'' Financial plan must indicate how much money is required to generate

income and how much is going to be spent on a particular transaction; and

how much will be borrowed and paid. ‘’

• LEARNING OUTCOMES
1. Prepare financial statement such as balance sheet, income
statement, cash flow projections and summary of sales and
receipts;
2. Interpret financial statements; and
3. Identify where there is a profit or loss for a business.
It doesn’t
matter how
many
resources you
have. If you
don’t know
how to use
What is a financial Plan?

• It refers to the capital investment and sources of funding the operation of the business. It shall show financial
projections over a period of one year and five years program and shall be determine the rate of return on
investments. It must be able to show the return on equity and break-even sales as well as pricing sensitivity
test.
• The process of determining whether an entrepreneur’s idea is a viable foundation for creating a successful
business.
• It is also a course of action for obtaining and using the money that is needed to implement the goals of the
business organization. Once the plan is in action, the performance of the organization is monitored and
evaluated in terms of the attainment of the goals. Just like any other plan, financial planning should be flexible
and realistic.
F IVE A RE A S O F • P
N I ctioG
eN
rot
L A N
FINANCIAL P • state Pl n Planni
• E
Reti ann ng
• In remen ing
ves t Pl
• Ta tme ann
xP nt P ing
lan lan
nin nin
g g
What is Protection Planning?

la nn ing is a ll a bo ut p re paring for the

Protection P o k in g a t li fe protection,
n in vo lv e lo
unexpected. It ca m e p ro tection.
cove r a nd in co
critical illness

le me n t o f a ny fi n a n ci a l strategy.
• Insurance is a key e “not a
t, yo u ap p ly fo r it . It is
• Insurance is “not bough
benefit, it is a privilege”.
nce pla n no t fo r w h a t it is, but for what
• Get an insura
it does.
 What is Estate Planning?

Estate planning is making the necessary

arrangements so that everything you own, or
“estate”, will go to the right people when you
die. An estate may include land properties,
vehicles, bank accounts, investments and
insurance, furniture, jewelry and other items
of value.

• Estate Plan must be assessed every 2 or 3

years.
 What is a Retirement
Planning?
in g m e an s p re p a ri n g to day for your
Retirement Plan n
u co n ti n u e to m e et a ll your goals
future life so that yo T h is in cl u d es setting your
e p e n d e n tl y.
and dreams ind o u n t o f m o n ey you will
g th e am
retirement estimatin yo u r re ti rement savings.
n g to gr o w
need, and investi

o earl y to p lan fo r a re tirement.

• No such thing as to
e n t o n yo u r ch il d re n , p arents,
• Never rely your retirem
rnment.
family business, or gove
What is Investment Planning?

Investment Planning is the process of matching

your financial goals and objectives with your financial
resources. It is a core component of financial planning.
It is impossible to have one without the other. It begins
when you are clear on your financial goals and
objectives. Our Financial Planning process is designed
to help you get clear on how to match your financial
resources to your financial objectives.

• Analyze current investment positions and identify

opportunities for improvement.
• Never look at yields alone, must be aligned to your
objectives, time horizons and risk appetite.
What is Tax Planning?
P la n nin g in v o lve s w e ig hing
Tax
various tax options to
rm in e th e m o s t b en e fic ial
dete ne
c o n d u c t a b u s in e ss . O
way to
u ld b ea r in m in d th a t ta x
sho e
g a im s n o t o n ly to s a v
plannin r
xe s b u t a ls o to re d u c e o
on ta g
ta x e xp o s u re s d u r in
eliminate
tax examinations.

imize tax lia biliti es lega lly.

• Min
PREPARATION OF THE PROJECTED FINANCIAL
STATEMENTS

• The Projected Income Statement shows the revenues, cost of goods sold/cost of sale, operating expenses
categorized into two types: marketing/distribution expenses and administrative/office expenses, other income
and expenses, financing costs, income taxes and the bottom line figure, the net profit after tax or a net loss. This
describes company’s ability to generate cash by computing for sales and expenses.
• The Projected Statement of Cash Flows which reflect the sources and uses of cash and cash equivalents. There
are three (3) sources and uses of cash such as Operating Activities (proceeds of from cash sales/ cash service
revenues, payment for expenses, payment of inventories for cash and the payment of accounts payable),
Investing Activities (proceeds from the sale and purchase for cash of the Property, Plant and Equipment and
Investments), and lastly, Financing Activities (cash proceeds from the investment of the owners/ issuance of
share of stocks, proceeds from bank borrowings and cash payment for the withdrawal of the owners and
payment of cash dividends).
• The Projected Balance Sheet/Statement of Financial Position which shows the financial position of the
enterprise as of the given period of time. It reflects the total assets together its total liabilities and total
equity/net worth/net assets. This shows financial condition by accounting for assets (cash, receivables,
inventory, equipment, property, investments) and liabilities (accounts payable, salaries, taxes, and bonds, notes
and mortgage payables).This statement reflects the enterprise financial position as of a given date in terms of its
total assets, total liabilities and total equity.
• Assets which represent the resources controlled by the entity as a result of past events and from which future
economic benefits are expected to flow to the enterprise. The asset has two categories: the current assets and
the non-current assets.
Current Assets provide economic benefits for a period of one year or the normal
operating cycle, whichever is shorter. Examples of current assets that are
reported in the Statement of Financial Position according to liquidity (the ability
of asset to be easily converted into cash and to pay its short-term obligations on
time) are:
• Cash and Cash Equivalents
• Marketable Securities/Short-Term Investments
• Accounts Receivable, Net of Allowance for bad debts
• Short-Term Notes Receivable
• Other Non-Trade Receivables such as Advances to Employees
• Inventories
• Prepaid Expenses
 Examples of Non-Cash Assets are:
Property, Plant and Equipment, Long-Term Investments and Intangible Assets

• Property, Plant and Equipment • Long-Term Investments • Intangible Assets

- Land
- Building, Net of Accumulated - Investment in Associates - Goodwill
Depreciation
- Land Improvements, Net of Accumulated - Investment in Bonds - Patent, Net of Amortization
Depreciation - Trademark, Net of
- Office Equipment, net of accumulated Amortization
depreciation
- Office Furniture and Fixtures, Net of - Copyright, Net of
Accumulated Depreciation Amortization
- Store Equipment, Net of Accumulated
Depreciation - Leasehold Rights, Net of
- Store Furniture and Fixture, Net of Amortization
Accumulated Depreciation
- Transportation Vehicle, Net of - Computer Software, Net of
Accumulated Depreciation Amortization
What are Liabilities? a ri si ng from past
ligation o f an en terp ri se
• Liabilities are present ob ex pe cte d to re su lt in a n outflow
f which is
events, the settlement o resources em bo d y ing e co no m ic benefits.
e e ntity of econom ic
from th

gories:
• Liabilities have two cate
1. Current Liabilities
es
2. Non-Current Liabiliti
 What are Current
Liabilities?
• Current Liabilities are economic obligations that are payable within one year
or normal operating cycle, whichever is shorter.
Examples are shown below
1. Trade accounts and notes payable
2. Accrued expense payable such as accrued salaries payable (expense already incurred
but not yet paid)
3. Unearned Income or Revenue (income already received in advance but not yet earned)
4. Income Tax Payable
5. Withholding Taxes Payable
6. SSS Premiums Payable
7. Pag-IBIG Premiums Payable
8. Phil Health Premiums Payable
 • No
obl n-Cu
What are Non-Current
Exa gation rren
i
Liabilities? mp s t t L i
les h at a b
aya ilitie
are i s p
1. L :
2. B
ong
-Ter
bl e s
wit are e
ond mB hin con
s Pa a nk o ne om
yab Lo a yea ic
le nP r.
aya
ble
CAPITAL
• The Capita
l represent
i n t h e as s e s the residu
ts of th e en al interest
deducting terprise aft
all of its to e r
term for ca tal liabilitie
pital is equ s. Another
worth whi ity, net ass
c h i s m e as u ets and ne
total asset red as the t
s over tota excess of
l liabilities.
 For Single Proprietorship and Partnership,
the Capital is computed as follows:

Initial Investment or Beginning Capital P xxx

Add: Additional Investment P xxx
Net Income ___xxx___
Total xxx

Less: Withdrawal/Drawing ___xxx___

Ending Capital xxx
For Corporation Type of Business,
the Capital is computed as follows:
Issued Shares at Par Value P xxx

Additional Paid-In Capital

Share Premium in Excess of Par Value xxx

Additional Paid-In Capital from Treasury Stock Transactions xxx

Retained Earnings (all net income or net loss is closed under this account) xxx
Treasury Shares, at Cost (xxx)

Total Stockholders’ Equity P xxx

The format of the Projected Balance Sheet/Statement of Financial Position
Name of Company
Projected Balance Sheet/Statement of Financial Position
Year 1 Year 2 Year 3 Year 4 Year 5
Assets
Current Assets
Cash and Cash Equivalents (Schedule7)
Marketable Securities/Short-Term
Investments

Trade and Other Receivable (Schedule 8)

Inventories (Schedule 9)
Prepaid Expenses (Schedule 10)
Total Current Assets

Non-Current Assets
Property, Plant and Equipment, net
(Schedule 11)

Long-Term Investment
Intangible Assets
Total Non-Current Assets
Total Assets

Liabilities and Equity

Current Liabilities (Schedule 14)

Non-Current Liabilities (Schedule 15)

Total Liabilities

Equity
Capital/Stockholders’ Equity (Schedule 16)

