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Chapter 5

FINANCIAL ASPECT

Finance is a business function that uses numbers and analytical tools to help managers or

owners make better decisions. Every business must learn at least basic finance principle to

effectively operate its company. Finance helps management for a clear understanding of the

business current financial position, particularly whether the business is profitable or not.

Financial aspect of a business is a vital part of a business entity because the proponents

determine the cost of project and its mode of financing. Presented in this chapter are the

major financial statements such as the income statement, statement of financial position and

statement of cash flow.

This chapter will also show the analysis of the entitys position and the business

performance for its first five years. This is important to come up with a good economic

decision that will benefit the proposed business.

Major Financial Assumptions

1. The business will be registered as Barangay Micro-Business Enterprise (BMBE).

2. JAST Dance & Fitness Studio uses calendar year.

3. Fixed assets are depreciated using straight line method.

4. The service price for dance rentals will increase by 8% annually.

5. The service price for dance workshops and zumba will remain the same for the next

5 years.
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6. 60% of the total net income will be withdrawn and the remainder will be divided

equally to the partners.

7. Contingency fund is 9.05% of the working capital.

8. All expenses are expected to increase by 2.60% annually.

9. Salaries will increase by 3% annually.

10. Rentals are minimum of 2 hours.

11. From Mid-April to Mid-June, only one studio is available for studio rental to give

way for the dance workshop.

12. Prepaid rent is assumed to be for a year.

13. The required rate of return is 12%.

14. The business invested on time deposit on its the second year of operation up to the

fifth year earning 1.75% interest compounded annually which is based from

prevailing interest rate in the market.

Cost of the Project

To start the business, the partners will put up an initial capital. By principle, there would

be no profit earned if there is no investment laid. The cost of the proposed project is

composed of the pre-operating expenses, working capital, materials, labor and overhead and

contingencies.

Cost of the Project

Pre-operating Expenses 283,381.10

Fixed Assets 164,433.00

Working Capital (3 months) 286,277.25

734,091.35
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Contingency Fund (9.05%)

25,908.65
PROJECT COST
760,000.00

Pre-operating expenses

Business Permits and licenses (Table 44) 17,720.00

Marketing Expense (Table 19) 8,410.00

Leasehold Improvement (Appendix) 257,251.10 283,381.10

Acquisition of Fixed assets

Furniture and Fixtures (Table 23) 66,708.00

Dance Studio Equipment (Table 21) 97,725.00 164,433.00

Working Capital

Materials

Office supplies (Table 30) 2,746.00

Cleaning supplies (Table 28) 1,217.00 3,963.00

Labor

Salaries (Table 37) 281,495.00

Contracted Services Expense (Table 37) 107,712.00 389,207.00

Overhead

Utilities (Table 37) 140,518.46

Rent (Table 37) 345,600.00

SSS, PHIC and HDMF Contribution (Table 37) 25,189.20

13th month pay (Table 35) 57,000.00 568,307.66

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Administrative

Salaries Expense (Table 24) 138,720.00

Utilities Expense (Table 32) 5,854.94

Rent Expense (Table 37) 14,400.00

SSS, PHIC and HDMF Contribution (Table 37) 13,136.40

13th Month pay (Table 35) 11,520.00 183,631.34

Working Capital 1,145,109.00

Source of investment

The total cost of the project needed to establish the proposed business is P760,000.00.

The general partners decided to contribute sufficient and equal amount of capital in the form

of cash. The partners will contribute P190,000.00 each that will constitute P760,000.00 of

the total cost. The partners agreed that the profit and loss ratio would be 25% for each of

the partners.

Table 47. List of contribution by the partners

Partners Capital Contribution (in pesos)
Isabel Marcelo 190,000
Trixia Mae Umandap 190,000
Joseph Rigonan 190,000
Alexander Ochinang Jr. 190,000
TOTAL 760,000

Projected Financial Statements

Financial statements are the primary means of communicating accounting information

about a business to those who have an interest in the business. These statements model the

business enterprise in financial terms. As is true of all models, however, financial statements

are not perfect pictures of the real thing. Four major financial statements are used to
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communicate accounting information; the income statement, the statement of owners

equity, the balance sheet, and the statement of cash flows. (Needles, Belvered Jr., 2014)

Income Statement

The Income Statement summarizes the revenue earned and expenses incurred by the

business. It reports how well a company has performed its operations over a period of time.

Many people consider it the most important financial report because it shows whether the

business achieved its profitability goal that is, it earned an acceptable income. The

projected income of the proposed business for its first year of operation is P485,391.65; for

the second year is P525,166.67; for its third year is P553,024.06; for its fourth year is

P599,683.17; and for its last year is P652,536.68. See Exhibit A for a better understanding of

the proposed business earning capability.

