Financial Planning for Small Business 1.
1. Cash available section - identifies the decreases in working capital and this shows whether the
When any result is desired, certain activities must
be undertaken to make it happen. To increase the chances
of reaping the financial rewards expected from the
business, financial planning becomes a requisite.
Importance of Financial Planning
Financial planning provides the small business
operator with a detailed approach to managing the financial
activities of the firm.
Financial Planning
It is an activity that involves analysing the
financial flows of the firm as a whole, forecasting the
consequences of various investments, financing, profit
decisions, and weighing the effects of various alternatives.
Budget - A budget is an estimate of the income and
expenditures for a future period of time, usually one year.
Steps in Budget Preparation
A budget is prepared by using the following
steps;
1. Build the foundation for the budget.
a. Project the best estimate of the
volume of products or services (or
both) expected and the revenue
that will be received.
b. Divide the estimate into monthly
figures.
c. Obtain an estimate of monthly
cost of sales or rentals, by product
or service.
2. Determine anticipated fixed costs.
3. Establish projected non–operating income and
costs.
Types of Budget Applicable to Small Business
1. Cash Budgets – for all types of firms;
2. Production budgets – for small manufacturing
firms; and
3. Sale budgets – for small service firms.
The Cash Budget - A cash budget is a forecast of
future cash receipts and cash disbursements over various
intervals of time.
The cash budget contains the following main
section.
beginning cash balance and the expected cash firm is becoming more solvent or less solvent.
receipts. Break-even Analysis
2. Cash disbursements section - list all cash A very useful tool in managing the finances of a
outlays for the period except for interest small firm. It is a means to determine at what point in a
payments on short – term loans. business activity the total revenue equals expenses.
3. Cash excess or deficiency - is shown by
subtracting cash available from cash needs. Break-even analysis is used to determine the following
information which are useful to the SBO:
4. Financing section - will show the planned
borrowings and payments, including interests.
1 .Sales in pesos for a period, resulting on a zero
5. Cash balance – is a result of cash available net income
plus borrowings less cash disbursements. 2. Sales in pesos for a period, resulting in a
reasonably calculated (add desired) net income;
Production Budget and
An estimate of the quality of goods to be 3. Sales in pesos for a period, resulting in
manufactured during the budget period. It describes how maximum net income for capacity available.
many units must be produced in order to meet sales needs
and satisfy ending inventory requirements.
Calculating the Break- even Point. The break –
even point may be determined by using the following
Sales Budget formulas.
It is applicable to service firms identifies each
service and its quality that will be sold. The services 1. Calculating the break-even point in units
produced are identical to services sold. BEPU = F/P – V
2. Calculating the break-even point in pesos
Financial Analysis BEPP = F/1 – V/P
Refers to the process of interpreting the past, Where
P = price per unit
present, and future financial condition of a firm.
F = fixed costs
In making a financial analysis of a small V = variable cost per unit
business, the following are basic requirements;
1. Financial statements; An example of how the break-even point is calculated
2. Break-even analysis; and is shown below;
3. Financial ratio analysis. Given;
Financial Statements Price per unit of product = P50,000
There are three major classes of financial Fixed costs = P3,500,000
Variable cost = P450,000
statement that provide major financial data about a small
Units sold = 120
business. Variable cost per unit = P3,750
1. Balance Sheet Solution:
- The balance sheet shows at a glance the financial 1. BEPU = P3,500,000/50,000- 3,750 = 75.67
health of a firm. The information becomes more relevant if units
compared with the company's balance sheet of previous 2. BEPP = P3,500,000/1-3,750/50,000 =
years. P3,783,783.78
2. Income statement
- Shows the revenue and other income, expenses, and
net income for the small business covering a period of time. Financial Ratio Analysis
Income statement will make the analysis more meaningful. Financial ratios – are useful tools used by SBOs to
3. Statement of changes in financial position. determine the financial health of the firm. They are used to
- Designed to explain the financial changes that occur spot trends (good or bad), get a better way of handling
in a company from one accounting period to the next. cash, and forecast the effect of operations on profitability.
Highlighted in this statement are the increases and Financial ratios may be classified as follows;
1. Liquid ratios;
 2. Activity ratios;
3. Profitability ratios; and
4. Leverage ratios.
Liquidity ratios – reveal the firm’s ability to pay
debts as they become due. The most commonly used
liquidity ratio are; (1) current ratio and (2) quick
ratio.
1. Current ratio - is used to measure the ability
of the firms to meet current debt. It is
calculated by dividing current assets with
current liabilities. The current ratio should
be 2:1. This is so because some of the assets,
especially inventory, take time to turn to
cash. If the receivables are old and
uncollectible the ratio would not be
accurate.
2. Quick ratio - is also used to measure a
firm’s ability to pay its debts on time.
