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Chapter 5

FINANCIAL STUDY

5.1 Financial Assumptions

1. Sales and purchases are made in cash.

2. Sales will increase by 3% annually.

3. Compensation Allowance will increase by 10% annually.

4. 3% increase in price and 15% increase in production annually

5. Freight in will remain constant.

6. Leasehold Improvements expenses will be incurred in the first year of operation.

7. Leasehold improvements estimated useful life is 10 years

8. Price of Office Supplies will increase by 5% annually

9. Air Conditioning Unit will be incurred only for the first year of operation.

10. Janitorial supplies will increase by 3% annually

11. Kitchen supplies will increase by 3% annually

12. Other permits will remain constant for three years; SEC is valid for three years.

13. Price of packaging and labeling is constant during the first 3 years of operation

and volume is estimated to increase by 10% annually.

14. Power consumption is estimated to increase by 3% annually

15. Water consumption is estimated to increase by 5% annually

16. Advertising and promotion will be incurred only in the 1st year of operation

17. Employee Benefits will increase by 10% annually.

18. 13th month pay will increase by 10% annually.

19. Total Partners' Withdrawal is 5% of Net Income will increase by 5%annually.

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20. Product capacity will increase by 15% annually.

21. Selling price will increase by 3% annually.

5.2 Total Project Cost

Capital Requirements
a.       Property, Plant and Equipment
Kitchen Equipment ₱179,517.00
Office Supplies and equipment 23,999.00
Furniture and Fixtures 40,713.00
Leasehold Improvements 69,310.00 ₱313,539.00
b.      Working Capital
Raw Materials 45,589.11
Freight In 250.00
Direct Labor 9,000.00
Packaging and Labeling 6,750.00
Compensation Allowance 26,400.00
Rent Expense 5,000.00
Transportation Expense 184.00
Utilities Expense 22,250.47
Janitorial Expense 1,108.00
Kitchen Supplies 6,573.00
Office Supplies 611.00
Employee Benefits 632.78 124,348.36
c.       Pre – operational Expenses
Permits and Licenses 4,650.00
Advertising and Promotion 3,640.00 8,290.00
d.      Contingencies (5%, of a, b, c)
a.       Property, Plant and Equipment 15,676.95
b.      Working Capital 6,217.42
c.       Pre – operational Expenses 414.50 22,308.87
TOTAL Capital Requirement 468,486.22

Each Partners Contribution ₱156,162.07

22. Kitchen Equipments and Furniture/Fixtures with total cost below P3, 000 is

recognized as expense.
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23. Sales of more than P3, 000,000.00 will be subjected to VAT.

5.3 Source of Financing

The total project cost of the business amounting to ₱468,486.22 will be financed

by the personal contribution of the partners. Each partner will share the following

amount.

Dem Grace Fernandez ₱156,162.07

Katherine Natino 156,162.07
Clarisse Joy Ubana 156,162.07
Total ₱468,486.22
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5.7 Financial Analysis

Return on Investment    
Formula: Average Net Operating Income
x 100
  Investment
       
Net Income before
  Year Income Tax  
  2019 ₱16,814.60  
  2020 184,657.62  
  2021 343,039.01  
  2022 535,063.52  
  2023 775,504.20  
  TOTAL ₱1,855,078.95  
  Average ₱371,015.79  
       
  ₱371,015.79
Return on Investment =
  ₱468,486.22
    = 79.19%

Return on Investment= Net Operating Income Margin x Turnover

Average net sales
Margin= Average net operating Income Turnover=
Average net sales Total project cost
= 371,015.79 = 3,325,091.18
3,235,091.18 468,486.22
= 0.1146 = 6.91

ROI = 0.1146 x 6.91 = 0.7919 or 79.19%

The return on investment indicates the average profitability over a certain period
and how much the investment will earn over the years. The return on investment was
computed by multiplying the net operating income margin by the turnover, there is a 0.11
percent margin. It means that for every 1 peso of average net sales, the proposed
business is projected to earn a little over 11 centavos. As for the turnover, it is projected
to be 6.91 times. It means that for every 1 peso of investment or project cost, the
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proposed business is projected to be able to generate ₱6.91 in net sales. In the proposed
business, it shows that there is an average of 79.19 percent return on investment.
Meaning, that for every peso of the investment will result to an average return of 79
centavos on the years of operation. Therefore, it can be concluded that the proposed
business “La Espresso Yourself Café” is feasible.

Payback Period

Year Net Cash Flow Investment amount to be Payback

recovered Period
₱468,486.22
2019 73,473.54 395,012.68 1 year
2020 235,457.68 159,155.00 1 year
2021 385,296.72 0.00 0.45
2022 489,973.43
2023 670,516.13
TOTAL 1,854,717.50
Average 370,943.50

Payback Period = 2.45 years or 2 years, 5 months and 12 days.

The payback period of the proposed business indicates the length of time that the

capital or partners’ investment can be recovered. The proposed business payback period

means after 2 years, 5 months and 12 days. The business can recover its invested capital

within this period.

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Liquidity Ratio

Current Ratio
Formula: Current Assets
Current Liabilities

Year Current Assets Current Liabilities Current Ratio

2019 ₱247,384.06 ₱25,797.81 9.59 : 1
2020 476,563.38 79,911.50 5.96 : 1
2021 820,207.95 146,176.07 5.61: 1
2022 1,286,456.29 210,996.57 6.10: 1
2023 1,924,051.51 291,839.29 6.59: 1

The proposed business current ratio indicates the business’s capacity to pay its

short term obligations. As the business continues to grow, it gets a strong liquidity

position. During the first year of operation for 2019, it has 9.59 ratio which means that it

has P9.59 available assets to pay its current liabilities as well as for the following years.

The business has a liquid status.

Net Profit Margin

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Formula: Average Net Income
x 100
  Average Net Sales
       
Net Profit
Year Net Income Net Sales
Margin
2019 ₱11,433.93 ₱2,241,000.00 0.51%
2020 125,567.18 2,654,464.50 4.73%
2021 233,266.53 3,144,213.20 7.42%
2022 363,843.20 3,724,320.54 9.77%
2023 527,342.86 4,411,457.67 11.95%
Total 1,261,453.69 16,175,455.91  
Average ₱252,290.74 ₱3,235,091.18  
       
Net Profit ₱252,290.74    
Margin = ₱3,235,091.18    
= 0.0780 x 100  
= 7.80%    

The business profit margin shows the stability of the business’ net income in

relation to the sales of the product. It shows an increase of profit margin every year,

meaning, that the business is earning and improving every year.