Balance Sheet

The purpose of the balance sheet is to show the financial position of a business on a

certain date, usually at the end of the month or year. For this reason, it often is called the

Statement of Financial Position. The balance sheet presents a view of the business as the

holder of the resources, or assets that are equal to the claims against those assets. The claims

consist of the companys liabilities and the owners equity. The projected total assets and

liabilities and partners equity for the year 2017 is P983,458.94 which will increase to

P1,194,446.29 for 2018; P1,416,574.71 for 2019; P1,657,492.44 for 2020; and P1,919,410.50

for 2021. See Exhibit B for more details.

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Statement of Cash Flows

The statement of cash flows focuses on liquidity, which is, balancing the inflows and

outflows of cash to enable it to operate and pay its bills when they are due. Cash flows are

the inflows and outflows of cash into and out of a business. Net cash flows are the

difference between the inflows and outflows. The proponents estimated the total cash for

2017 to be P227,076.60. See Exhibit C for the movements of the partners capital.

Statement of Changes in Partners Equity

The statement of changes in partners equity is a financial report that demonstrates the

adjustments in total partners equity accounts during an accounting period. It also shows the

activities in the elements or components of the partners equity. The projected cash balance

of the proposed project is P238,539.16 in 2017; P291,055.83 for 2018; P346,358.24 for 2019;

P406,326.55 for 2020; and P471,580.22 for 2021. See Exhibit D for a more thorough

discussion of this matter.

Financial Analysis

Financial analysis is the use of financial statements to analyze a companys financial

position and performance, and to assess future financial performance (Subramanyam, K.R.,

2014). Financial analysis is used to evaluate economic trends, set financial policy, build long-

term plans for business activity, and identify projects or companies for investment. This is

done through the synthesis of financial numbers and data.

One of the most common ways to analyze financial data is to calculate ratios from the data

to compare against those of other companies or against the company's own historical

performance.
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Payback Period

Payback period is also known as payout and payoff period. It is the length of time

required to get back the amount of initial investment. It is used to quantify the level of risk

associated with a project.

The JAST Dance and Fitness Studio would be able to recover its investment in 1 year

and 4 months. It is computed by dividing the net investment of the business to the annual

net cash inflow. (See Exhibit E)

Net Present Value

The net present value of the business is what remains when the present value of cash

inflows is deducted by the amount of initial investment. The projects net present value is

P1,237,053.00. The project is feasible because it will yield a return exceeding the minimum

desired rate of 12%. (See Exhibit F)

Profitability Index

The higher the profitability index, the more desirable the project is. The projects

profitability index is 2.63 thus it is acceptable. The PV index is computed by dividing the PV

of cash inflows to the PV of net investment. (See Exhibit G)

Return on Investment

Return on investment measures the amount of return on an investment relative to the

investments cost. The return on investment of the proposed business is 49.36% which

translates to the acceptability of the project because it is higher than the cost of capital. A

high ROI means the investments gains favorably compared to the investment cost. The
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return on investment is computed by dividing the net income of the proposed project to the

total assets. (See Exhibit H)

Accounting Rate of Return

Accounting rate of return is used in capital budgeting. It circulates the return, generated

from the net income of the proposed capital investment. The accounting rate of return of

the business is 59.02%. This is the amount of profit or return that an individual can expect

based on an investment. This allows the investors and the partners to easily compare the

profit potential for the project. (See Exhibit I)

Internal Rate of Return

Internal rate of return is the rate which equates the present value of a future cash inflow

with the cost of the investment which produces them. The internal rate of return of the

proposed business is 63.46% which is greater than the required rate of return of 12%. This

means that the project should be accepted. (See Exhibit J)

Operating Leverage

Operating Leverage is a measurement of the degree to which a project incurs a

combination of fixed and variable costs. A business that makes sales providing a very high

gross margin and fewer fixed costs and variable costs has much leverage. The operating

leverage of the proposed business for 2017 is 2.35 which is computed by dividing the

contribution margin to the net income. For 2018 is 2.26, 2019 is 2.24, 2020 is 2.15 and 2021

is 2.07. This implies the change in net income with respect to change in sales.(See Exhibit K)
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Breakeven Analysis

The Breakeven Analysis is important because it is used by the business to determine

the level of operations needed to cover all operating costs and is used to evaluate

profitability at different level of sales. The breakeven point in units of the proposed project

is 162 which is multiply to the total service price of 2,610 will result to the breakeven point

in peso of P421,941.87. (See Exhibit L)