CHAPTER VI

FINANCIAL STUDY

The success of any business endeavor emanates from

thorough and in-depth study of every aspect of the business.

This encompasses consideration on the aspects of management,

marketing, technicalities, socio-economic, as well financial

matters.

The feasibility of a business idea is manifested by

real demand, competitiveness, competence of the management

and most importantly, a good return on investment. Presented

in this chapter are the projected financial statements as

well as the analytical tools used by the proponents to

evaluate the financial viability of the proposed business.

The concepts and assumptions that underlie the preparation

of these projected financial statements are as follows:

1. The initial capitalization of the proposed business

shall be P1,000,000. This amount may be raised by

availing a loan from banks or to be invested by the

one executing the proposed business. For the purpose

of this study, it was assumed that said amount is to

be invested by the partners.

2. Property and equipment have been depreciated using

the straight-line method over the estimated useful

lives as presented in the schedules, assuming no

residual/salvage values.

3. Withholding tax payable denotes unremitted

withholding tax on rental payments which is 5% of

the monthly rental.

4. It was assumed that goods and services to be used in

the business will be purchased from VAT registered

supplier, substantiated with valid documents, thus

can be claimed as input VAT.

5. It was assumed that the partners will withdraw 90%

of the net income for their personal use.

6. Estimated sales, service fees and operating expenses

like communication and supplies were assumed to

increase equal to the average rate of inflation on

annual basis. Average inflation rate as of December

2018 is 4.95%

7. Taxes and licenses include business permit and BIR

annual registration fee which was based on the

prevailing rate as mandated by the local government

code and the tax code.

 8. Amounts presented on the financial statements as

well as the schedules and computations are in

Philippine Peso.

Project cost summary:

Cost of building renovation P 274,200.00

Machinery and equipment 211,239.00

Furniture and fixtures 181,410.00

Kitchen utensils 100,820.40

Working capital 232,330.60

Total P 1,000,000.00
 PROJECTED STATEMENT OF FINANCIAL POSITION
As of December 31

YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5

ASSETS
Current Assets:
Cash and cash equivalents 354,991.86 482,177.46 622,313.76 776,496.33 945,398.24
Unused supplies 25,520.00 26,105.00 27,165.00 28,269.00 29,441.40
Total 380,511.86 508,282.46 649,478.76 804,765.33 974,839.64

Non-Current Assets:
Property, Plant and Equipment - net-sch.1 680,820.42 593,971.44 507,122.46 420,273.48 333,424.50

TOTAL ASSETS 1,061,332.28 1,102,253.90 1,156,601.22 1,225,038.81 1,308,264.14

LIABILITIES & PARTNERS' EQUITY

Current Liabilities:
Withholding tax payable 4,125.00 4,125.00 4,125.00 4,125.00 4,125.00
VAT payable-sch.4 30,517.50 32,028.12 33,613.51 35,277.38 37,023.61
Total Liabilities 34,642.50 36,153.12 37,738.51 39,402.38 41,148.61

Partners' equity:
Capital - beg. 1,000,000.00 1,026,689.78 1,066,100.79 1,118,862.71 1,185,636.44
Add: Net Income 266,897.82 394,110.05 527,619.28 667,737.22 814,791.00
Total 1,266,897.82 1,420,799.83 1,593,720.07 1,786,599.94 2,000,427.44
Less: Drawings (240,208.04) (354,699.04) (474,857.35) (600,963.50) (733,311.90)
Capital - end 1,026,689.78 1,066,100.79 1,118,862.71 1,185,636.44 1,267,115.54

TOTAL LIABILITIES & PARTNERS' EQUITY 1,061,332.28 1,102,253.90 1,156,601.22 1,225,038.81 1,308,264.14
 PROJECTED INCOME STATEMENT
For the Year Ended December 31

YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5

Revenues - sch.5 4,695,000.00 4,927,402.50 5,171,308.92 5,427,288.72 5,695,939.51

Cost of sales and service - sch. 6 1,643,250.00 1,724,590.88 1,809,958.12 1,899,551.05 1,993,578.83
Gross Profit 3,051,750.00 3,202,811.63 3,361,350.80 3,527,737.67 3,702,360.68

