements;
• Availability of internal funds, referenced as necessary to the cash flow statement;
• The self-financing ratio, particularly when this is to be incorporated in a financial performance covenant;
• Equity contributions;
• Terms of loans, including interest rates (or on lending rates, where applicable), grace periods, repayment periods, incidence of foreign exchange risk, guarantee fees and financial charges during development; and
• Dependability of a financing plan in terms of firm commitments that have been received, the progress of negotiations where loans or equity contributions have not been finalized, the availability of additional sources of funds in the event of cost overruns or lower-than-expected generation of internal funds, and a sensitivity analysis relating to the latter items, and any critical items listed above.

4.3.4.10.4. Funds from all principal sources should be identified as line items in the financing plan. Funds sources should be set out in terms of foreign and local currencies, using the US dollar as the foreign currency, and grouped in the table under local and foreign sources, including ADB loans, ADF, and TA; funds from other foreign lenders and donors; local loans, local equity including grants and subsidies from government; and internally generated funds. In cases where the EA is conducting an ongoing operation, as in the case of a public sector enterprise, it may, or may not, be generating sufficient funds from ongoing operations to support these activities. It is, therefore, advisable to include in the financing plan either the net funding through the period of the financing plan that the agency will generate, or the additional funding needs, which it will require, to operate and maintain its existing and new facilities. The sources of additional funding should be identified; for example, subsidies from government.

4.3.4.10.5. The financing plan should contain explicit references to contributions to be made by the agency during implementation, with specific reference to the acceptability to ADB of a policy of deficit funding by government, particularly any policy that contributes to the capital investment of the EA.

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⁶ Financial Analysts have discretion to agree alternative arrangements (see paragraph 2.4.3).
⁷ Financial Analysts have discretion to agree alternative arrangements (see paragraph 2.4.3).
⁸ Financial Analysts have discretion to agree alternative arrangements (see paragraph 2.4.3).
⁹ Financial Analysts have discretion to agree alternative arrangements (see paragraph 2.4.3).

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