Total Liabilities and Capital

The Format of the Projected Balance Sheet/Statement of
Financial Position
• Prior to the preparation of the projected income statement, the proponent should consider the demand and
supply analysis. Demand may include major consumers of the product/service, while the supply includes
supply for the past years and the projected supply. Other factors included in the market study that is
important to be considered are product pricing, the expected volume/units to be sold or the number of
clients, users and services to be rendered and the proposed marketing strategies/programs of the enterprise.
• It is also essential to compute the unit and total costs of the product to be sold or the cost of services to be
rendered as the basis of the pricing strategy. After the unit cost was identified, the proponent should
determine the mark-up percentage for the recovery of the total costs and expenses and to achieve its mark-
up/net profit per unit.
• The Selling Price per unit must be equal to the Unit Cost per unit plus the desired mark-up.
• The amount of Sales Revenue or Service Revenue shall be computed by multiplying expected total units to be
sold or number of services/clients to be rendered for a given period of time multiply by the estimated selling
price per unit. Under trading and manufacturing business, any sales discounts and sales returns and
allowances shall be deducted from the Gross Sales to arrive at Net Sales figure.
Below is the Computation of the Cost of Goods Sold/Cost of
Sales for a Trading/Merchandising Business:

Beginning Merchandise Inventory, at Cost P xxx

Add: Net Cost of Purchases
Gross Purchases P xxx
Add: Freight-in xxx
Total xxx
Less: Purchase Discounts xxx
Purchase Returns and Allowances xxx xxx
Total Goods Available for Sale xxx
Less: Ending Merchandise Inventory, at Cost xxx
Cost of Goods Sold/Cost of Sales xxx
Divided by the Total Units Sold xxx

Estimated Unit Cost of Goods Sold

 For the manufacturing set up, the computation of the Cost of Goods Sold/Cost of Sales is shown below:

Beginning Raw Materials Inventory P xxx Add: Beginning Work-In Process Inventory xxx__
Add: Net Cost of Purchases Other factory expenses _xxx xxx_
Gross Purchases P xxx Total Costs Placed in Process xxx
Add: Freight-in __xxx__ Less: Ending Work-In Process Inventory xxx__
Total Cost of Goods Manufactured xxx
xxx Add: Beginning finished goods inventory xxx__
Less: Ending Raw Materials Inventory xxx Total Cost of Goods Available for Sale xxx
Purchase returns and allowances xxx Less: Ending finished goods inventory xxx__
xxx__ Cost of goods sold/cost of sales xxx
Total Raw Materials Available for Use xxx Divided by the expected total units to be sold /xxx__
Less: Ending Raw Materials Inventory xxx__
Raw Materials Used Estimated Unit Cost of Goods Sold xxx__
xxx
Direct Labor xxx
Manufacturing Overhead - For a service type of business, the cost of services may
Indirect Labor xxx include the cost of direct manpower to be used, the cost of
Indirect Materials xxx direct materials and supplies to be utilized and other costs
Factory Insurance xxx to be incurred in the rendering of services. The total cost of
Depreciation-factory equipment xxx
Depreciation-factory furniture and fixture xxx
services shall be divided by the expected volume of services
Depreciation-factory machinery xxx to arrive at the unit cost of services.
Factory Utilities xxx
Factory Taxes xxx
Total Manufacturing Costs xxx
For the preparation of the Projected Income
Statement, the following are the details of the
expenses to be reported.
1. Operating Expenses - Administrative /Office Expense

• - Office Rent Expense

Marketing/ Distribution Expenses will include:

- - Insurance Expense
Advertising and Promotion expense

- - Office Salary Expense

Rent Expense-Store Salary Expense-Store

- - Office Supplies Expense

Freight-Out/ Transportation Out

- - Bad Debt Expense

Delivery Expenses

- - Office Utilities Expense

Store Supplies Expense Depreciation Expense- Store Equipment

- - Depreciation Expense-Office Equipment

Depreciation Expense-Store Furniture and Fixture

- - Depreciation Expense-Office Furniture and Fixture

Utilities Expense-Store
- Depreciation Expense-Office Building
For the preparation of the projected income
statement, the following are the details of the
expenses to be reported.
2. Other Income
• Gain on sale of old equipment
• Gain on sale of investment
3. Other Expenses
• Loss on sale of old equipment
• Loss on sale of investment
4. Financing costs
• Interest expense on bank loans
5. Income Taxes
• Income Tax on Net profit Before Taxes
(The current income tax rate for corporation and
partnership engaged in trading and
manufacturing business is 30 %.) The proponent
should consider the government required salary
deductions on a monthly basis such as Social
Security System (SSS), Philippine Health
Insurance, Pag-IBIG Fund and Withholding Taxes
per Bureau of Internal Revenue. It is also
important to consider the share of the employer
in these mandatory payroll deductions except for
the withholding tax. The compensation of each
employee should be the minimum required as
prescribed by the Department of Labor and
Employment (DOLE). The enterprise should also
include in the salaries and wages expense the
13th month pay as required by the law. Other
fringe benefits may be also be incorporated for
the welfare of its employees.
The example of the Projected Income Statement is shown nent
ro p o
below: er h an d , th ep
ts o f the
t h e oth m p o nen w hich
Name of Company
O n e c o flo w s
t h s h cash
Projected Income Statement

a rn o f c a a n d
d le atement cash
Year 1 Year 2 Year 3 Year 4 Year 5

s h o u l
s t s e s o f
e s , c a sh
and u n purpos osited
Gross Sales Revenue (Schedule 1)
Less: Sales Discounts
ro j e c ted r c e s
p
th e sou d is c ussio as undep n s,
s h ow i
Sales Returns and Allowances
F o r u c h d c o
Net Sales
u i v a lents. on hand s of bills an cash
eq a s h rm c k s ;
es c a fo che
Less: Cost of Goods Sold (Schedule 2)
Gross Profit
in c lu d
ti o n s in
n a g e r ’s
g f u n ds
Less: Operating Expenses
a s h c ollec e c k s , ma d w orkin fund,
c e r ’s ch b a n k an h a nge
m c Ca s h
Marketing Expenses (Schedule 3)
cust o in a u n d,
Administrative Expenses (Schedule 4)
aine d as h f ther s . l
Operating Income
maint s petty c mong o commercia
a a rm hat
such d , - te s t
Add: Other Income (Schedule 5)
u n o rt n t
Total
a y ro ll f nclude sh t instrume hin a
Less: other Expenses (Schedule 6) p
le n ts i m arke h wit
Net Income before Financing Cost e qui v a
d m o n e y
i n t o c as
d w ith a
s an ted e an
Less: Interest Expense
pa p e r co n v e r
i
f
od o r less.
ti m
Net Income before Income Tax b e p e r
can ly s hort 0 d ays o
Provision for Income Tax
e 9
Net Income relativ y period of
it
matur
The three significant parts of the statement of the cash
flows are the following:
1. Operating Activities - Proceeds from the sale of property, plant and equipment
• Sources of Cash - Proceeds from the sale of investments
- Cash sales/ cash service revenues - Property, plant and equipment include land, equipment, furniture and fixtures,
- Collection from trade accounts and note receivable building and transportation vehicle currently used in the business and not
• Uses of Cash intended for sale.
- Cash payment for operating expenses - Investments include equity and debt securities investment. Equity securities
- Cash payment for purchases of merchandise/raw materials investment represent shares of stocks of other companies with the intention of
- Cash payment for trade accounts and notes payable earning investment income, dividends, appreciation, having a significant
2. Financing Activities influence with other enterprise and control. Debt securities investment
• Sources of Cash comprise money market placements such as treasury bills and commercial
- Cash investment by the owner papers and investment in bonds issued by the reputable corporations authorized
- Proceeds from the issuance of shares to issue by the Securities and Exchange Commission. Investment may also
- Proceeds from bank loans include investment properties such as land held for long-term appreciation, a
• Uses of Cash building owned by the enterprise and leased out, a property that is being
- Cash withdrawal by the owner constructed or developed for future use as investment property, among others.
- Payment of cash dividends • Uses of Cash
- Purchase of treasury shares for cash - Cash payment for purchase of property, plant and equipment
- For discussion purposes, treasury shares are those previously issued but - Cash payment for the purchase of investments
reacquired by the corporation for some important reasons such as improving
earnings per share and shares to be allocated for the employees of the company
stock purchase plan.

3. Investing Activities
• Sources of Cash
Below is the format of the Projected Statement of Cash
Flows:
e
After the Projected Incom
Year 1 Year 2 Year 3 Year 4 Year 5
Cash Flow from Operating Activity:

Cash Inflow:
Cash sales/ cash service revenue

Statement and Projected

Collection of trade accounts/notes
receivable

Cash Outflow:
Cash payment for operating
Expenses

Cash payment for purchase of

te m e n t of C a s h F lo w s a re
Sta
merchandise

Cash payment for trade accounts/

notes payable

prepared, the proponent

Net Cash Provided (Used) by Operating Activity

Cash Flow from Financing Activity:

should prepare the last

Cash Inflow:
Cash investments by the owner
Proceeds from the issuance of

ired,
Shares for cash

financial statement requ

Proceeds from bank loans
Cash Outflow:
Cash withdrawal by the owner

e et/
Payment of cash dividend

d B a la n c e S h
Payment for treasury shares

the P ro je c te
Net Cash Provided (Used) by Financing Activities

Cash Flow from Investing Activity:

Projected Statement of
Cash Inflow:
Proceeds from sale of property,
Plant & Equipment

Financial Position.
Proceeds from sale of investments
Cash Outflow:
Cash payment for the purchase of
Property, plant & Equip,

