ENTREPRENEURSHIP

Governor Pack Road, Baguio City, Philippines 2600

Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: ABM 12
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph

MODULE 7 – ENTREP Subject Teacher:

Managing The Finance Function Of The Enterprise

Learning Objectives:
At the end of this module, the learners are expected to:
a. define entrepreneurial finance;
b. forecast sales;
c. forecast costs; and
d. forecast profits

The process of making financial decisions for a start-up business is called entrepreneurial finance.
While finance as a function is commonly operative only after a business is established, it may
nevertheless be used as a means to make forecasts on financial information necessary to come up
with good economic decisions for a new business venture. The proper application of tools for
forecasting must be clearly understood as regards new or start-up businesses and established
businesses. Unlike established businesses, no historical financial data is available yet for a start-up
business. Thus, the content of the forecasts to be performed by a new venture shall solely be based on
estimates. A reliable means of acquiring estimates on financial data is through benchmarking.
Benchmarking is used to acquire legally available information about other business enterprises for
purposes of comparing this set of information with those of the start-up business.

In this module, the finance function of a new venture shall focus on developing forecasts on the
following accounts:

1. Sales;
2. Cost; and
3. Profits.

Sales Forecasting

In forecasting the sales, the business enterprise must set an estimate of its initial sales during the
first year of operations. As mentioned in the introduction, since no historical data is available, it is
strategic to perform benchmarking on the pertinent information pertaining to established businesses
who belong to the same line of business or industry. To make the benchmarked information more
reliable, the following factors shall be considered:

a. The size of the business- The existing business subject of benchmark must have the same or nearly
the same size as that of the new venture performing the benchmark. The start-up business must
evaluate the similarity between its capacity to manufacture goods with those of other businesses
already established in the industry.

b. Products sold by the business- The start-up business must ensure that the subject of its benchmarking
is a business selling same kind of products or are at the least, substitutes of the products sold by new
venture.

c. Demographics of the customers of the business- The start-up business must also ensure that the
business enterprise subject of the benchmarks sells its products to the same target market. This will
become a basis for forecasting the increase in sales brought about by the changing behavior of the
customers affecting the demand for the products offered.

Entrepreneurship Page 1 of 4
 ENTREPRENEURSHIP
Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: ABM 12
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph

MODULE 7 – ENTREP Subject Teacher:

Trend in Sales. The trend in sales, which is the main component of the sales forecast, must be
presented in terms of percentage. An increasing percentage is expected in the sales forecast.

Illustration:

Bry V. Enterprise is a newly established business in Baguio City. It will engage in selling branded
motorcycle parts. The following information about other like businesses were gathered through
benchmarking for its reference:

Established Businesses Nature Average increase in

annual sales (In 5-year
time)
Choo A. Motorcycle Parts Selling motorcycle parts, mostly 20%
(authorized distributor of branded.
Kawasaki parts)
Ariston’s Surplus Parts Selling surplus motorcycle parts. 10%
Keyni J. Service Center Provides services for upgrade and 15%
maintenance of motorcycle.

Using the information above, the best business with which the estimates may be based from is
Choo A. Motorcycle Parts, being closest to the nature of the new venture. As such, the new venture
may use 20% as the basis for its forecasted increase in sales concerning the first years of its operations.

Cost Forecasting

Corollary to the expected increase in sales, the costs, both in producing the goods as well as
those attributed to operating expenses (Selling and Administrative Expenses) shall also increase. This is
a justification of the “matching concept” in the generally accepted accounting principle. As sales
increase, the corresponding costs and expenses shall also increase. Strictly speaking, the costs and
expenses that are directly related to sales are Cost of Goods Sold and Selling Expenses. Administrative
expenses don’t usually increase alongside the increase in sales, except when the extent of
administrative needs expands as sales and production also expands.

