IS SCHOOL OF TECHNOLOGY AND SKILLS DEVELOPMENT, INC.

ENTREPRENEURSHIP
MODULE 12
DEVELOPING A BUSINESS MODEL

Prepared by: Ariel M. Morales

LEARNING OBEJECTIVES:
1. Discuss the function of forecasting in preparing a Firms projected revenues and costs.

DEVELOPING A BUSINESS MODEL

Every aspiring entrepreneur must first develop a business model or plan before venturing
into a business, whether this is a micro, small, or medium enterprise. Preparing a business
model is important for the following reason:

 The business model serves as an extension of the feasibility study

 It combines all the factors in the business plan to produce a complete picture of the
proposed enterprise
 It conveys the vision, mission and objectives of the enterprise to internal and external
parties.

The business model must contain at least the following:

 Forecast of business revenues

 Calculation of costs
 Estimation of profits
 Projections of its five-year financial statements

FORECASTING BUSINESS REVENUES

Forecasting means estimating or predicting future business performance. A revenue forecast
includes the income source such as sales, services, interest on bank deposits, dividends and
commissions.
BELOW ARE EXAMPLES OF SOME TAXPAYERS AND THEIR SOURCES OF INCOME:

TAX PAYER INCOME SOURCES

   
Furniture maker Sale of furniture
Bakery owner Sale of breads, cakes, biscuits
Convenience store owner Sale of grocery items, ice cream, softdrinks
Physician, lawyer, accountant, engineer Professional fees
Depositor Interest on savings and time deposits
Stockholder Cash dividends
Salesperson Salaries, commissions
Apartment owner Rental income

Let us take the sales of goods as an example. Table illustrates the estimated
annual revenues derived from the sales of goods over a five year period.

TABLE 1: PROJECTED REVENUES FROM SALES

YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5

440,400.00 566,925.00 658,418.00 763,307.00 932,080.00

Estimated sales are based on the results of the sole proprietor’s interviews with small trading
businesses in the neighborhood. To attract customers and still make a profit, the mark up
should range only from 5.59% to 5.82%. To compute for the mark up, divide Revenues (Sales)
by Costs. Estimated daily cash sales range from Php 1, 206.58 to Php 2, 553.64. The daily figure
is multiplied by 365 days to arrive at the yearly revenue.
FORECASTING COSTS
COSTS refer to expenditures incurred in generating revenues. Forecasting costs incurred in
manufacturing and trading businesses have two components:

 Cost of Goods Sold

 Selling and administrative expenses

In the manufacturing business, the cost of goods sold is computed as follows:

1. Add the cost of raw materials, direct labor (salaries and wages) and indirect materials
(items needed in the manufacture of goods, such as nails and paint) to arrive at the cist
of goods manufactured.
2. Deduct ending inventories of raw materials, work- in- process and finished goods from
the cost of goods manufactured to arrive at the cost of goods manufactured and sold.

Note that ending inventories for the current year becomes the beginning inventories for
the incoming year.

SELLING EXPENSES - includes the salaries, commissions, and entertainment expenses of

salespeople and representatives.

ADMINISTRATIVE EXPENSES – usually consist of taxes, licenses and fees, electricity, water and
telephone expenses, salaries/wages of accountants, clerks, janitors and transportation
expenses.
 TABLE 2: Illustrates the Cost of Goods Sold and selling administrative expenses. Total costs
are determined by adding these two components.

Estimated costs of goods were based on the tags affixed on the various items found in a mall.
Merchandise Inventory at the end of the year average Php 64,350.40 ( sum of ending
administrative expenses were computed based on the actual experience of the proprietor’s
immediate family.

TABLE 2: PROJECTED COSTS

(In Philippines Peso)

PARTICULARS YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5

           
Cost of Goods Sold          

Beginning Inventory - 36,000.00 49,225.00 71,607.00 69,000.00

Purchases 360,000.00 456,250.00 547,500.00 620,500.00 803,000.00

Total goods available for sale 360,000.00 492,250.00 596,725.00 692,107.00 872,000.00

