Reference:

Dr. Eduardo Morato Jr. A Trilogy on Entrepreneurship. Eduardo Morato Publishing.

Financial Prospects/Forecast
The learner will be able to:
1. Identify Income Statement and Balance Sheet.
2. Make their own Financial Statements.
3. Financial ratios and measurements
Financial forecast represents the monetary transactions that
your enterprise expected to engage in. These forecasts become the
ultimate determinants of enterprise feasibility because they
measure profitability.

Financial forecasting calls for the creation of four different financial

statements, namely:
(1) Income Statement
(2) Balance Sheet
(3) Cash Flow Statement
(4) Funds flow statement

For now, we shall only discuss how to prepare simple Income

Statement and Balance Sheet.
Reference:
Dr. Eduardo Morato Jr. A Trilogy on Entrepreneurship. Eduardo Morato Publishing.

Income Statement
Reference:
Dr. Eduardo Morato Jr. A Trilogy on Entrepreneurship. Eduardo Morato Publishing.

Income statement
The income statement is financial statement that measures an
enterprise performance in terms of revenues and expenses over
certain period of time. The formula is:

Revenues – Expenses = Income or Profit (Loss)

 Income Statement Sample
1. You should have the good basis for doing a Sales forecast.
2. You should then subtract the Cost of Goods Sold.
3. They should give the Gross Profit.
4. Deduct Operating Expenses from the gross profit to derive Operating Profit.
5. Then subtract the Taxes due to get Net Profit After Taxes.

If the enterprise has non-operating revenues and expenses, they should be added or
subtracted from the operating profit before the taxes are computed.

Monthly Income Statement of Mang Juan’s Manufacturing:

Gross Sales Php 750,600
Less: Cost of Goods Sold 468,487 Note: The Costs of Goods Sold
Gross Profit 282,113 refers to the materials, labor costs
Less: Operating Expenses 166,145 and overhead of making a product.
For service establishments, the
Operating Profit 115,968 entrepreneur can compute the costs
Less: Taxes 21,392 of servicing the customers directly
Net Profit After Taxes Php 94,576 as cost of services rendered.
Reference:
Dr. Eduardo Morato Jr. A Trilogy on Entrepreneurship. Eduardo Morato Publishing.

Balance Sheet
 Balance Sheet
Creating the balance sheet is a bit more complicated, as it looks at three
different things, namely Assets, Liabilities, and Equities.

Assets represents anything of value that is owned by the business.

These are your cash, accounts receivable, inventory of goods, equipment
and machinery, facilities, vehicles, etc.

Liabilities represents financial obligation of the business.

What you need to borrow in order to invest in assets (example: money that
you need to borrow from you relatives, friends and financing institutions).

Equity represents investment of the owner. Your personal or other

investors resources invested into the business.
For the balance sheet, we use a simple equation;

ASSETS = LIABILITIES + EQUITY

Balance Sheet of Mang Juan’s Manufacturing:
ASSETS LIABILITIES
Current Assets: Current Liabilities:
Cash Php 100,500 Accounts Payable Php 150,000
Accounts Receivable 370,200 Income Taxes Payable 20,500
Inventory 405,350 Wages Payable 75,000
Fixed Assets: Short term Debt 125,000
Land 322,100 Long-term Liabilities:
Building 300,000 Long-term Debt 777,650
Vehicles 150,000 EQUITY
Owner’s Capital 500,000

Total Assets Php 1,648,150 Total Liabilities and Equity Php 1,648,150
**Remember that both sides should always be balance with each other.
Total assets should always equal to the total of liabilities and equity.
Reference:
Dr. Eduardo Morato Jr. A Trilogy on Entrepreneurship. Eduardo Morato Publishing.

Financial Ratios and

Measurements
 Financial Ratios and Measurements
If you have a forecasted income statement and balance sheet, you can
begin calculating for a 3 financial measurement that will help you assess the
potential performance of your business proposal.
1. Income Payback Period
2. Return on Sales (ROS)
3. Return on Assets (ROA)

You can use Payback Period, ROS, and ROA in identifying which
opportunities have the most promising financial prospects.
Keep in mind that there are lots of other financial ratios, such as the current
ratio and the asset turnover that will be useful in analyzing business
prospects. However, solving for some of these ratios require a more in-
depth knowledge of the other financial statements.
 Three Financial Ratios and Measurements

1. Income Payback Period

The payback period is the time it takes to earn back the resources that you initially invested
in your business. The formula to payback period is:

Income Payback Period = Total Investments

Annual Net Income After Taxes

Example: If Mang Juan had initial investment of Php1,500,000, it would take around 1.32
years (or 16 months) for the entrepreneur to recover the investments.
The solution is as follows:

Income Payback Period = Php 1,500,000 = 1.32 years

Php 94,576 x 12months

**Generally speaking, the faster you earn back the money you spent, the better the
investment is.
2. Return on Sales (ROS)
Another financial measurement or ratio you can solve is the Return on Sales (ROS).
Solving for ROS answers the questions of how much profit you are actually earning
for each peso you get from selling. The formula for ROS is as follows:

Return on Sales = Net Profit After taxes

Sales

Example: Mang Juan above had an ROS of 12.6%. This means that for every peso of
sales, the enterprise made a profit of 12.6 centavos. The higher the ROS, the better
the return. The solution is as follows:

Return on Sales = Php 94,576 = 0.126 or 12.6%

Php 750,600
3. Return on Assets (ROA)
A third ratio is Return on Assets (ROA). ROA is an indicator of how
efficiently the enterprise’s assets can be used to bring in profits out of
investments. The formula is as follows:

Return on Assets = Net Profit After taxes

Total Assets

Example: Mang Juan’s monthly ROA is 5.7%. A higher ROA means

you will be able to get more profits out of your investments.
The solution is as follows:

Return on Assets = Php 94,576 = 0.057 or 5.7%

Php 1,648,150