Cash payment for the purchase of

investment

Net Cash Provided (Used) by Financing Activity

Increase (Decrease) in Cash and cash equivalents

Add: Beginning cash balance

Cash and cash equivalents
 Financial Analysis
b o o k o f D r. B a lta zar, he
• Based from the p ro je c te d financial
r th e
mentioned that afte , th e p ro p o n en t should
are d
statements are prep sis su c h as c o m p u tation of
n a ly
perform the financial a s, capital recover analysis,
lysi
ratios, break-even ana on a n d se n si tiv it y analysis.
u ta ti
net present value comp sis that
d in fin a n cia l a n aly
• Ratios are tools use io n s th at m a y not be
ing c o n d it
provide clues to underly ns of the individual
ctio
apparent from an inspe
p onents m ak ing up th e ratio.
com
For analysis of the projected financial statements, ratios that
maybe computed•are Liqthe following:
u
• Pr idity
ofit Rati
• So ab i o s
lve lit y
• Ac nc y Rati
tivi Rati os
ty R os
atio
s
 Liquidity Ratio measures the ability of the enterprise to pay its short-
term obligations. Ratios under this category are:
• Current Ratio = Total Current Assets__
Total Current Liabilities
 (it indicates short- term debt paying ability)

• Acid- Test Ratio = Total Quick Assets (it excludes inventories and prepaid expense)
Total Current Liabilities
 (immediate short-term liquidity)

• Net Working Capital = Total Current Assets – Total Current Liabilities

 (amount to meet current debts and carry sufficient inventories)
Profitability Ratio measures the health of the financial condition and
effective management and the ability of the enterprise to earn satisfactory
profit and return on investment. Ratios under this category are:

• Gross Profit = Gross Profit (margin between selling price and cost of sales)
Net Sales
• Profit Margin = __Profit__ (net income generated by each peso sales)
Net Sales
• Return on Total Assets = __Profit____ (it measures the profitability of
assets)
Average Total Assets
• Return on Equity = ___Profit___ (profitability of the owner/ shareholder’s
investment)
Average Equity
• Assets Turnover = ___Net Sales___ (it measures how efficiently assets are used to generate
sales)
Average Total Asset
Solvency Ratio measures the ability of the enterprise to pay its
long-term obligations as they are due. Ratios include:
• Debt to Total Assets = __Total Liabilities__ (percentage of total assets provided by creditors)
Average Total Asset
• Debt to Equity = _Total Liabilities (level of borrowing relative to funds used to finance enterprise)
Average Total Equity
• Time Interest Earned = Earnings Before Interest Expense and Taxes (ability to meet interest payments as they
become due)
Interest Expense
Activity Ratio also measures the liquidity ratio of the
enterprise such as:
• Accounts Receivable Turnover = ______Net Credit Sales______
Average Accounts Receivable
(liquidity of receivables)
• Average Collection Period = _______365 days________
Accounts Receivable Turnover
(liquidity of receivables and collection
success)
• Inventory Turnover = ____Cost of Goods Sold___ (liquidity of inventory)
Average Inventory
• Average Days in Inventory = ______365 days____
Inventory Turnover
(liquidity of inventory and inventory
management)
 BREAK-EVEN ANALYSIS
What is Break-Even Analysis?

• A Break-Even Analysis is a financial calculation that weighs the costs of a new

business, service or product against the unit sell price to determine the point at
which you will break even.
• Part of the financial aspect is the determination of a number of it to be sold at
break- even point of the amount of projected break- even sales where the
enterprise will not earn a profit nor incur a net loss. It is important for the
proponent to have the knowledge of the break- even point when he or she decide
whether to introduce new product lines, change sales prices on established
products, or enter new market areas. it is important to determine two types of
costs for this purpose. These are variable cost and fixed cost. Variable costs are cost
that change in total relative to the movement with the level of production which
include direct materials, direct labor, cost of goods sold, sales commissions, freight-
out for a merchandiser and gasoline is airline and trucking business, and variable
factory overhead. Fixed costs are cost that is constant in relation to the movement
of the level of production. Examples of the fixed costs are depreciation on buildings
and equipment, rent, insurance, property taxes and supervisory salaries. For break-
even analysis, it is also essential to compute for the contribution margin by
deducting the selling price from the total variable cost.
Formulas to compute for the
following:
1. Break- even Sales in Units = _Total Fixed Costs_
Unit Selling Price
Contribution Margin Per Unit
- Formula to Compute Contribution Margin Per Unit:
Unit Selling Price P xxx
Unit Variable Cost xxx__
3. Required Sales in Units to Earn the Target Profit
Unit Contribution Margin xxx
= Total Fixed
======== Costs + Target Profit

2. Break- Even Sales in Peso = _Total Fixed Costs_ Contribution

Margin per unit
Contribution
Margin % 4. Required Peso Sale to earn the Target Profit

- Formula to Compute Contribution Margin Percentage: = Total Fixed Costs + Target Profit

Contribution Margin Percentage = Unit Contribution Contribution

Margin Margin Percentage
Illustrative Example:

Jeremiah
cabinets Company, a man
h ad th e ufacture • Requ
• fo l l o wing dat r of woo ired:
S al e s i n U a for 2015 den • C om p
• n its : ute the f
Sales Pri P 1, 5 0 0 ol l ow i n g
c e • 1 . Co :
• P 1 , 50 0 ntributio
Variable per unit • 2 . Co n Margin
• Cost ntributio per unit
Fixed Co P 75 0 p e • 3. Bre n Margin
st r unit ak- Even percenta
P 195,00 Sales in u ge
0 • 4. Bre nits
ak- Even
• 5. Req Sales in p
uired Sal e so
175,000 e s i n uni
ts to earn
• 6. Req Target Pr
uired Sal ofi
175,000 es in Pes
o to earn
Target Pr
ofi
Computations:

1. Contribution Margin Per Unit

Sales price per unit P1, 500
Variable Cost per unit - 750
P 750
2. Contribution Margin Percentage = Unit Contribution Margin = P 750  50%
Unit Selling Price P1, 500
3. Break-Even Sales in Units = Total Fixed Costs = P 195,000 = 260 units
Contribution Margin Per Unit P 750
Proof:
Sales (260 units x P1, 500) P 390, 000
Variables costs (260 units x P750) 195, 000
Contribution Margin P195, 000
Less: Fixed Cost 195, 000
Net Income P 0
 Computations:
4. Break-Even Sales in Peso
Break-Even Sales in Peso = Total Fixed Costs = P 195,000 = P390, 000
Contribution Margin Percentage 50%
5. Required sales in units to earn target profit of P175,000 =
Total Fixed Costs + Target Profit = P195, 000 + P175, 000 = P370, 000 = 493.33 Units
Contribution Margin Per Unit P750 P750
Proof:
Sales (493.33units x P1, 500) P 390, 000
Variables costs (493.33units x P750) 195, 000_
Contribution Margin P370, 000
Less: Fixed Cost 195, 000_
Net Income P 175, 000

6. Required sales in units to earn target profit of P175,000

Total Fixed Costs + Target Profit = P195, 000+P175, 000 = P370, 000 = P740, 000
Contribution Margin per unit 50% 50%
Capital Recovery

• It is impo
rtant for the
years to rec proponent t
over the inv o estimate t
the number estment of h e n u mbe r
of years of the project. of
enterprise. r T
The paybac ecovery, the better it is he shorter
of capital in k period me f
vestment pr thod is a qu or the
ojects. The ick evaluatio
formula is: n
Payback P
eriod = N
et Initial in
vestment
Annual Ne o r Capital_
t Cash Infl
ow
 Continuation…

For example, the initial investment was P1,200,000 and the annual net cash
inflow is P480,000, then the payback period is 2.5 years. If the annual cash
inflows are uneven, the payback period is found by recovering the cost of the
investment/capital year by year. For example:

Year Cash Flows Unrecovered Investment

0 (950,000) 950,000
1 400,000 550,000
2 400,000 150,000
3 200,000 0
- In year 3, the cost is totally recovered, using only 150,000 of Year 3’s P200, 000
(75%). The payback period is 2.75 years.
 Continuation…

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 NET PRESENT VALUE APPROACH
What is Net Present Value Approach?

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 FINANCIAL STATEMENTS

According to Fajardo from his book titled Entrepreneurship, he mentioned

the need for financial management because, next to people, money is the
most important resource of any business organization. Without money,
there is no business at all. Money is needed to start a business. Money is
needed to sustain activities like production and marketing. And yet some
managers do not realize the vital role of money. They do not use it wisely.
As a result, their business fails. Even enterprise with surplus funds cannot
sustain their growth in the long run of their funds are mismanaged.
Good financial management can ensure the following:
• Financing priorities are established in accordance with organizational
objectives.
• Spending is planned and controlled in the line with established priorities.
• Adequate funding is available when it is needed, now and in the future.
• Funds are obtained and used efficiently.
 DEVELOPING THE FINANCIAL PLAN

A Financial Plan is a course of action for obtaining and using the money that is needed to
implement the goals of the business organization. Once the plan is in action, the performance
of the organization is monitored and evaluated in terms of the attainment of the goals. Just
like any other plan, financial planning should be flexible and realistic.

