Learning Activity

How to go about preparing the financial plan

a. Find out how much money you will need to get your planned activities
going by completing the table below. Breakdown each line item into two.
That is, how much of each item listed on the 1st column will be funded
by equity and how much will be funded by debt? Are you within the debt:
equity limit set by the bank or institution you intend to borrow from?
Table 45
Total Project Cost
Debt Equity Total
Total pre-operating expenses 2,000 5,000 7,000
Fixed investment 2,000 5,000 7,000
Working capital (minimum cash balance you need for one 1,000 2,000 3,000
cycle to pay your raw materials, direct labor, manufacturing
overhead,
operating expenses)
TOTAL PROJECT COST (Total pre-operating 5,000 12,000 17,000
expenses + fixed investment + working
capital requirement)
Proportion of debt:equity 30% 71% 100%

b. Where are you going to get the funds to finance your total project cost?
The majority of the money I'll use to run the business, which will be my
initial investments—comes from my personal funds, though I will borrow
some money from my parents.

c. For borrowed money, you will need to pay interest. Compute your annual
financial charges.
Table 46
Financing Charges

Principal:_5,000_____________________ Mode of Payment Installment_

Interest rate per annum: Term of loan: 5 years___
_2%___________
Year Interest Principal Total Outstanding
Payment Balance
1 2% 1,000 1,100 4,000
2 4% 1,000 1,200 3,000
3 6% 1,000 1,300 2,000
4 8% 1,000 1,400 1,000
5 10% 1,000 1,500 0
  There are slight variations in the income statements of a
manufacturer, a trader, and a service provider.
 Entrepreneurs who are to indulge in a manufacturing and
trading business should complete the table for Projected
Income Statement for Manufacturers and Traders and
Projected Cash Flow Statement as specified in the tables in
the following pages
 Entrepreneurs who will be going into service business should
have to complete the income statement as presented in the
tables in the pages presented following this page.

d. Entrepreneurs who are going into the manufacturing business as well as

trading business, prepare your Projected Income Statement for the next
3 years by completing the table in the next page:

Table 47
Projected Income Statement
for Manufacturers and Traders
Year 1 Year 2 Year 3
Total sales 95,500 100,350 110,200
Less: Cost of goods sold 80,250 115,288 150, 699
Gross profit from sales 15,250 14,938 40,499
Less: Selling expenses 3,500 4,500 6,500
Less: Administrative expenses 195,440 205, 996 218, 233
Net operating profit 181,449 193,786 202,521
Less: Interest charges 1,000 1,000 1,000
Net income before taxes 180, 449 192,786 201,521

Table 50
Projected Cash Flow Statement
Cash Inflows Pre- Year 1 Year 2 Year 3
Operating
Loan proceeds 5,000 5,000 5,000 5,000
Owners’ Equity 7,000 7,000 7,000 7,000
Cash sales 0 93,500 97,000 97,000
Add: Collection of receivables 0 1,540 2,796 3,232
TOTAL CASH INFLOWS 12,000 107,040 111,796 112,232
Cash Outflows

Pre-operating expenses 2,000 0 0 0

Fixed investment 0 19,400 22,211 22,633
Materials purchases 2,600 15,355 15, 670 15, 830
Direct labor 16,289 17,900 19,511
 Production overhead minus 0 1, 760 1,800 988.09
depreciation and
Indirect materials
Selling & administrative expenses 0 198,940 210,496 224,733
minus depreciation and
amortization of pre-operating
expenses
TOTAL CASH OUTFLOWS 4,600 251,744 268,527 283,695.09
NET CASH FLOW 7,400 144,704 156,731 171,463.09
Add: Beginning cash balance 7,000 7,000 7,000 7,000
Less: Principal repayments/interest 0 1,000 1,000 1,000
payments
ENDING CASH BALANCE 14,400 150,704 162,731 177,463.09

e. Prepare the projected balance sheet. A Balance Sheet informs the

reader of a company's financial position as of one moment in time, it
allows someone—like a creditor—to see what a company owns as well
as what it owes to other parties as of the date indicated in the heading.
This is valuable information to the banker who wants to determine
whether or not a company qualifies for additional credit or loans. Others
who would be interested in the balance sheet include current investors,
potential investors, company management, suppliers, some customers,
competitors, government agencies, and even labor unions.

