Chapter 5

Financial Study

This section of the study outlines the financial forecasts for the business,
encompassing the total project cost, projected income statement, projected cash flow,
and projected balance sheet.

I. Major Assumption

1. The selling price of the products is assumed to increase by 10% annually.

2. Planned production capacity for mango float is assumed to be 90 tubs per day
or 2,340 tubs per month.
3. Production capacity is assumed to increase by 30% annually.
4. Utility is assumed to increase by 5% per year.
5. Salaries and wages are assumed to increase by 10% annually.
6. Repair and maintenance are assumed to increase by 10% per year
7. Supplies expense is assumed to increase by 5% per year
8. Business Permit is assumed to increase by 10% per year.
9. Rent Expense is assumed to increase by 10% per year.
10. Depreciation is computed using the straight-line method.
11. Demand analysis for the population aged 15-64 is 61% with buying frequency
of five times a year.
12. The projected demand for mango float is computed using the Moving Average
method of 2.89%
13. The projected supply of mango float is computed using the Moving Average
method of 21.67%.
14. Drawing is 10% of net income.
II. Total Project Cost and Expense

Table 28
Total Project Cost

Pre-operating Expenses
Permits and Licensing ₱ 3,500.00
Advertising Expense ₱ 1,500.00 ₱ 5,000.00
Initial Fixed Investment
Tools and Equipment ₱ 25,640.00
Furniture & Fixtures ₱ 3,500.00 ₱ 29,140.00
Initial Working Capital
Cost of Raw Materials ₱ 124,020.00
Operating Expense
Supplies Expense ₱ 5,150.00
Salaries & Wages ₱ 39,050.00
Fringe Benefits ₱ 4,746.25
Utilities Expense ₱ 2,661.50
Maintenance and Repairs ₱ 166.67
Rent Expense ₱ 3,000.00 ₱ 54,774.42
Total ₱ 212,934.42
Add: Cash on Hand ₱ 7,065.58
Total Investment Cost ₱ 220,000.00

The proposed business is to incur about ₱220,000 as project cost. This amount
covers the pre-operating expenses, purchase of fixed assets, working capital and
operating expenses during the conduct of the business.

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 Table 29
Life of Fixed Capital and Depreciation
Est.
Cost 2025 2026 2027
Particulars Life in
(Php) (Php) (Php) (Php)
Years
Tools and Equipment
Electric Mixer 2,800.00 3 933.33 933.33 933.33
Silicon Spatula 200.00 3 66.67 66.67 66.67
Stainless Spoon 60.00 3 20.00 20.00 20.00
Stainless bowl 2,500.00 3 833.33 833.33 833.33
Knife 80.00 3 26.67 26.67 26.67
Chiller 20,000.00 5 4,000.00 4,000.00 4,000.00
Sub Total 25,640.00 5,880.00 5,880.00 5,880.00
Furniture & Fixtures
Collapsible Kiosk 2,000.00 5 400.00 400.00 400.00
Monoblock Chairs 500.00 5 100.00 100.00 100.00
Plastic Table 1,000.00 5 200.00 200.00 200.00
Sub Total 3,500.00 700.00 700.00 700.00
Total 29,140.00 6,580.00 6,580.00 6,580.00

The proponents also determined that the life of fixed capital which refers to the
duration over which a fixed asset, such as machinery, equipment, or furniture, is expected
to be useful and economically beneficial to the business. On the other hand, depreciation
cost represents the gradual reduction in the value of a fixed asset due to factors like wear
and tear, usage, or obsolescence over its useful life. This cost is allocated periodically
and recorded as an expense on the business’ financial statements. Presented in Table
29 shows the projected life of fixed capital and its depreciation cost.

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 Table 30
Projected Business Permit
Year Total Amount
1 ₱ 3,500.00
2 ₱ 3,850.00
3 ₱ 4,235.00

The proposed business will incur business permits & licensing fees of ₱3,500 is
based on the usual fee within the municipality. This is composed of Barangay Business
Permit at ₱500.00 per annum and Mayor’s Permit of ₱3,000 per annum. These costs are
assumed to increase by 10% per year.