Here are three steps involved in financial planning:

• Establishing Objectives - These should be clear and specific to determine their cost or
budget. Objectives should be realistic. That is, they can be supported by available
resources in terms of human, material and financial inputs. Otherwise, such objectives are
not attainable.
• Budgeting - A budget is an estimated or projected program of expenses and incomes over
a specified future period. Incomes come from estimated sales while expenses are based
on both fixed and variable costs of operations of the businesses, like salaries, rentals,
materials, taxes, payments of water, electricity and others.
• Identifying Sources of Funds - These are four primary types of financing a business
enterprise: a) income from sales, b) owner's money and sale of shares of stock, c)
borrowings from friends, relatives and financial institutions, and issuing bonds, and d)
sales of some property of the enterprise as a last resort.
 Ba
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The Use of Ratios in Financial Analysis

1. Measure of Profitability
Which may be further subdivided into:
A. Sales and Profits Comparison Ratios
B. Profits Compared with Assets Ratios
2. Measure of Asset Use
3. Measure of Liquidity and the Use of Debt
 A. Sales and Profits Comparison Ratios

• The first of these ratios is your Net Income After Taxes to Net Sales. This
ratio presents your company's total earnings after taxes as they compare
with total revenues, an indication on whether an acceptable percentage
of your after tax income has been realized from your net sales production.
• It may be desirable for you to analyze some of your expenses as they
relate to your sales. For example, it may interest you to know the
relationship of your Total Raw Materials Cost or your Direct Labor Cost to
Net Sales. Going a bit further, you could do this same procedure to all
your other expenses. In which case, your analysis will then permit you to
work carefully and determine up to what extent you could increase your
operational expenses and still sell without a loss.
 B. Profits Compared with Assets Ratios
Financial Rate of Returns falls under this grouping. They evaluate a
company's earning power. The most common are:
The Return on Over-all Assets, which measures your company’s
adequacy of net income. It measures how productive your assets have
been during your last operating period. This ratio is given by the formula:
Net Income_
Total Assets
In line with this formula, your Rate of Net Operating Income to Total
Assets, your Rate of Income Before (After ) Taxes to Total Assets, etc.
May be computed presentations.
The Return on Assets help you to analyze your total income as they
compare with each of your different types of assets: Current Assets, Fixed
Assets, Intangible Assets, and Other Assets. They help you examine how
these different types of assets compare with your total earnings. More
detailed computations on these rates of returns include each specific
asset as a percentage of total income. Your company's Return on
Investments may be computed by using the formula:
Net Income____
Total Owners Equity
In using rate, your total owners' equity may vary within the accounting
period. It is then that the average owners' equity is used. A situation may
arise when you have a high return on investments and still have
unsatisfactory investments. This happens when you use an outdated
asset base. It is therefore advised that when using this formula, always
use current values for all your figures.
For Corporations, a useful method for determining rates of returns on
owners' investments in the Return on Common Stockholders' Equity
which is given by the formula:
Net Income less Dividend Requirements on Preferred Stocks_
Average Common Stockholders Equity
This rate depends on the company's financial structure and policies. It
must be noted here that the average common stockholders' equity in the
formula is your company's residual equity i.e., the total equity remaining
after provisions have been made for the claims of all other equity
holders.
Another method that compares stockholders' invested capital to future
dividends is the Discounted Cash Flow Method. Here, the time element is
considered by using the present value theory. This method tries to
determine a certain rate of return wherein future dividends are
discounted to equal total stockholders' initial capital investments. The
higher the rate computed, the more favorable is your project.
 Continuation…
Another method that relates
stockholders’ cash investments with
future dividends/returns is the Payback
Period which is computed in several ways.
Payback period refers to the time needed
for stockholders to fully recover their
initial investments, which make these
formulas more important to the investors.
Some of these methods are:
• Net investment to Annual Cash Flows
• Bail-out Payback Method
• Present Value Payback Method
Other methods in this group are:
• Profitability (or Desirability) index
method
• Book Values per Share of Stock
• Price Earnings Rate (Earning per Share)
• Market Value to Earnings per Share
• Payout Rate (Dividend per Share to
Earnings per Share)
• The inverse of your payback, known as
the Payback Reciprocal is another way
of determining your project’s
investment repayment in the form of
total income earned over a period of
time. In simple terms, this rate is “one”
divided by your payback formula.
The Use of Ratios in Financial Analysis
2. Measure of Asset Use

A good measure of asset use is given by the formula: Average Receivables_____

Year- End Receivables_
Average Day’s Sale
From whose analysis you may be able to recommend
maintenance or improvement of your company’s policies to
improve your cash management operations. Other measures of
this grouping are Turn-over Rates. Turn-over Rates refer to the
number of times a specific asset is used (turned into cash) in a
normal business period. These ratios normally have to do with
receivables and inventories:
For your Current Assets Turnover, the formula is:
Cost of Good Sold and Operating Expense less Depreciation_
Current Assets
The Accounts Receivables Turnover is evaluated by the formula:
Net Sales for the Period_____
Average Accounts and Notes Receivables
The Number of Days’ Sales in Receivables, or the average time
required to collects receivables is computed as follows:
Average Daily Sales Accounts
Where the Average Receivables is equal to Total Net
Receivables, beginning plus ending divided by 2, and Average
Daily Sales is equal to Total Annual Sales divided by 300, 360 or
365 depending on standard usage.
Merchandise (Inventory) Turn-over Ratios, on the other hand,
evaluates your inventory position or the number of times your
(average) inventory has been disposed and replenished during
a given period. The formula for this ratio is:
Cost of Good Sold____
Average Inventory for the Period
 Continuation…
Your Number of Days’ Sales in Inventories,
or the average time it requires to dispose of
your inventory is computed by the following
formula:
Average Inventory for the Period_____
Average Daily Cost of Goods Sold for the Period
If your company comes up with several
departmental product classifications, you may
want to compute each department’s inventory
turnovers. Furthermore, you may want to
compute more specific inventory turn-over
ratios like:
Finished Goods Turn-over =
Cost of Good Sold_________
Average Finished Goods Inventory
A gauge on how effectively you have utilized
your plant and your equipment in terms of sales
production will be detailed in your Plant and
Equipment Turn-over Ratio. This ratio is given by the
format:
Total Sales for the Period_ ____
Total Investments in Plant and Equipment
This last consideration may also be
expanded to include other specific assets
owners’ capital and compared with total sales.

Goods in Process Turn-over =

Cost of Good Manufactured___
Average Goods in Process Inventory
Raw Materials Turn-over =
Cost of Raw Materials_____
Average Raw Materials Inventory
 The Use of Ratios in Financial Analysis
3. Measure of Liquidity and the Use of Debt
One of the most valuable measurements of the company
that should be known is its ability to meet its short-term
indebtedness through the Current Ratio.
This ratio is given by the formula:
Current Assets___
Current Liabilities
The ratio however, does not conclude a company’s
condition of immediate solvency especially when
inventories from a significant part of the company’s total
current assets. Instead, the Acid Test Ratio (or Quick
Ratio) is used. This ratio uses the company’s cash, readily
marketable securities, notes receivables and account
receivables (all known as the company’s quick assets)
which are divided by the Total Current Liabilities.
Other formulas that indicate measures of liquidity are:
• Cash and Near-Cash Accounts to Average Daily Cash
Payments
• Payables Outstanding to Average Day’s Payables
Normally, your company’s assets, or some of it, are
offered as collaterals to some long-term debts. In such
case, the ratio of your Total Debts to Total Assets
provides an excellent indication of your protection
against your company’s credits, as well as the possibility
of securing additional indebtedness on the strength of
some excess securities.
Modifications of this ratio are also available, all
indicative of your company’s specific assets as they
compare with your total obligations. Some of these
modifications are:
• Plant and Equipment to Long term Debt
• Owners’ Capital to Total Liabilities
• Total Equity to Total Debt
 THE INCOME STATEMENT

The income statement reports income and expense activity for a specific period of time. It shows how
much money the company made after accounting all expenses. The bottom line figure represents its profit or
its loss. The company can either distribute the profit directly to the owner as an owner's draw, or it can
reinvest the profit in the business. In either case, the profit is reflected in the owner's equity section of the
balance sheet by using the "expanded accounting equation." The expanded accounting equation is an
affirmation of the interrelationship between the income statement and the balance sheet.
The income statement, balance sheet and cash flow statement are all interrelated. It describes how the
assets and liabilities were used in the stated accounting period. The cash flow statement explains cash
inflows and outflows, and it will ultimately reveal the amount of cash the company has on hand, which is also
reported in the balance sheet.
Stockholders and potential creditors analyze the company financial statements and calculate a number
of financial ratios with the data they contain to identify the company financial strengths and weaknesses and
determine whether the company is a good investment/credit risk.
One important way the financial statements are used together is in the calculation of free cash flow
(FCF). Smart investors love companies that produce plenty of free cash flow. It signals the ability of the
company to pay debt and dividends, buy back stock and facilitate the growth of business-all important
undertakings from an investor's perspective. However, while free cash flow is a great gauge of corporate
health, it does have its limits and is not immune to accounting trickery.
 Continuation…
The Income Statement is a written account
of a company's operating gains/losses for "a
certain period of time". Income statements start
with: (p.213 A Business Planning by Cuyugan,
1996)
1. Sales – It means the commodities actually
sold by the company.
2. (Less) Cost of Goods Manufacturing and Sold -
- The actual costs of the company's beginning -
and ending inventories of raw materials, work-
in- process and finished products direct labor -
costs and direct manufacturing overheads that -
directly affect the manufacturing processes and
have been made available for sale.
3. (Less) Operating Expenses - They are
subdivided into:
• Selling Expenses - which refer to costs directly related
to selling, advertising and delivery of a company's
goods and/or services to customers.
- The most commonly used items are:
- Salesmen's salaries, commissions and bonuses
- Travelling and Transportation expenses
Advertising and Publicity expenses
Delivery expenses
Sales Taxes
Depreciation of Delivery Equipment and other
store equipment used that are related to the
“sales” function.
 Continuation…
• Administrative Expenses – also called General - Interest Income
Expenses; these refer to costs incurred in - Dividend Income
administering the company’s business. These
items usually come in the form of: - Rent Income
- Salaries and Expenses of general executives and of - Royalties
the general accounting and credit departments • (Less) Other Expenses – which may be in the
- Provision for Doubtful Account form of:
- Contributions - Interest Expense Charges
- Professional Fees - Amortization of Debt Discounts
- “Certain Taxes” - Losses on Sale of Marketable Securities
- Depreciation of office building(s) and of office - Losses on Sale of Equipment
equipment’s - Losses on Sale of Long-Term Investments/Fixed
- Amortization of Intangible Assets Assets
• (Add) Other Income – which may be in terms of: - Losses on Sale of Obsolete Machineries
 BASIC ACCOUN
TING EQUATIO
Double-entry a N
offset every de ccounting requires a credit e
bit entry for all ntry to
accounting tran bo
sactions. The to okkeeping or
must equal the ta
total of all cred l of all debit entries
accounting equ it
ation refers to entries. The basic
accounts: Asse balance sheet
ts
Asset accounts = Liabilities + Owner ’s Equity
are debit entrie .
equity account s
s are credit ent . Liability and owner ’s
is recorded in a rie
n asset accoun s. Every entries that
an offsetting cr t as a debit mu
edit entry in ei st have
or in owner ’s e th er a liability acc
quity. ount
BALANCE SHEET