2. Debt- equity ratio - compares debt to equity. Kolehiyo ng Lungsod ng Lipa
This ratio may be obtained by dividing total City of Lipa
liabilities with equity. College of Business Administration
Sources of Financing
In managing small business finance, one of the
major concerns of the SBO is managing the firm’s sources
of financing. The SBO’s responsibility is to choose and tap
the best source of funds that company can use to finance its
operations. ENTREPRENEURIAL MIND
Sources of funds fall into two major categories: CHAPTER 13
1. Debt capital; and
2. Equity capital.
 Debt capital – represents funds obtained
Managing Small
through borrowing. Debt financing may be
classified according to length of maturity which
are as follows;
1. Short-term capital;

Activity Ratios
2. Intermediate financing; and
3. Long-term financing.
 Short-term Capital – borrowings need to
Business Finance
Also referred to as turnover ratios, activity
be repaid within one year. The small business
ratios provide a glimpse of how effectively the firm has two alternative sources of short- term
using its asset. The following ratios are useful in financing;
determining activity. 1. Trade credit - refers to products or services
1. Accounts receivable turnover – is the type provided by suppliers to small business on Group 4 Members;
of activity ratio that relates accounts deferred payment, usually short term.
receivable to sales. 2. Banks - another source of short-term capital.
2. Inventory turnover ratio – measures the Marcelo, Kenjunel
number of times inventory turns over during  Intermediate and Long-term Morillo, Rafael John
the year. Financing- the high rates of failure of small
business have caused much worry to bankers Napili, Jhomar
Profitability Ratios
and they shy away from lending to small Odeste, Aivon Jay
firms.
This term refers to a class of financial ratios Orbino, Jayson
that measure the overall financial performance of  Equity Capital Pentinio, Jaynelson
firm. The ratios show the ability of the firm to Financing fund requirements through equity
generate revenues in excess of operating costs and consists of the following options; Rodriguez, Fatima
other expenses. 1. Additional capital infusion from the sole Samontanez, Michaela Jewel
proprietor;
2. Additional capital generated through a Santos, Lyka Rose
Leverage Ratios
These ratios measure the extent to which a partnership agreement; and Tagle, Jayson
3. Sale of stock through a corporate form of
firm relies on debt financing they describe the business. Tarroza, Jonh Christian
financing strategy of the firm and are used to evaluate
the risk accruing to the creditors or the risk that the
firm faces and its financing operations.
1. Debt ratio – compares the total liabilities of BSBA 1-H
the firm to its total assets.
Promotion – is an activity undertaken by successful
companies. In terms of using promotion as a tool, firms
differ on intensity of usage.
Promotion defined – may be defined as activities,
including advertising, personal selling, sale promotion,,
public – relation, direct marketing.
Promotion and Customer Demand – there are
instances when promotion increases the total customers
demand form the firm products or services but it depends to
the nature of competition in the market. It will be very
useful for SBO to know how he can use the various
methods of promotion to his advantage.
TYPES OF CUSTOMER DEMAND
To understand the value of promotion and to know the type
of customer demand.
1. Established Demand - refers to the purchase
made by people from a certain firm as a results of
any or all of the following;
a. Positive experience with the firms
products
b. the convenient location of the firm
c. the attractive appearance of the firm
2. Newly Created Demand - when the firms
engage in activities assigned to attract people to
buy from the firm. This is also referred as
promoted demand.
METHODS OF PROMOTION
1. Advertising
2. Personal Selling.
3. Publicity
4. Sales Promotion
5. Word-of-Mouth
Advertising - is any paid form of nonpersonal
presentation and promotionof ideas, goods and services by
an identified sponsor.
TYPES OF ADVERTISING
1. Retail Advertising - is made by various retail store
such as grocery stores and bakeries to attract customer.
2. Service Advertising - is made by various service
establishments such as transportation, recreation and
insurance.
3. Trade Advertising - is made by manufacturers to
motivate wholesalers and retailers to carry their products.
4. Industrial Advertising - is made by manufacturers to
motivate other manufacturers to use their products and
services.
5. Institutional Advertising - is designed to create a
favourable image for a firm.
TYPES OF ADVERTISING MEDIA
1. Television - is a medium that is expensive but it has a
wide area of coverage, mostly nationwide.
 Local Television Networks - are now able to air
local programs in foreign countries where
substantial numbers of Filipinos are residing
 Two Giant Television Networks
a. ABS – CBN
b. GMA
2. Radio Stations - can be classified into two:
a. those that cover the entire country like
DZRH and
b. those that cover a smaller area like
DWJJ and DWNE in Cabanatuan City
and Nueva Ecija respectively.
3. Newspapers - nationwide circulation are often times
inappropriate for small business, especially if its target
customers are situated in their respective local areas.
 Newspapers can be classified according to area
circulation
 National
 Regional
 Provincial or Local
4. Magazines - are of nationwide circulation and are
mostly inappropriate for small business advertising.
5. Outdoor Billboard - is a little discriminating as a form
of advertising and it can be placed where most of the target
customers pass by.
- It is less costly and is often appropriate for
small business advertising.
7. Specialty Advertising - is more discriminating and a
more direct way of convincing prospective customers to
buy.
- Examples of Specialty Advertising tools are
pencils, calendars, shopping bags and key chains.
8. Yellow Pages - provide the small business advertiser
with some advertising exposure.