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 Table 31
Supplies Expense
Particulars Unit Cost Quantity (pc.) Annual Cost
Logbook 50.00 1 50.00
Ballpen 10.00 10 100.00
Sando Bag 0.50 5,000 5,000.00
Total 5,150.00

Table 31 shows the supplies expenses of the proposed business which are
necessary for continued production.

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 Table 32
Projected Supplies Expense

Year Total Amount

1 5,150.00
2 5,407.50
3 5,677.88

Shown in Table 32 is the projected supplies expense for the first three years of the
business. It is assumed that the cost will increase by 5% per annum.

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 Table 33
Projected Salaries and Wages
Year Total Amount
1 468,600.00
2 515,460.00
3 567,006.00

Table 33 shows the projected salaries and wages for the first three years of the
business. The proponents assumed that there would be 10% increase every year.

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 Table 34
Projected Utilities Expense
Year Total Amount
1 31,938.00
2 33,534.90
3 35,211.65

The projected utility expense for the first three years of operation is assumed to
increase by 5% per year.

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 Table 35
Projected Maintenance and Repairs Expense
Year Total Cost
1 2,000.00
2 2,200.00
3 2,420.00

Regular maintenance will ensure that all equipment and production machinery
operate efficiently and remain in good condition. Presented in Table 35 are the projected
maintenance and repair expenses of the proposed business. It is assumed that the repair
and maintenance cost will increase by 10% annually.

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 Table 36
Projected Rent Expense
Year Total Amount
1 36,000.00
2 39,600.00
3 43,560.00

The proposed business will incur a monthly rent expense of Php 3,000.00 per
month. This cost is assumed to increase by 10% per year. Shown in Table 36 is the
projected rent expense.

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III. Sources of Financing
The initial funding requirement of this proposed business is financed through the
owner’s infusion of fresh capital.

Table 37
Source of Funding
Source Total
Jocelle Lazaro ₱55,000.00
Cuty Ruth Eramis ₱55,000.00
Ira Abian ₱55,000.00
Evelyn Tanquilan ₱55,000.00
Total Capital Requirement ₱220,000.00

Based on the table above, this proposed project is financed by the owners only. In
this partnership, the partners have agreed that the profit and loss of the business will be
equally divided among them.

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IV. Projected Financial Statements
Table 38
Projected Statement of Comprehensive Income

Year 1 Year 2 Year 3

Sales Revenue 2,808,000.00 4,015,440.00 5,742,055.00

Less: Cost of Sales 1,488,240.00 2,128,183.20 3,043,289.15
Sales Discount 0.00 0.00 0.00
Gross Income 1,319,760.00 1,887,256.80 2,698,765.85
Less: Operating Expenses
Salaries and Wages 468,600.00 515,460.00 567,006.00
Fringe Benefits 56,955.00 62,650.50 68,915.55
Utilities Expense 31,938.00 33,534.90 35,211.65
Maintenance and Repairs 2,000.00 2,200.00 2,420.00
Supplies Expense 5,150.00 5,407.50 5,677.88
Permit and Licensing 3,500.00 3,850.00 4,235.00
Rent Expense 36,000.00 39,600.00 43,560.00
Advertising Expense 1,500.00 0.00 0.00
Depreciation Expense 6,580.00 6,580.00 6,580.00
Total Operating Expense 612,223.00 669,282.90 733,606.07
Income Before tax 707,537.00 1,217,973.90 1,965,159.78
Less Income Tax (30%) 212,261.10 365,392.17 589,547.93
Net Income 495,275.90 852,581.73 1,375,611.85

The projected statement of comprehensive income reflects the business’

income during a specific time. This summarizes all the sources of revenue and expenses,
including taxes and interest charges, if there are. The business is projected to have a net
income of Php495,275.90 in the first year. In the second year, it increased its net income
to Php852,581.73 and Php1,375,611.85 in the third year. The increasing net income only
shows that positive results of operation are expected in the first three years.