o m o st im p o rtant financial
The tw rprise are the
n ts o f a n e n te
stateme t a nd the balance
a te m e n
incom e st
mpares the et includes:
t. T h e fo rm e r co • A balance she
shee d operating sh, stock, land,
sale s re v e n u e s a n
ally • Assets – e.g. ca ment, money
x p e n se s in a g iven period, usu than buildings, equip siness
e r
nues are greate others owe the
bu
one year. If reve s profits. It the
expenses, it me
an
ilitie s – e .g . m oney owed to
o f th e b a la n ce sheet, it is a • Lia b
r th e tax department,
case n e rs o
o f th e financial conditio su p p li
debt
state m e n t
rise at a given point
in loans, credit card
of a n e n te rp – th e value of the
e , u su a ll y o n yearly basis. • N e t w o rt h
u cting what the
tim a ft e r d ed
et is composed business nown as the
The balance she ssets, liabilities busine ss o w e s (a ls o k
of three basic p ws what the
arts: a ce sh e e t e q u ation or equity).
o balan
and capital. It sh what it owes, what discussions are
s, • The following n’s idea found on
enterprise own ested, and the
v some of Cuyuga “Business
the owner has in losses. Entries in d
or his book entitle
accrued profits are based on the
et Planning ”:
the balance she unting equation:
o
conventional acc
es + Capital
Assets = Liabiliti
Balance Sheet
 Continuation…

A. Cash
The Balance Sheet- an accounting report of B. Marketable Securities, sometimes referred
the assets, liabilities and capital of the to as “Temporary Investments”
company. It is a formal statement of financial C. Account Receivables
conditions of a company was of a given date”.
D. Notes Receivables
• Assets
E. Inventories
- Current Assets- items which could easily be
realized in cash or sold during a normal F. Notes Receivables
operating cycle. - Investments-Tangible and Intangible
- Fixed Assets
- Intangible Assets
- Other Assets
Balance Sheet
 Continuation…
• Liabilities - Other Long Term Liabilities
- Current Liabilities - Deferred Revenues
A. Accounts Payable Examples include:
B. Notes Payable • Long-term leasehold advances
C. Dividend Payable A. Fees received in advance for long term
service
D. Accrued Expenses
B. Deferred gross profit on installment sales
E. Income Tax Payables
F. Customers’ Accounts
- Long Term Liabilities
A. Bonds Payable
B. Premiums on Bonds Payable
 The Use of Ratios in Financial Analysis
3. Stockholders’ Equity and Owners Capital
• Stockholders’ Equity – refers •
to residual interest of the
owners on the assets of the
company in this case, a
corporation) measured by the
excess of assets over liabilities •
• Paid-In-Capital – This
represents the actually paid by
the company’s stockholders.
This item includes retained
earnings capitalized as stock •
dividends, gifts or donations of
any assets made by the
source, including persons or
entities other than the
company’s stockholders.
Capital stocks – are the
portions of paid-in capital
representing the total stated
value of the shares of stocks
issued by the company.
Treasury Stocks – refers to the
company investment’s own -
stocks issued and then re-
acquired (but not cancelled) by
the company.
Retained Earnings – the
cumulative balance of periodic
earnings, dividend
distributions, prior period
adjustments and special
distributions to stockholders.
These may be:
- Unappropriated Retained
Earnings, which is that portion
of retained earnings that is
free and which could be
declared as dividends; or
Appropriate Retained
Earnings, represents that
other portion of retained
earnings that has been
restricted from any dividend
declaration.
FORECASTING REVENUE AND GROWTH

Forecasting is calculating or
usually as a result of study predicting (some future ev
and analysis of available pe ent or condition)
foresight of consequences rtinent data. It is a
and provision against them
estimate of a future happen ; prediction or
ing or condition. Many entr
that building forecasts with epreneurs complain
any degree of accuracy take
could be spent selling rath s
er than planning. But few in a lot of time that
in the business if unable to vestors will put money
provide a set of thoughtful
important, proper financial fore
forecasts will help to develo casts. It is
staffing plans that will help p operational and
make the business a succes
Revenue is the total incom s.
expected to yield large annu e produced by given source, a property
al
investment. It is the yield of revenue, the gross income returned by an
so
a nation or state) collects an urces of income taxes) that a political unit (as
d receives into the treasury
Growth is a stage in the pr for public use.
producing especially by grow ocess of growing, it is a result of growth, a
in
especially in capital value an g. It is anticipated progressive growth
d income. Some investors
immediate income. prefer growth to
 BUILDING FINANCIAL FORECASTS
Start with expenses, not revenues. It is
much easier to forecast expenses than
revenues. The most common
categories of expenses are as follows:
• Fixed Costs/Overhead
• Rent
• Utility bills
• Phone bills/communication costs
• Accounting/bookkeeping
• Legal/insurance/licensing fees
• Postage
• Technology
• Advertising & marketing
• Salaries
Variable Costs
• Cost of Goods Sold
• Materials and supplies
• Packaging
• Direct Labor Costs
• Customer service
• Direct sales
• Direct marketing
RULES IN FORECASTING EXPENSES
1. Double the estimates for advertising
and marketing costs since they always
escalate beyond expectations.
2. Tripe the estimates for legal,
insurance and licensing fees since they
are very hard to predict without
experience and almost always exceed
expectations.
3. Keep track to direct sales and
customer service time as a direct labor
expense even when doing these
activities during the start- up stage to
forecast this expense with more
clients.
FORECAST REVENUES
• Conservative revenue projections
might have the following
assumptions:
1. Low price point
2. Two marketing channels
3. No sales staff
4. One new product or service
introduced each year for the first three
years
• Aggressive case might have the
following assumptions
1. Low price point for base product,
higher price for premium product.
2. Three to four marketing channels
managed by a marketing manager.
3. Two salespeople paid on
commission.
4. One new product or service
introduced in the first year, five more
products or services introduced for
each segment of the market in two and
three.
 KEY RATIOS IN FORECASTING
• KEY RATIOS IN FORECASTING
After making aggressive revenue
forecasts, it is easy to forget about
expenses. Many entrepreneurs will
optimistically focus on reaching revenue
goals and assume that the expenses can
be adjusted to accommodate reality if
revenue does not materialize. The best
way to reconcile revenue and expenses
projections is by a series of reality
checks for key ratios. Here are a few
financial ratios:
1. Gross margin is the total direct costs
to total revenue during a given quarter
or given year. This is one of the areas
where aggressive assumptions typically
become too unrealistic. The assumption
is to make gross margin increase from
10 to 50 percent. If customer service
and direct sales expenses are high now,
it may be high in the future.
2. Operating profit margin. What is the
ratio of total operating costs- direct
costs and overhead, excluding financing
costs- to total revenue during a given
quarter or given year? You should
expect positive movement with this
ratio. As revenues grow, overhead costs
should represent a small proportion of
total costs and your operating profit
margin should improve. The mistake
that many entrepreneurs make is they
forecast this break- even point too early
and assume they do not need much
financing to reach this point.
Revenue forecasts are useful both
for start- ups and existing business, here
is how to prepare:
• Decide on a Timeline
Decide on how far you want to look into
the future. This will be determined by
creating the report.
• Forecast Your Expenses
Predicting expenses is perhaps the
easiest part of revenue forecast with
the past expense records of an existing
business and researched forecast.
TWO TYPES OF EXPENSES
1. Fixed costs - These are the expenses
that remain the same every month.
They include things such as rent, fixed
salaries, utilities, insurance, phone,
internet and technology costs, postage,
advertising and marketing expenses,
legal, accounting, and bookkeeping fees.
2. Variable costs - These are the
expenses that change every month,
depending on your sales volume. They
include the cost of the goods sold
(including materials and supplies),
packaging costs, sales, cost of labor,
marketing, and customer service costs
as they directly relates to the sale of
product.
 FORECAST THE SALES
The thought of forecasting sales intimidates a
lot of people, but in reality, it is simply an act of
looking at some raw data and making some logical
assumptions from it. If an existing business looks at
the past sales figures, and then considers the
following factors to make monthly future sales:
• Identify customer base and determine which one
include in the forecast.
• Plans for expansion? If so, include current
geographical area as well as he area plan to
include in the future.
• Market conditions: What is the state of the
market? Will it remain steady or rising.
• Business position: Consider the position of the
business within the industry, and factor in growth
expectations.
• Seasonal adjustments: Many businesses have
increased and decreased sales in a seasonal cycle.
If business falls into that pattern, take this into
consideration.
Sources of Information on Forecasting
• Look at the most recent consumer spending
habits in the 2013 Consumer expenditures report
from the Bureau of Labor Statistics to see how in
demand products or services are.
• To find detailed information about the industry,
visit the bureau of the Industries at Glance pages.
• Check the most recent Producer Price Index to
determine price stability for the industry.
Next, take the entire researchers and make use
of them to predict the future sales. If the company
offered more than one product or service, one
should do this for each area and combine them for
total figure.
• Determine how sales are calculated for
the industry.
• Create a profile of ideal customer. For
regional businesses, use the data form
the Census Bureau to determine how
many of them live within a reasonable
radius of the business.
• Estimate the market share; determine
the total number of available customers
and predict how many of them will be
buying.
• Determine how often the customers
will buy. For example, the company can
easily count the customers booking the
service to a beauty parlor every four to
six weeks. But if the business is a tree-
trimming service, once a year customer
head count would be a good estimate.
• Predict the average amount of each
purchase for each product or service
categories.
To arrive at the projected sales
volume, use the given formula:
Number of customers x Average sales price x Number of yearly purchases = Yearly
projected sales
Next, deduct total Projected Expenses
and have Revenue Forecast
First:
Number of customers x Average sales price x Number of Yearly Purchases = Yearly
projected sales
Second:
Yearly projected sales – Projected Expenses = Revenue Forecast
 COSTS
Projected Cost Forecast

When a project is executed, variances occur between the original cost and
process planning and the actual course of the project. Simply shifting activities
within floats is enough to change the pattern of costs in the project. Once the
first actual costs have been incurred, it is necessary to check and possibly
update the figures for the remaining costs. This is only way to preserve a base
for a realistic cost forecast during the whole of the life cycle of a project.
3. Calculate overhead on actual and commitment values.
The company must calculate the overhead on actual and commitment
values separately for the calculation of the estimated costs at completion. The
system determines the planned overhead for the cost to complete as part of
the forecast.