- It's coverage is limited to persons with
telephones.
9. Direct Mail - is less expensive and most discriminating.
- Its main drawback, is the difficulty of obtaining
a credible listing of potential customers.
- Most advertising sent through the mail end up
in wastebaskets.
10. Local Cable TV - which has come of age as an
advertising medium has a captive audience.
- If the target customers of a small business are a
part of that audience, then advertising through it
may be practical.
11. Movie houses - an alternative form of advertising. It is
less costly but the audience is limited to a particular class
of people.
- Movie house may be useful as an advertising
medium for certain businesses like local
restaurants and car parts dealer.
 Catalog, sample, hand-outs and leaflets also a
form an alternative means of advertising but it
requires a certain amount of time to prepare
them.
 The use of text messages through the cellphone
has recently been tried by financing firms in
advertising their products.
Personal selling – it is the method of promotion that is
direct personal and often on face to face interchange
between tje companys salesperson and the consumer.
TYPES OF SALESPERSON
1.) Order getters - There tasks is to increase the firms
sales by selling to new customers and by increasing sales to
present costumers.
a. Current costumer salesperson - concentrates on
current costumers and seek more sales from
them.
b. New business salesperson - locates prospects
and converts them to buyers.
2.) Order taker - there responsibility is to seek repeat sales
from costumers by making sure that product quantities are
there where and when they are needed.
a. Inside order - stays inside the sales office and
from there receives orders by mail, telephone or
directly from persons coming in.
b. Field order taker – travels to costumers and
from their places orders and taken.
3.) Support personnel - to facilitate the selling function. Sales promotion - is a method of promotion other than Kolehiyo ng Lungsod ng Lipa
Their functions include locating prospects, educating advertising, personal selling and publicity that increase City of Lipa
costumers, building goodwill and providing service after sales through temporary sales incentives. College of Business Administration
sale.
a. Missionary salesperson - is usually employed by MAJOR TOOLS OF SALES PROMOTION
a manufacturer who wants to establish presence 1. Point of purchase Display - items used by sellers to
in a certain area. attract attention, inform and persuade prospective
b. Trade salesperson - help the company’s customers to buy. ENTREPRENEURIAL MIND
costumers especially retail stores, promote the 2. Premium - special incentive in the form of a gift.
product. 3. Trading Stamps - customers are given in relation to the
c. Technical salesperson - is one of the amount of their purchase.
CHAPTER 12
promotional methods which can be tapped by the 4. Sampling - manufacturers give away free samples to
cash strapped small businessman. introduce new product.
5. Product Demonstration - customers are given the
TYPES OF PUBLICITY
1.) News publicity - deals with events of national, regional
or local interest.
opportunity to observe the product benefits and
performance before purchasing.
6. Retailer coupons - motivates customer to buy from the
Promoting the
Kinds of news publicity
a. Spontaneous news publicity - one made as a
result of a fire, union strike , lahar onslaught,
retailer. The coupon entitles the buyer to a discount or a
free item.
7. Consumer Contests - customers compete for prizes by
Small Business
bank holdups and other major occurrences. completing a contest such as supplying a missing word on a
b. Planned news publicity - one based on news phrase or sentence.
releases prepared and distributed by the small 8. Sweepstakes - require the participants to submit some
business on a regular basis. kind of entry form but are purely games of chance requiring
2.) Business feature articles - refer to detailed stories creative effort by the consumer. Group 4 Members;
about the firm or its offerings most often appearing in 9. Rebates - offers the return of the money based on proof
business magazines. of purchase. Marcelo, Kenjunel
3.) Service feature articles - refer to lighter stories 10. Trade Shows - temporary exhibitions of products and Morillo, Rafael John
focusing on personal care, household items and recipes services. It is where direct purchases are made.
Napili, Jhomar
which find their way in the pages of newspapers and Word- of - Mouth
magazines - is a method of promotion wherein people encouraged Odeste, Aivon Jay
4.) Finance releases - are stories that are targeted to appear selling other people products and services they have Orbino, Jayson
in the business sections of newspapers and magazines. enjoyed. When people have positive experience about a
Pentinio, Jaynelson
5.) Product releases - refer to illustrations or pictures product or service, they have a tendency to resell these to
distributed to media. other people. Rodriguez, Fatima
6.) Pictorial releases - refer to illustrations or pictures - Positive word-of-mouth attracts new customer and retains Samontanez, Michaela Jewel
distributed to media. existing ones. If the SBO wants to reap the benefits of
Santos, Lyka Rose
7.) Background editorial releases - refer to extra positive word-of-mouth, the following must be maintained:
information (such as biography of the firms general 1. Competent employees; Tagle, Jayson
manager. 2. Proper treatment of people; Tarroza, Jonh Christian
8.) Emergency publicity - refers to the special media 3. Not overcharging;
releases regarding disasters or serious problems like the 4. Not using false claims in advertising;
2009 swine flu threat. 5. Keeping promises to customers;
6. Having a good product or service; and BSBA 1-H
7. Keeping customer happy.