The phrase “Minimize costs to maximize profits” is controlling in cost forecasting. While costs and
expenses usually increase alongside increase in sales, the business enterprise may nevertheless employ
strategies of minimizing costs. Economies of Scale is the concept adopted by many businesses to
minimize the costs incurred. When the business enterprise becomes more efficient with the use of its
inputs of production, larger levels of output may be had with only little cost incurred in producing them.

Profit Forecasting

Profit is the positive result of the operations of the business enterprise. A profit is derived when
the amount of sales or revenue exceeds the total cost of goods sold and operating expenses. In
forecasting the level of profits for a particular period of time, business enterprises may set-up a certain
percentage of expected increase. However, for purposes of simplifying the financial forecast, the
increase in profits is usually made dependent on the forecasted increases in sales and costs. As such,
when sales increase, profits are usually expected to increase as well.

Entrepreneurship Page 2 of 4
 ENTREPRENEURSHIP
Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: ABM 12
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph

MODULE 7 – ENTREP Subject Teacher:

Illustration

Bry V. Enterprise is a newly established business in Baguio City. It will engage in selling branded
motorcycle parts. For the first accounting year, it forecasted the level of its sales, cost of goods sold,
expenses, and profit as they appear in its Income Statement for the first year of operations 2021:

Bry V. Enterprise
Income Statement
For the Year Ended December 31, 2021

Sales P 2,000,000
Less: Cost of Sales 800,000
Gross Profit P 1,200,000
Less: Operating Expenses
Selling Expenses
Salaries Expense P 150,000
Advertising Expense 30,000
Rent Expense 70,000
Supplies Expense 12,000 262,000
Administrative Expenses
Salaries Expense 50,000
Utilities Expense 10,000
Communication Expense 5,000
Depreciation Expense 150,000
Miscellaneous Expense 3,000 218,000
Net Profit P 720,000

5-year Period: Forecasted Levels of Sales, Costs and Expenses, and Net Profit.

Based on the benchmarked data, Bry V. Enterprise sets a constant 20% annual increase on its sales.
The Cost of Sales is expected to increase at the same rate. As part of its strategy, it forecasted that
sales-related expenses will only increase at a rate of 15% annually, while administrative expenses
increase at a rate of 10% annually for the first 5 years of its operations. The 5-year forecast on sales,
cost and profit is presented as follows (In ₱ 000’s):

Accounts 2021 2022 2023 2024 2025

Sales (20%) 2,000 2,400 2,880 3,456 4,147

Less: Cost of Sales (20%) 800 960 1,152 1,382 1,659
Gross Profit 1,200 1,440 1,728 2,074 2,488
Less: Operating Expenses
Selling Expenses (15%)
Salaries Expense 150 173 198 228 262
Advertising Expense 30 35 40 46 52
Rent Expense 70 81 93 106 122
Supplies Expense 12 14 16 18 21

Entrepreneurship Page 3 of 4
 ENTREPRENEURSHIP
Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: ABM 12
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph

MODULE 7 – ENTREP Subject Teacher:

Administrative Expenses (10%)

Salaries Expense 50 55 61 67 73
Utilities Expense 10 11 12 13 15
Communication Expense 5 5.5 6.1 6.7 7.3
Depreciation Expense 150 165 182 200 220
Miscellaneous Expense 3 3.3 3.6 4 4.4
Net Profit P 720 P 899 P 1,118 P 1,385 P 1,711

References:
BAL 338.04
Kuratko, D. (2012). Entrepreneurship: An Introduction. Pasig City: Cengage Learning Asia
K9654
2012 Pte. Ltd.
BAL 658.421 Batisan, R. (2016). Entrepreneurship. Makati City: Diwa Learning Systems Inc
B3208
2016

BAL 658.421
Aduana, N. (2016). Entrepreneurship in Philippine Setting. Quezon City: C&E Publishing,
B3208
2016 Inc.

Kotler, P., & Armstrong, G. (2013) Principles of marketing (14th ed.). Harlow, England:
Pearson Education Ltd.

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