Less: Operating Expenses

Salaries and wages 1,034,400.00 1,034,400.00 1,034,400.00 1,034,400.00 1,034,400.00
Communication, light and water 232,800.00 244,323.60 256,417.62 269,110.29 282,431.25
SSS & PhilHealth, Pag-ibig 105,097.20 105,097.20 105,097.20 105,097.20 105,097.20
13th month pay and other benefits 86,200.00 86,200.00 86,200.00 86,200.00 86,200.00
Rent expense 990,000.00 990,000.00 990,000.00 990,000.00 990,000.00
Supplies expense 202,056.00 212,057.77 222,554.63 233,571.09 245,132.85
Permit, Taxes and Licenses 47,450.00 49,774.03 52,213.09 54,772.89 57,459.40
Depreciation 86,848.98 86,848.98 86,848.98 86,848.98 86,848.98
Total 2,784,852.18 2,808,701.58 2,833,731.52 2,860,000.44 2,887,569.68

Net Income for the period 266,897.82 394,110.05 527,619.28 667,737.22 814,791.00
 PROJECTED STATEMENT OF CASH FLOWS
For the year ended December 31

YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5

Operating Activities:
Net Income 266,897.82 394,110.05 527,619.28 667,737.22 814,791.00
Depreciation 86,848.98 86,848.98 86,848.98 86,848.98 86,848.98
(Increase)Decrease in unused supplies (25,520.00) (585.00) (1,060.00) (1,104.00) (1,172.40)
(Decrease)Increase in current liabilities 34,642.50 1,510.62 1,585.39 1,663.87 1,746.23

Net cash provided by operating activities 362,869.30 481,884.64 614,993.65 755,146.07 902,213.81

Investing Activities:
Acquisition of Property, plant and equipment (767,669.40) - - - -

Financing Avtivities:
Investment by the partner 1,000,000.00 - - - -
Withdrawal by the partner (240,208.04) (354,699.04) (474,857.35) (600,963.50) (733,311.90)
Net cash provided(used) by financing activities 759,791.96 (354,699.04) (474,857.35) (600,963.50) (733,311.90)

Net increase(decrease) in cash 354,991.86 127,185.60 140,136.30 154,182.57 168,901.91

Cash and cash equivalents - beg. - 354,991.86 482,177.46 622,313.76 776,496.33

Cash and cash equivalents - end. 354,991.86 482,177.46 622,313.76 776,496.33 945,398.24
 PROJECTED FINANCIAL ANALYSIS
For the year ended December 31

YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5

1. LIQUIDITY
Current assets 380,511.86 508,282.46 649,478.76 804,765.33 974,839.64
Current ratio =
Current liabilities 34,642.50 36,153.12 37,738.51 39,402.38 41,148.61

10.98 14.06 17.21 20.42 23.69

Current ratio indicates how much current asset is available for every peso of current liability.

2. SOLVENCY
Total liabilities 34,642.50 36,153.12 37,738.51 39,402.38 41,148.61
Debt ratio =
Total assets 1,061,332.28 1,102,253.90 1,156,601.22 1,225,038.81 1,308,264.14

0.0326 0.0328 0.0326 0.0322 0.0315

Debt ratio indicates the portion in the assets provided by the creditors.

Debt - Equity Total Liabilities 34,642.50 36,153.12 37,738.51 39,402.38 41,148.61

ratio = Total Equity 1,026,689.78 1,066,100.79 1,118,862.71 1,185,636.44 1,267,115.54

0.0337 0.0339 0.0337 0.0332 0.0325

Debt - Equity ratio indicates the ratio in the assets provided by the owners and those provided by the creditors.
 PROJECTED FINANCIAL ANALYSIS
For the year ended December 31

YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5

Total Equity 1,026,689.78 1,066,100.79 1,118,862.71 1,185,636.44 1,267,115.54

Equity Ratio =
Total Assets 1,061,332.28 1,102,253.90 1,156,601.22 1,225,038.81 1,308,264.14

0.9674 0.9672 0.9674 0.9678 0.9685

Equity Ratio indicates the portion in the assets provided by the owners.

3. PROFITABILITY
Net Income before tax 266,897.82 394,110.05 527,619.28 667,737.22 814,791.00
Return on Assets =
Ave. Total assets 1,061,332.28 1,081,793.09 1,129,427.56 1,190,820.02 1,266,651.48

0.251 0.364 0.467 0.561 0.643

Accounting rate Net Income 266,897.82

= 26.69%
of return Investment 1,000,000.00

Accounting rate of return denotes the undiscounted rate of return on the invested capital of the owner used to
evaluate the profitability of the proposed business. The prevailing interest rate in banks and other financial institutions
during the time the study was conducted is 18%P.A. Hence, should the would-be owner finance the proposed
business through bank loan, the return on investment is still higher than the cost of capital.