Ending Inventory 36,000.00 49,225.00 71,607.00 69,000.00 95,920.00

Total Cost of Goods Sold 324,000.00 443,025.00 525,118.00 623,107.00 776,080.00

Selling and Administrative Expenses          

Wages 30,000.00 30,000.00 31,200.00 31,200.00 36,000.00

Transportation 1,200.00 1,500.00 1,300.00 1,400.00 2,000.00

Rent 36,000.00 36,000.00 36,000.00 38,000.00 38,000.00

Light and water 25,200.00 26,400.00 28,800.00 27,600.00 30,000.00

Total selling and administrative expenses 92,400.00 93,900.00 97,300.00 98,200.00 106,000.00

TOTAL COSTS 416,400.00 536,925.00 622,418.00 721,307.00 882,080.00

FORECASTING BUSINESS PROFITS

The projected incomes from operations refer to the difference between revenues and costs

In the example, the net profit or net income is the difference between the total revenues on
Table 1 and the total costs presented on table 2. Table 3 shows the computations of Projected
Annual Profits for a five-year period.

TABLE 3. PROJECTED PROFITS

PARTICUALRS YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5

           

440,400.0 566,925.0 658,418.0 763,307.0

REVENUES 0 0 0 0 932,080.00

416,400.0 536,925.0 622,418.0 721,307.0

COSTS 0 0 0 0 882,080.00

PROFIT 24,000.00 30,000.00 36,000.00 42,000.00 50,000.00

However, business operations do not always generate profits. A business incurs losses when
costs exceed revenues. If revenues and costs are equal, the business breaks even.

CREATING THE ENTERPRISE’S FIVE YEAR PROJECTED INCOME

STATEMENT:
Using the forecasted data found on Tables 1 to 3, the prospective entrepreneur can now
prepare the enterprise’s five-year projected income statements. The steps are shown below.
 1. Start with sales
2. Deduct the cost of goods sold to arrive at the gross profit.
3. Subtract selling and administrative expenses and depreciation from gross profit to
determine net profit from operations.

TABLE 4. PROJECTED INCOME STATEMENTS (YEAR 1 TO YEAR 5)

PARTICULARS YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5

           

Sales 440,000.00 566,925.00 658,418.00 763,307.00 932,080.00

Cost of goods sold          

Beginning inventory - 36,000.00 49,225.00 71,607.00 69,000.00

Purchases 360,000.00 456,250.00 547,500.00 620,500.00 803,000.00

Total goods available for sale 360,000.00 492,250.00 596,725.00 692,107.00 872,000.00

Ending inventory 36,000.00 49,225.00 71,607.00 69,000.00 95,920.00

Cost of goods sold 324,000.00 443,025.00 525,118.00 623,107.00 776,080.00

133,300.0
Gross Profit 116,400.00 123,900.00 0 140,200.00 156,000.00
Selling and Administrative
expenses          

Wages 30,000.00 30,000.00 31,200.00 31,200.00 36,000.00

Transportation 1,200.00 1,500.00 1,300.00 1,400.00 2,000.00

Rent 36,000.00 36,000.00 36,000.00 38,000.00 38,000.00

Light and water 25,200.00 26,400.00 28,800.00 27,600.00 30,000.00

Total 92,400.00 93,900.00 97,300.00 98,200.00 106,000.00

NET PROFIT 24,000.00 30,000.00 36,000.00 42,000.00 50,000.00

To obtain the trend in revenues, costs and profits for a five year period, data from tables above
were presented on an annual basis using a spreadsheet/worksheet. If incomes, expenses and
profits consistently go down each year, then the trend is considered downward. But if incomes,
expenses and profits go up in one year, drop the following year, then move up again in the next
year, the business trend is described as irregular.

In our example, the figures for revenues. Costs, and profits all show an upward trend. Hence,
the entrepreneur can implement the business plan,

Assessment:
1. Prepare the Income Statement of Strauss Mini Market, Inc. for the month of
December 2019.

Sales P 560,000.00
Cost of Goods Sold 220,000.00
Wages 106,000.00
Rent 25,000.00
Lights and Water 13,200.00
Transportation 9,950.00
Office supplies 2,500.00
Repair and maintenance 1,800.00

2. Compute the PROJECTED COSTS of MANG JUAN'S MILK TEA for the month of
October 2021.

DESCRIPTION AMOUNT
   
PURCHASES 18,600.00
ENDING INVENTORY 5,200.00
BEGINNING INVENTORY 3,820.00
WAGES 14,300.00
TRANSPORTATION 1,350.00
RENT 5,000.00
LIGHTS AND WATER 2,300.00
TAXES 5,800.00
TELEPHONE AND COMMUNICATION 1,625.00