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 Table 39
Projected Statement Cash Flow

Year 1 Year 2 Year 3

Cash Inflow
Proceeds from Sales 2,808,000.00 4,015,440.00 5,742,055.00

Less: Cash Outflows

Purchase of Equipment 29,140.00 0.00 0.00
Cost of Sales 1,488,240.00 2,128,183.20 3,043,289.15
Operating Expense
Salaries and Wages 468,600.00 515,460.00 567,006.00
Fringe Benefits 56,955.00 62,650.50 68,915.55
Utililies Expense 31,938.00 33,534.90 35,211.65
Maintenance and Repairs 2,000.00 2,200.00 2,420.00
Supplies Expense 5,150.00 5,407.50 5,677.88
Permit and Licensing 3,500.00 3,850.00 4,235.00
Rent Expense 36,000.00 39,600.00 43,560.00
Advertising Expense 1,500.00 0.00 0.00
Income Tax 212,261.10 365,392.17 589,547.93
Owner's Drawing 49,527.59 85,258.17 137,561.18
Total Cash OutFlows 2,384,811.69 3,241,536.44 4,497,424.34
Net Cash Flow 423,188.31 773,903.56 1,244,630.66
Add. Cash Balance Beg. 220,000.00 643,188.31 1,417,091.87
Cash Balance, Ending 643,188.31 1,417,091.87 2,661,722.53

The statement of cash flows provides aggregate data regarding all cash inflows a
business receives from its operations and external investment sources. It also includes
all cash outflows that pay for business activities and investments during a given period.
The owner’s drawing is computed as 10% of the net income. As seen above, in the first
year of operation of the proposed business, it has a total cash inflow of Php2,808,000.00
less the total cash outflow of Php2,384,811.69. The result is a cash balance ending in
Php643,188.31 . The same procedure is used for the succeeding years. The bulk of cash
inflow stems from cash earned from operations, which is a good indicator. Finally, the
amount of cash available is also a positive indicator of the business’ financial health. It
means that the proposed business has enough liquidity or cash to pay its expenses or
can be used to purchase new equipment for the expansion of operations.

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 Table 40
Projected Three-Year Statement of Changes in Equity
Total
Year Lazaro Eramis Abian Tanquilan
(Php)
(Php) (Php) (Php) (Php)
1 Partner’s
55,000.00 55,000.00 55,000.00 55,000.00 220,000.00
Beginning Equity
Add: Profit 123,818.98 123,818.98 123,818.98 123,818.98 495,275.90
Total 178,818.98 178,818.98 178,818.98 178,818.98 715,275.93
Less:
Withdrawal 12,381.90 12,381.90 12,381.90 12,381.90 49,527.6
Partner’s Ending
Equity 166,437.08 166,437.08 166,437.08 166,437.08 665,748.31
2 Partner’s
166,437.08 166,437.08 166,437.08 166,437.08 665,748.31
Beginning Equity
Add: Profit 213,145.43 213,145.43 213,145.43 213,145.43 852,581.73
Total 379,582.51 379,582.51 379,582.51 379,582.51 1,518,330.04
Less:
Withdrawal 21,314.54 21,314.54 21,314.54 21,314.54 85,258.17
Partner’s Ending
Equity 358,267.97 358,267.97 358,267.97 358,267.97 1,433,071.87
3 Partner’s
358,267.97 358,267.97 358,267.97 358,267.97 1,433,071.87
Beginning Equity
Add: Profit 343,902.96 343,902.96 343,902.96 343,902.96 1,375,611.85
Total 702,170.93 702,170.93 702,170.93 702,170.93 2,808,683.72
Less:
Withdrawal 34,390.30 34,390.30 34,390.30 34,390.30 137,561.18
Partner's Ending
Equity 667,780.63 667,780.63 667,780.63 667,780.63 2,671,122.53

The table above represents the projected changes in equity of the owners of the
proposed business in the first three years of operation. The beginning partner’s equity is
the cash contributed by the partners during project start-up. The profit of the business in
its first-year operation is then divided equally among the partners and added to their
corresponding equity to get their total equity for the year.The owner’s withdrawal is
assumed to be 10% of the income, equally divided among the partners, as well. The
amount of the owner’s withdrawal is then subtracted from their corresponding total equity
to get the partner’s ending equity.