Cost forecasts are normally performed as part of periodic processing. If the
company wants to run the cost forecast at a particular time and/or in
background processing, one can plan it as a job in the Schedule Manager. Use
the Schedule Manager monitor to check the scheduled job both during and
after processing.
1. Choose Financials Period- End Closing Single Functions to access the cost
forecast. One can run the cost forecast in individual or collective processing.
2. Based on planned, actual, and commitment values, the system determines
the remaining cost in network activities. In doing this, the system includes:

Prerequisites
• All the actual ad commitment values in the project.

The system determines cost to complete only for activity- assigned

• The plan values for network activities in the project.
networks which are both appended and apportioned. Preliminary planning • Forecast values from confirmations.
networks are not included.
It does not consider the following:
Process Flow
• WBS element plan values
Before accessing the cost forecast, the following are needed:
• Network preliminary planning values
1. Reschedule
• Plan costs for material components in valuated project stock (planned for a
2. No activity scheduling takes place in the cost forecast. It must be later release)
rescheduled first, so that the calculation of the cost to complete takes account
of the changed dates.
 THE COST SIMULATION VERSIONS

Based on planned, actual, and commitment costs, the system determines what is still to be done in
network activities and costs this again. The system records the value so determined as cost to complete,
by period, in a forecast version for:
• Internally processed activities
• Externally processed activities
• General costs activities
• Material components not managed as part of project stock (whether valued or not)
The values are normally determined as of the first day of the current period, as part of period- end
closing. However, one can have the option of specifying own key date for the cost forecast. The system
uses the key date to determine the cost distribution.
Residual costs are determined in the same way as planned values are calculated. The basis for the
residual cost calculation is the planned costing variant defined by the activity. If an activity is marked as
complete or there is a final confirmation for it, the system sets the cost to complete the zero.
The system copies the cost to complete to the forecast version, along with the actual and commitment
values for the project, which it reads from the database. Commitment values from periods before the
period of the cost forecast key date are recorded in the forecast version as of the period of the key date
(default: current period)
 RESULT

The following forecast version values are charge a low, competitive price while earning
available for evaluation in the Project Informationdecent margins without the cost associated with
System: electricity, water, oil, laundry and rent of other
• Cost to complete spas.
• Actual values at the time of the cost forecast. Supermarkets like Waltermart, Robinson’s and
Gaisano (in the province), with small returns on
• Commitment values at the time of the cost sales, asks suppliers to provide them manpower
forecast. like merchandisers and promo girls. Suppliers also
pay for displays and replace bad orders (B.O). In
The discussion of Josiah Go and Chiqui E. on bookstore where consignment is a norm, suppliers
their book Marketing Plan is as follows: absorb losses from pilferage, as major bookstores
pay based on what is actually sold.
Cost Control Strategies
Red Ribbon changed its distribution strategy
Thai massage has been gaining ground in the and instead of expanding solely by opening more
market with centers like Ton Ton Massage offering full branches, it expanded by putting out more
stretching massage, kwon as “Wat Po” without any kiosks catering to the take- out market, which allow
amenities usually offered in more expensive spas them to operate at a much lower operating cost.
like sauna, shower, aromatherapy, big towels and
separate locker rooms. This enabled them to
 Product Improvement
Product Improvement involves changing some of
the firm’s product and market mixes. Two available
strategies are Product Migration Strategy and Vertical
Integration Strategy.
1. Product Migration Strategy
Migration strategy, also known as Moving Up the
Ladder strategy, has many names. It is called Planned
Obsolescence in the consumer durable market or
Cannibalization strategy in the non-allocated durable
goods like soaps and detergents.
An assessment of margin contribution by product
must be made before adding or deleting products to
improve margins. For instance, many appliance stores
like Abenson and Automatic Center have center have
allocated space for furniture lines because they are
more profitable to carry than appliances.
In the banking industry, some banks like Citibank
have raised the minimum maintaining balances to
discourage small value depositors. They have, in fact,
abandoned a segment of the market to the benefit of
other banks, which caters to the smaller value
depositors.
Telecom companies have been trying to grow
beyond their usual voice and text service, and have
looked into data as growth opportunities. Hence, the
introduction of the iPhone 4S series leapfrogged three
times in growth versus the previous phone model
iPhone 4 due to online service like Siri, the branded
virtual personal assistant which responds to voice
command. The introduction of Apple iPad2 tablets, on
the other hand, enabled data to grow at least 2.5 times
more than using the iPhone 3G model, thus putting
increasing demand for more bandwidth as use of
applications and video intensifies in smartphones. This
further puts pressure on capacity build-up of network
operators to avoid congestion. These operators will
have to decide if heavy financial investments will be
done or if outsourcing infrastructure to suppliers such
as IBM, Ericson, and Huawei is an option, which would
be an operating model innovation.
 Product Improvement
2. Vertical Integration Strategy
Vertical Integration Strategy can either be
forward or backward. The objective is to gain
economies of scale, and to increase control and
margins. For instance, Jollibee has their own
bakery (backward integration) providing them
bread and other products. AgriNature, a leader
in fresh fruits and vegetables, has forward
integrated by acquiring, among others. The Big
Chill stores as part of their integration among its
farming, production, distribution and retail
divisions, shifting its former farm-to-market
mindset to farm-to-plate model.
Without an alcohol distillery, Tanduay will
end up buying from alcohol suppliers, thus
increasing raw materials costs. For this reason,
they have their own alcohol distillery set up in
Pulupundan, Negros Occidental (130,000 liters a
day capacity) and other in Lian, Batangas
(150,000 liters a day capacity). Tanduay buys
molasses from sugar mills and coverts them into
alcohol, which is used as the main ingredient for
their many brands like Tanduay Rhum G5,
Tanduay Five Years, Tanduay ESQ, Gin Kapitan,
Cossack Blue and Boracay Rhum. Tanduay is to
rhum as what San Miguel is to beer, and they are
dominant in the marketplace as the second-
largest selling rhum in the world after Bacardi of
Puerto Rico.
Corporate Retrenchment
The goal of corporate retrenchment is to
remove ’’excess fat” and create a leaner
organization. Two available strategies are
Overhead Reduction Strategy and Reorganization
Strategy.
 Overhead Reduction Strategy
Enchanted Kingdom makes use of their
existing 300 employees to do performance besides
their usual tasks. This not only reduces overhead,
but this multi-tasking actually helps boost the
confidence of the employees and allows them the
chance to showcase their performing skills. Even
some of the owners join cast in some
performances.
Jollibee used to insist on stand-alone stores
when they expanded in the U.S. but decided to be
located wherever Seafood City opens a facility to
take advantage of the foot traffic. After all, while
Jollibee is market leader in the Philippines, it is a
niche player outside of the Philippines and an
alliance with Seafood City, the largest Filipino-
owned supermarket chain in the US, makes sense.
The key is to cut overhead that has no strategic
implications. These things usually do not directly
affect business, like office supplies and other “nice-
to-haves”. Sometimes, there are miscellaneous
expenses that actually represent a large percentage
of the total corporate expenses that need to be
trimmed. Often for more established businesses,
there are the challenges to change existing
paradigm of how traditional cost is viewed, for
most of those costs may not actually create value.
Instead of following the high fixed cost nature half
of their total cost, BanKo appointed independent
channels and paid them a fee for every transaction
processed. Earlier, in 1996, when the food group of
San Miguel Corporation adopted the “WIIFM”
(What’s in it for me) program, it offered a one-
month bonus to all employees if they are able to
collectively cut 10% of the company’s fixed cost.
This makes sense when the annul fixed cost in the
area of P2 billion and the cost of payroll for a
month is only P50 million.
Reorganization Strategy
With fixed costs escalating and the number of qualified outlets with category authority decreasing,
Waters Philippines decided to get out of the distribution of their high-tech water purification products via
retail stores. At a much higher price versus competition, waters needed a proper demonstration and
explanations of their quality, 3-in-1 alkaline, mineral and purified water benefit with their home water
system, a goal achieved only after they shifted into a direct selling organization via in independent sales
force. Its sales and profitability reached an all-time high after the reorganization from distribution selling to
retail selling, from selling cash at the retail stores to selling via installment to the end users, and from salaried
manpower like salesmen and promo girls to independent network marketers and leaders.
Profit
It is determined by the money get from sales, cost of stock and of course all the expenses incur. Keeping a
close on each of these will ensure are maximizing the profit in the business. It is the excess of returns over
expenditure in a transaction or series of transactions; the excess of the selling price of goods over their cost;
it is the net income usually for a given period of the time; the ration of profit for a given year to the amount
of capital invested or the value of sales; the compensation accruing to entrepreneurs for the assumption of
risk in business enterprise as distinguished from wages or rent (Merriam-Webster)
It is reflected in reduction in liabilities, increase in assets, and/or increase in owner’s equity. It is an
indicator of comparative performance, but it is less valuable than return on investment (ROI) and an earning,
gain, or income and it is less valuable than return on investments. The monetary surplus left to a procedure
or employer after deducting wages, rent, cost of raw materials, etc.
Origin of Profit
Profit or normal profit is a component of implicit costs and not a component of business profit at all. It represents the
opportunity cost, as the time that the owner spends running the firm could be spent on running a different firm. The enterprise
component of a normal profit is that a business owner considers necessary to make running the business worth his or her while,
i.e., it is comparable to the next-best amount the entrepreneur could earn doing another job. Particularly, if enterprise is not
included as a factor of production, it can also be viewed a return to capital for investors including the entrepreneur, equivalent to
the return the capital owner could have expected (in a safe investment), plus compensation of risk. In other words, the cost of
normal profit varies both within and across industries, as per the risk-return spectrum.
Profit Maximization
Profitability is a term of economic efficiency. Another significant factor for profit maximization is “Market Fractionation”. A
company may sell goods in several regions or in several countries. Profit is maximized by treating each location as a separate
market. Rather than matching supply and demand for the entire company, the matching is done within each market. Each market
has different social factors. When the price of goods in each market area is set by each market then overall profit is maximized.
According to Josiah Go on his book in Marketing Plan, he mentioned Profit Strategy. In 2008, San Miguel Corporation started to
diversify its business aggressively. They made a conscious decision to be a powerhouse conglomerate, instead of staying put in a
table but increasingly low-margin core business in food and beverage. It funded its diversification unto different independent
companies, selling minority stakes in these companies at a premium, selling some of its foreign –owned business and taking
advantage of the low interest cost of money offered to them.
San Miguel Corporation then invested in high growth, high margin but high capital businesses with strong demand in power,
petroleum, utilities, mining, infrastructure, telecommunications, mining, water, and tourism, among others with the aim to grow
these businesses. Their food and beverage group will just be about 20% of its total consolidated revenue in the future. Petron,
Meralco and San Miguel Corporation are thee of the ten largest corporations in the Philippines, all are owned either in part or in
whole by the San Miguel Group. In April 2012, San Miguel acquired 49% of the Philippine Airlines. Based on estimates, San Miguel’s
total consolidated revenue would account for about 5% of the Philippines’ gross domestic product of P9 trillion in 2011.
CALCULATE NET PROFIT
Consider the following Formulas:
• Sales= Commissions Paid or Discounts given + Cost of
Goods + Gross Profit
• Gross Profit= Variable + Fixed Expenses + Net Profit
Income earned from business:
• Sales
• Gross Profit
• Net Profit
SENSITVITY ANALYSIS
Gone are the days when owners or directors of major
firms would agree to a long period before recovering their
investments. Nowadays, the direction, as well as the
prestige to the marketer, is in braking even at the least
possible time because it is difficult to predict the future.
Major firms dealing with consumer-package goods have,
in fact, cut down their investment recovery period from 2
to 3 years previously to as low as 6 to 9 months. This was
achieved by investing heavily in marketing programs to
gain a critical mass or by setting up new product or new
program launches to attain profitable market shares
immediately.
Remember that profitability as a marketing objective
is based on corporate objective such that when the owner
of a firm targets a 15% return in sales (ROS), each
marketing division of the firm using a sensitivity analysis,
firms can determine the most efficient marketing mix
combination to maximize profit in each segment.
MARGIN RETURN MODEL
Another available profit guide model is the Margin-
Return Model, which links their planning model to the
requirement of firms to maintain a reasonable
shareholder’s values are:
• Net Profit Margin
• Return on investment (ROI)
Most companies set net profit target as a percentage
of sales to reflect short- term operational recovery of
capital by dividing net profits to net worth. An alternative
calculation of ROI is to break down its components to
determine the specific strengths and/ or weaknesses of
the financial performance. Below shows the formula:
 Sensitivity Analysis