4. PAYBACK PERIOD
Annual net
Payback Year Balance
cash inflow
Net cost of investment 1,000,000.00
Year 1 353,746.80 1.00 646,253.20
Year 2 480,959.03 1.00 165,294.17
Year 3 614,468.26 0.27 -
2.27 year

Payback period of the proposed business is approximately 3 years and 4 months

 SCHEDULES AND COMPUTATIONS

YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5

Schedule 1. Property, Plant and Equipment

Leasehold Improvement 274,200.00 274,200.00 274,200.00 274,200.00 274,200.00
Machinery & Equipment 211,239.00 211,239.00 211,239.00 211,239.00 211,239.00
Furniture & Fixtures 181,410.00 181,410.00 181,410.00 181,410.00 181,410.00
Kitchen Utensils 100,820.40 100,820.40 100,820.40 100,820.40 100,820.40
Total 767,669.40 767,669.40 767,669.40 767,669.40 767,669.40
Less: Accumulated Depreciation - sch.2(86,848.98) (173,697.96) (260,546.94) (347,395.92) (434,244.90)
Net 680,820.42 593,971.44 507,122.46 420,273.48 333,424.50

Schedule 2. Accumulated Depreciation

Accumulated Depreciation - beg. - 86,848.98 173,697.96 260,546.94 347,395.92
Annual depreciation - sch. 3 86,848.98 86,848.98 86,848.98 86,848.98 86,848.98
Total 86,848.98 173,697.96 260,546.94 347,395.92 434,244.90

Schedule 3. Annual depreciation Leasehold Machinery & Furniture & Kitchen Total
Improvement Equipment Fixtures Utensils
Leasehold 274,200.00
27,420.00 27,420.00
Improvement 10
Machinery & 211,239.00
21,123.90 21,123.90
Equipment 10
181,410.00
Furniture & Fixtures 18,141.00 18,141.00
10
100,820.40
Kitchen Utensils 20,164.08 20,164.08
5

Annual depreciation 27,420.00 21,123.90 18,141.00 20,164.08 86,848.98

*Annual depreciation is computed using the straight line method. Residual value is assumed to be zero.
 SCHEDULES AND COMPUTATIONS

YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5

Schedule 4. VAT payable
Output VAT 563,400.00 591,288.30 620,557.07 651,274.65 683,512.74
Less: Input VAT 197,190.00 206,950.91 217,194.97 227,946.13 239,229.46
Net VAT 366,210.00 384,337.40 403,362.10 423,328.52 444,283.28
Less: VAT previously paid 335,692.50 352,309.28 369,748.59 388,051.14 407,259.67
VAT payable 30,517.50 32,028.12 33,613.51 35,277.38 37,023.61

*VAT payable denotes unremitted business tax to the BIR as at the end of the period.

Schedule 5. Revenue
Estimated daily sales - coffee shop 10,000.00 10,495.00 11,014.50 11,559.72 12,131.93
No. of operating days a year 313 313 313 313 313
Estimated annual sales - coffee shop 3,130,000.00 3,284,935.00 3,447,539.28 3,618,192.48 3,797,293.00

Estimated daily service fee - pet shop 5,000.00 5,247.50 5,507.25 5,779.86 6,065.96
No. of operating days a year 313 313 313 313 313
Estimated annual service fee - pet shop 1,565,000.00 1,642,467.50 1,723,769.64 1,809,096.24 1,898,646.50

Estimated annual revenue 4,695,000.00 4,927,402.50 5,171,308.92 5,427,288.72 5,695,939.51

Schedule 6. Cost of sales

Estimated annual sales - coffee shop 3,130,000.00 3,284,935.00 3,447,539.28 3,618,192.48 3,797,293.00
Less: Mark up based on sales (60%) 1,878,000.00 1,970,961.00 2,068,523.57 2,170,915.49 2,278,375.80
Cost of sales 1,252,000.00 1,313,974.00 1,379,015.71 1,447,276.99 1,518,917.20

Estimated annual service fee - pet shop 1,565,000.00 1,642,467.50 1,723,769.64 1,809,096.24 1,898,646.50
Less: Mark up (75%) 1,173,750.00 1,231,850.63 1,292,827.23 1,356,822.18 1,423,984.88
Cost of service 391,250.00 410,616.88 430,942.41 452,274.06 474,661.63

Estimated annual cost of sales and service 1,643,250.00 1,724,590.88 1,809,958.12 1,899,551.05 1,993,578.83