Table 51
Projected Balance Sheet
Pre- Year 1 Year 2 Year 3
ASSETS Operating
Period
Cash 7,000 7,000 7,000 7,000
Accounts Receivable 0 1,540 2,796 3,232
Raw materials inventory 0 13, 650 14,300 14,950
Finished goods inventory 0 25,000 50,000 75,000
Merchandise inventory 0 0 0 0
Supplies/spare parts inventory 0 0 0 0
TOTAL CURRENT ASSETS 7,000 47,190 74,096 100,182
Property, plant, and equipment 2,200 2,200 2,200 2,200
Less: Accumulated depreciation 0 3,496 3,180 2,650
NET PROPERTY, PLANT, AND 2,200 1,296 980 450
EQUIPMENT
Pre-operating expenses 2,000 0 0 0
Less: Amortization of pre-operating 2,000 500 500 500
expenses
NET PRE-OPERATING EXPENSES 0 500 500 500
TOTAL ASSETS 9,200 48,986 75,576 101,132

LIABILITIES AND OWNER’S EQUITY

Accounts payable 0 0 0 0
Current portion of loans payable 0 1,000 1,000 1,000
TOTAL CURRENT LIABILITIES 0 1,000 1,000 1,000
 Long-term loans (net of current 0 1,100 1,200 1,300
portion)
TOTAL LIABILITIES 0 2,100 2,200 2,300
Owner’s equity 9,200 46,886 73,376 98,832
Retained earnings 0 0 0 0
TOTAL OWNER’S EQUITY 9,200 46,886 73,376 98,832
TOTAL LIABILITIES & OWNER’S 9,200 48,986 75,576 101,132
EQUITY

f. By now you have all the figures at your fingertips. It’s time to decide. Do
you think the business you intend to pursue is viable? Should you
proceed with your plans? What is it going to be? (Provide a summary of
the financial analysis here)

 Debt to equity ratio: The Company relies more on equity (71%)

than on debt (30%) to finance operations. Due to the lack of major
future debt commitments for the company, this suggests a lesser
financial risk. In addition to having a lower financial risk, the
company's reliance on equity financing can also be seen as a
positive attribute to potential investors and stakeholders.

 Net Income before Taxes: The net income before taxes for years
1, 2, and 3 are all in the positive range, demonstrating that the
company is making money. The fact that the net income for years
1, 2, and 3 are all positive indicates that the company's business
model is working effectively, and it is generating profits annually.

 Financial Charges: The business will incur fewer financial charges

thanks to the relatively low interest rate of 2% for a 5-year loan.
This will support the company's ability to remain financially stable
and profitable. . The low interest rate on the 5-year loan can also
provide the business with more flexibility in terms of investing in
growth opportunities and expanding its operations

 Cash Flow Statement: Each year's ending cash balance is

positive, demonstrating that the company has sufficient funds on
hand to meet its costs and investments. The growth in cash flow
from pre-operating costs to year one demonstrates that the
company is managing its cash flow effectively, which is a critical
aspect of maintaining financial stability

 Projected Balance Sheet: The owner's equity and total liabilities

exhibit a consistent upward trend each year, indicating that the
 company is expanding and increasing. The annual positive net
income figures serve as more evidence of this increase. This
growth can provide potential investors with confidence in the
company's future prospects and potential profitability.

In conclusion, based on the financial analysis , it seems like the

business is viable, and moving forward with the plans would be
prudent. It is crucial to remember that when making a final
decision, extra elements beyond financial analysis, such as
market trends, competition, and other external factors, should also
be taken into account.

Although the financial plan requires the preparation of a number of

financial statements and the analysis of several benchmarks in the form of
ratios culled from the statements, the entire business plan practically boils down
to a question of profitability. This is so because a profitable income statement
will generally mean a favorable cash flow. And since profitability and liquidity
virtually determine the financial health of any business enterprise, profitability
becomes the single most important factor.

Profitability is not the same as profit. It is a measure of net income as a

percentage of sales. The distinction is important since the profit figure is, by
itself, meaningless, while profitability takes other factors into consideration
particularly revenue, and, therefore, gives a better picture of overall
performance.

If for instance, XYZ Corporation generates a profit of PhP1 million as

against ABC Corporation’s PhP 100,000.00 it would, on the surface, appear
that XYZ Corporation has a better financial picture.

If XYZ Corporation however, had a revenue of PhP10 million and ABC

Corporation a revenue of PhP 500,000.00, the former has only 10% return to
sales as against the latter’s 20%. In this case, ABC Corporation is said to be
more profitable.
 In evaluating the proposed business’ profitability, it is important to
consider the industry’s profitability picture. In an industry where 10% profitability
is historically a good performance, aiming for 20% may be tantamount to asking
for the moon.

On the other hand, a projected profitability of 10% in an industry where

20% is generally attainable leaves much to be desired.

Profitability must also be viewed from a long-term or medium-term

perspective. Losses in the first few years of operation do not necessarily suggest
an unprofitable venture. If a continually profitable operation is projected after, for
example, three years, the business venture may still be considered viable.
Hence, profitability in the long-run is the more relevant gauge.

Finally, the question of financing comes into focus. If the business

venture is deemed profitable, are there enough sources for the initial capital
requirement? Are the financing arrangements and terms reasonable and viable?
In general, financing would not be a troublesome item if the previous aspects of
the business plan yield favorable conclusions. An undertaking which can
efficiently and profitably produce a product in demand will certainly not be
wanting in financing.