ROI = Return on Assets X Leverage Ratio

= Net Profit Margin X Asset X Total Assets
Margin Turnover Net Worth
= Net profit X Net Sales X Total Assets
Total Assets X Net Sale Net Worth
ROI = Net Profit
Net Worth
A review of the formula above reveals that ROI is highly
dependent on four variables: Total Assets and Net Worth
(shown in the balance sheet), and Net Sales and Net Profit
(shown in income statement). For profitable firms, a
dangerously high leverage ratio, i.e high debts (total asset-net
worth = total liability, remember?), will inflate a firm’s ROI
while increasing its future capital cost and decreasing its
future value unless backed up with adequate cash flow and
consistently high profit. A key factor for success, therefore, is
in the deliberate and careful choice of the best product-
market match as well as the positive influence of external
factors such as low interests rates in the long term and the
country’s monetary policies.
Wilson Lim, founder of the Abenson/ Electro World/ Walter
Mart Group, rationalized and proved that by increasing sales
on cash basis even at smaller profit he was able to increase his
inventory turnover and decrease his receivable thereby
decreasing his debts and converting his positive cash flows
into less risky real estate properties which appreciates in
value. It is quite like a tradeoffs decision. The point of view in
profitability is short term or long term. In his and many other
successful entrepreneurs’ case, their route to profitability is by
paying attention to balance sheet management aside from
monitoring the usual income statement.
Sea Oil, on the other hand, deliberately pushes higher-
margin gasoline at the retail level, hence, instead of the usual
70% diesel and 30% gasoline in stations of competitions, their
product mix is targeted at 60% diesel and 40% gasoline. This
enabled them to expand more profitability considering their
average growth since 1998 when they entered the petroleum
market was around 35% yearly.
What is satisfactory profit? Is P100 million profits too
much? The fact of the matter is that a reference point must
always be added to make any figure relevant.
 STRATEGIES TO MAXIMIZE PROFITS
Market Entrenchment
The objective of this is for firms to maintain and improve
its existing market standing. If a firm is financially
satisfactory, there is a strong likelihood of competitive
pressure. Firms can minimize competitive vulnerability by
either adopting market share protection strategy (short-
term) or repositioning strategy (long-term).
Market Share Protection Strategy
For firms to attain superior profit, they must have a
definite product- market choice. In terms of product, firms
can either go low-cost by offering a basic but acceptable
good product or go differentiated by offering more features
catering to those with superior needs.
As los cost or lowest cost producers, the firm can price
its product lower than competition because of its economies
of scale. They can ensure that no competition can offer the
same product at a cheaper price without being affected
financially.
In the Philippines, the maker of Dai-ichi is an example.
Producing and exporting millions of speakers, Dai-ichi makes
speakers under their own label as well as under the private
labels of several known brands in the market. Dai-ichi can do
this because their selling price is comparable, if now even
lower, than if these private label customers were to
manufacture speaker on their own.
In differentiation, firms can charge a reasonable
premium price because of distinct features that are readily
perceived and valued by its customers. IBM, for instance,
trained their sales force to have industry specialization so
that they can be like consultants solving customer’s problem
instead of traditional salesmen interested only in making
sale. IBM also practices key account management to ensure
“win-win” relationship between them and their dealers.
In most industries of firms, 20% of customers would be
responsible for 80% of sales volume. This is called the Pareto
Principle. Firms must, therefore, focus their attention on
continuously satisfying major customers, as well as those
with big potential, so that there will not be any reason for
them to shift to other brands. It does not however, mean
that one should not pay attention to small customers. What
are being emphasized her are simply the practicality as well
as the soundness of allocating time and effort between
major and small customers with different companies having
different ways of prioritizing markets.
Repositioning Strategy
Arm and Hammer broadened their target market for their
baking powder to include those wishing to deodorize their
refrigerator. Campbell has a variant that is not just a soup but a
meal substitute as well. Accidentally leaving champion
detergents; in his car, TV host Ryan Agoncillo swears the scent is
not overpowering unlike other detergents; in fact, it made his
car smells clean.
Market Expansion
Market expansion is a cost strategy. Similar to a
repositioning strategy, firms must have the financial resources
to supply the increase in demand, either from additional capital
or thru borrowings. This is because as sales are increased,
assets like inventories and delivery logistics must also be
expanded. Firms must also be careful and must rationalize its
expansion efforts. If they get overextended, they can move to a
less desirable quadrant. Two alternatives exist in this direction:
the Multinational Strategy and the Product Full Line Strategy.
Multinational Strategy
By redefining market boundaries from domestic to
worldwide, firms like Jollibee embarked on a multinational
strategy, targeting at least half of total revenues to come from
outside the Philippines. Thus, Jollibee has been buying stakes in
restaurants in many countries and bought local brands in China,
Taiwan, Vietnam and other countries to help fulfill this vision. In
January 2012, Jollibee, through its wholly owned subsidiary
Jollibee Worldwide Pte. Ltd. gained 50% of the business of the
Superfoods Group, which operates chains of restaurants in
Vietnam, Indonesia, Hong Kong, Japan, Cambodia and the
Philippines.
Product Full Line Strategy
Firms can also offer a complete line of products targeting a
broader market base. For instance, SM has expanded from a
shoe store to a department store to a one- stop shopping
complex offering practically everything that the middle class
required, consistent with their tagline, “we got it all for you”.
RFM Corporation offers almost a full line of products for every
meal. For breakfast, it has bread (RFM flour) and canned and
processed meats (Swifts and Rica). For Lunch and dinner, RFM
has pasta (fiesta), soup (White King), dressed chicken (Swifts),
beverage (Sunkist, Vitwater, Alo, and Selecta Milk), dessert
(Hans), and ice cream (Selecta). For snacks, it has hotcakes
(White King) and cracker nuts (Fujisan)
Similarly, Peerless Products, the market for champion
detergents since 1977, expanded to several variants only after
they have expanded production capacity in 2002. The supply
enabled them to expand geographically as well from having
distribution mostly in North Luzon and some parts of Visayas to
nationwide, thus allowing them to have greater economies of
scale to advertise in TV and create more awareness.
Volume Improvement
A firm may have satisfactory profit margins but unsatisfactory
returns due to heavy capitalization relative to sales volume, lack of
availability, or risk associated with transactions. This may occur
when firms have products competing in the early stages of the
product life cycle, when a major investment of expansion has been
undertaken, or when they are relatively new in the market. Hence,
the objective is to increase asset turnover through volume
improvement, considering that every incremental sale will
contribute to the attainment of better returns. Two basic
marketing strategies are sales stimulation strategy and system
selling strategy.
Sales Stimulation strategy
By using an integrated promotions strategy of advising, sales
promotions and selling, firms can improve volume. Coke spent
billions of pesos to stimulate demand for soft drinks, including the
launch of Coke Zero which targets those who have stopped
drinking soda due to sugar content.
Hyundai jumped from nowhere in December 2001 to being
the third leading automotive brand in the Philippines by adding to
the number of dealers from four 2002 to over 45 in 2012, making
Hyundai much more accessible to the public and maximizing the
reach of their investment in advertising and promotions.
Starting as a distribution company selling through other
stores, time depot decided to add their own retail outlets selling
Casio watches, and then arranging out that sales, as well as margin
to ales ratio of retail sort network became far superior to their
distribution counterpart.
System Selling Strategy
To sell related and complementary products to the same
customer is another alternative to increase sales volume. Cebuana
Lhullier, the leading pawnshop in the country has expanded
beyond its traditional services and discovered the power of their
distribution network in money transfer. Thus, what they may earn
from a pawn client in a month can be earned in a 5- minute
money transfer transaction. It also accepts bills payment services
and sells micro insurance.
Restaurants use a suggestion to apply system selling.