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 Table 41
Projected Statement of Financial Position

Year 1 Year 2 Year 3

ASSETS
Current Assets
Cash 643,188.31 1,417,091.87 2,661,722.53
Total Current Assets 643,188.31 1,417,091.87 2,661,722.53
Non-current Assets
Tools & Equipment, Furniture & Fixtures 29,140.00 29,140.00 29,140.00
Less: Accumulated Depreciation 6,580.00 13,160.00 19,740.00
Net Book Value 22,560.00 15,980.00 9,400.00
Total Assets 665,748.31 1,433,071.87 2,671,122.53

LIABILITIES
Loans Payable 0.00 0.00 0.00
OWNER'S EQUITY
Capital Beg. 220,000.00 665,748.31 1,433,071.87
Ad: Net Income 495,275.90 852,581.73 1,375,611.85
Total 715,275.90 1,518,330.04 2,808,683.71
Less: Owner's Drawing 49,527.59 85,258.17 137,561.18
Total Owner's Equity 665,748.31 1,433,071.87 2,671,122.53

Table 41 presents the projected statement of financial position of the proposed

business which includes assets, liabilities and equity of the business for the next three
years. Following the accounting formula for financial position which is assets is equal to
liabilities added by the owner’s equity, the data above shows that the total assets of
Php665,748.31 in year 1, Php1,433,071.87 on year 2, and Php2,671,122.53 in year 3.
The Owner’s drawing is computed as 10% of the net income for the year. Total assets
are all equivalent to the total owner’s equity of the same year.

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V. Financial Statement Analysis

Financial ratios are relationships determined from a business’ financial information

and used for comparison purposes. Profitability ratios such as Net Profit Rate and Return
on Investment provide data about management’s performance in using the resources of
the business.

Net Profit Rate

The net profit rate, also known as the net profit margin, is a financial metric that
shows the percentage of revenue that remains as profit after all expenses have been
deducted. It is calculated by dividing net income by total revenue and multiplying the result
by 100 to get a percentage. This rate provides insight into a company's profitability and
efficiency in managing its expenses relative to its income. A higher net profit rate indicates
a more profitable and well-managed business. The net profit rate of the business shows
an upward trend for the next three years.

Net Income x
Net Profit Rate =
Revenue 100
495,275.90 x
Year 1 = = 18%
2,808,000.00 100

852,581.73 x
Year 2 = = 21%
4,015,440.00 100

x
Year 3 = 1,375,611.85 = 24%
100

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 An upward trend in the net profit rate indicates that a business’ profitability is
improving over time. This means that the percentage of revenue remaining after all
expenses, taxes, and interest have been deducted is increasing. An upward trend in net
profit rate generally signifies a strong financial performance and indicates that the
business is becoming more profitable and efficient in converting revenue into profit.
Return on Investment
Return on Investment (ROI) is a financial metric used to evaluate the efficiency or
profitability of an investment. It measures the amount of return on an investment relative
to the investment's cost. ROI is calculated by dividing the net profit from the investment
by the initial cost of the investment and then multiplying by 100 to get a percentage. This
metric helps investors determine how effectively their money is being used to generate
profits and is commonly used to compare the profitability of different investments. A higher
ROI indicates a more profitable investment.
Net Income
Return on Investment = x 100
Cost of Investment

Return on 495,275.90
= x 100
Investment 220,000.00

Return on
= 225%
Investment

An ROI of 225% means that for every peso invested, the return is 2.25 times the
original investment.

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Payback Period
The payback period shows the amount of time it takes to recover the cost of
investment. Simply put, the payback period is the length of time an investment reaches a
breakeven point. As shown in the computation, the payback period of the business is after
three months.

Project Cost
Payback Period =
Cash Flow
220,000.00
Payback Period = = 0.3
643,188.31

VI. Conclusion

In conclusion, the proposed business, Dessert Heaven, which exclusively sells

mango floats, demonstrates a strong financial outlook for its first three years of operation.
The study reveals positive projections in the business's financial statements, highlighting
its attractive profitability ratio and high liquidity. Additionally, the payback period, or the
time required to recover the initial investment, is just three months, with an impressive
return on investment of 225%.

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