Experiences with drive-thru of McDonalds’s or Jollibee often show
that they always try to cross-sell related products like French fries
to go with burgers to increase leverage checks, which is a
transaction building strategy.
Sun Life Gepa Financial Inc. is a joint venture of two
companies, the Sun Life of Canada, which has a strong hold on the
AB market, and the Yinchengco-owned Grepalife. Formed in 2011,
the company entered into an exclusive distributionship agreement
with another Yunchengco-owned company, RCBC, giving instant
access Sun Life of Canada is strong with the high-end market, its
entry to the middle class market rather than doing it alone. This
allow market shares to grow faster from 17% in 2011 to 25% in 5
years as the formation of relationships, which takes time is
accelerated by partnering with the bank and tapping on its
existing relationships with clients.
Capital Restructuring
In capital restructuring the firms tries to remove some of their
fixed, relatively non-controllable costs. However, the firm should
not reduce fixed costs beyond a safe range that will actually affect
customer satisfaction. Two options available are Distribution
Productivity Strategy and Reseller Alignment Strategy.
Distribution Productivity Strategy
A firm can decrease challenger Bounty Fresh produces over 2
million birds per week the help of over 1,000 toll partners in 21
operations nationwide. Internationally, Dell Computer is known for
vendor-managed inventory (VMI) system, which allows their
vendor’s data access to what has been ordered by Dell’s customers,
and makes deliveries, by vendors done in time before assembly.
Reseller Alignment Strategy
The firm can also decrease their fixed assets in the distribution
channel. It can institute a telemarketing program instead of doing
personal sales calls to marginal accounts like what Suy Sing, the
biggest wholesaler in the Philippines, has been doing. In April 2012,
DOLE appointed RFM to distribute its pineapple-based products
nationwide.
A variation is for two or more companies to have a joint sales
force. It can also have a tie-up with a jobber or stockiest instead of
investing in a warehouse or branch. It can also franchise its retail
location.
An often-ignored area is in support services. Instead of having
products that need plumbers to install, Water Philippines decided
to carry most home water purifier models that can be self- installed
or require no installation at all except for a simple product set-up.
PLDT can also consider coming out with modular jacks that can be
picked up by customers who can simply plug-in their own
telephones.
Margin Improvement
The objective of margin improvement is to improve both the
gross margins as well as the net of products and services. Two
available strategies are Reprising Strategy and Cost Control Strategy.
Reprising Strategy
Petron, the biggest refinery in the Philippines, makes money
selling petroleum products as their core business, but makes higher
margins in petrochemical feed stocks such as propylene, benzene,
toluene, and mixed xylene. Thus, there is a motivation to scale up
their refining operations.
Cebu Pacific Air’s pricing strategy of charging a low price coupled
with lower baggage allowance led to major increase in their
ancillary income from excess baggage fees. The billions earned in
excess baggage fees they got annually were needed to partly offset
uncontrollable fuel costs.
 BUSINESS EXPENSES
• Cost of Goods
• Commissions/ Discounts
• Variable and Fixed Expenses
Profit earned from sales increase through the
following situations:
• The number of customers
• The volume of goods or services existing
customers buy
• The sales Price
To increase sales, objectives should include:
• Ensure many potential customers know about
business details and what have to offer.
• Ensure existing customers are happy with the
product or service and what to buy more of it.
• Review sales price regularly to ensure covering
all related costs and still making a profit. Find
out how to calculate margins, mark-up and
break-even amounts. This will help set right sales
price to meet profit expectations.
Cost of Goods Sold by Industry
Ways to calculate the cost of goods:
• Retail and wholesale is the difference between
the stock at the start and end of an inventory
reporting period. This would include stock sold
in between customer.
• Manufacturing is finished- goods stock, plus raw
materials inventories, goods- in- process stock,
direct labor, direct factory overhead costs and
goods sold in between.
• A service business is determined by labor used
rather than sale of a product. So, calculating the
cost of goods sold is simpler due to the low-level
use of materials required to earn the income.
 How to Calculate Cost of Goods Sold
Cost of Goods = Opening stocks + Purchases –
Closing stock
Expenses have an impact on profits. Review
the expenses and look for ways that can cut back.
Separating expenses into categories will help
calculate the costs. It also helps you see where
they can be increased or can be reduced. Expense
categories include:
• Cost of Goods Sold- These are expenses
related directly to sales such as buying stock
or components, freight costs if goods are
shipped to your business or wages if a staff
member works directly on producing an item
for sale.
• Fixed Expenses- These are expenses that stay
the same when your sales increase such as
rent, insurance, license fee, utilities etc.
• Variable Expenses- These are expenses that
go up or down based on the sales you make
such as advertising, delivery charges and
electricity if you are manufacturing.
• Profit and Loss Statement
The profit and loss statement (also called an
income statement) is a summary of income and
expenses for your business over a period of time.
It is prepared at regular intervals usually monthly
and at financial year end.
Use the financial statement temple to create a
profit and loss statement. Add as many categories
into the spreadsheet as needed below,
particularly in the sales revenue and expenses
are.
Tips for doing a profit and loss statement:
• Do a profit and loss statement in order to
analyze all income and expense categories.
• Try to do profit and loss statement monthly,
you will get a better understanding of your
income and costs.
• Recognize areas that need more analysis, and
take action before small problems become big
problems.
Cash Flow Statement
A cash flow statement is a summary of money
coming into and going out of the business for a
set time period. It is prepared monthly and at the
end of the financial year.
Cash Flow from Operating Activities
Operating activities are the day-to-day results
of buying and selling of goods and service. They
usually include:
• Receipts from income
• Payments for expenses and employees
• Funding of debtors
• Funding to and from suppliers
• Stock movements
Cash Flow from Investing Activities
Investing activities include investments in
future business activities. This type of cash flow
can include items such as:
• Payment for purchase of plant, equipment
and property
• Proceeds from selling the above
• Payment for a new investment
• Proceeds from selling an investment
Cash Flow from Financing Activities sheet reports. You can also ask your accountant to prepare your
Financing activities are how a business finances itself. Examples balance sheet.
include:
• Extra money the owners inject into the business.
• Money the business borrows.
• Money others borrowed from the business they pay back. Cash Flow Statement
• Money the owners take out of the business. A cash flow statement is a summary of money coming into and
Net operating cash flow is the amount of cash that a business going out of the business for a set time period. It is prepared at
has after paying its bills. If a business has a number or overdue bills, regular intervals usually monthly and at financial year.
these do not affect the cash flow statement until they are paid in Cash Flow from Investing Activities
cash. A cash flow forecast will help you measure and monitor how Operating activities are the day-to-day results of buying and
the business is operating. selling of goods and services. They usually include:
The cash flow statement can provide helpful warning signals to • Receipts from Income
avoid future financial troubles. Some potential warning signs are • Payment for expenses and employees
when:
• Funding of debtors
• Cash receipts are less than cash payments- you are running out
• Funding to and from suppliers
of money.
• Net operating cash flow is an outflow- cash flow is negative. • Stock movements.
• Net operating cash flow is less than profit after tax- you are Cash Flow from Investing Activities
spending more than you earn. Investing activities include investments in future business
Balance Sheet activities, buying and selling fixed assets. This type of cash flow can
include items such as:
The balance sheet is a general snapshot of the financial health
• Payment for purchase of plant, equipment and property
of a business on a given day. You would normally complete a
balance sheet at the end of a month or financial year. Once you • Proceeds from selling the above
have a profit and loss statement and cash flow statement you can • Payment for a new investment
complete a balance sheet. Accounting packages often offer balance • Proceeds from selling an investment.