Chapter 5

Financial Aspect

The objective of this chapter is to analyze the financial viability of the

project. This presents and discusses thoroughly the financial forecast of the
proposed business including the financial assumptions, the investment costs, the
financial statements, and the financial analysis. Furthermore, the summary of the
source and uses of funds such as capital structure and cost of capital are shown
herein.

5.1 Financial Assumption

This section shows the calculations, assumptions and methodology used

by the researcher as a basis for the projections of the expected financial
performance of the proposed business.

The following are the financial assumptions to be implemented by

“Pawfection” pet grooming center regarding financial related issues of the entity.
These are based on the data gathered during interview by the researcher from
various competitors in the business industry.

5.1.1 Revenue

This portion of the study discloses the financial assumption with

respect to the computation of revenues for the proposed business,
Pawfection pet grooming center.

1.Sales will increase by 2.9% annually starting from its second year of
operation. The increase is based on the inflation rate.

2. The business used the cost price basis method.

3. All cash receipts will be on cash basis.

4. Net income will be divided equally among the two partners.

5. The Pawfection pet grooming center will be operating at approximately

80% practical capacity.
5.1.2 Expenses

This portion of the study states the financial assumption with

regards to the computation of the expenses for the proposed business,
Pawfection pet grooming center.

1. All expenses are paid in cash and recorded in accrual basis other
than depreciation expense.

2. All pre-operating cost such as training cost, will be expensed as

incurred based on PAS 38 par.69.

3. The wages of the personnel will be assumed constant for 5 years.

4. Income tax of the employees will be withheld.

5. 13th month pay will be provided to the personnel.

6. The SSS, Phil-health, and Pag-Ibig contributions and remittances

will be paid every first week of the following month.

7. Straight line method of depreciation is used in depreciating fixed

assets. The depreciation is constant from first year to fifth year.

8. The materials will be purchased to cover operations up to 1 week.

9. All the expenses related to government agencies will be assumed

constant over the span of 5 years.

10. Permits and licenses will be constant from year 1 to year 5 except
with the community tax.

11. Rent expense will be constant from the first year of operation and in
the next years.

12. Utilities expense will be considered as overhead expense except

utilities that should be classified as period cost.
 13. Repairs and maintenance during the first year will be zero. During
the first year, it will be 2% of the cost of the fixed assets and will increase
by 4.35% each year due to inflation.

14. Pre-operating expenses, start-up, training cost, and promotional

cost are charged to expense.

5.1.3 Taxation

This section of the study discloses the financial assumptions that

probably affect the other sections of the projected financial statements of
the proposed business, Pawfection pet grooming center.

1. Pawfection pet grooming center is a Non-VAT registered entity.

2. The annual gross sales of the business do not exceed Php

3,000,000.00 thus exempt from value-added tax (VAT) under Section 109
(BB) of the National Internal Revenue Code, as amended by Republic Act
(RA) No. 10963.

3. Percentage tax is the applicable business tax for this proposed

Pawfection pet grooming center which imposed a 3% tax of the gross
sales.

4. This tax will be paid within twenty-five (25) days after the end of
each taxable quarter.

5. The newly revised BIR Form 2551Q will be used as the business
will be paying manually.

5.2 Initial Capitalization

The total capitalization of Pawfection pet grooming center will be Php

603,684.55. This investment will be used in the acquisition of the building,
machineries and equipment, supplies, furniture and fixtures, and other
expenditures necessary for the establishment of the proposed business.
Presented below on the next page is the table of investment cost of Pawfection
pet grooming center.

5.3 Sources of Financing

The total start-up financing sources for the proposed business will be
collected from the personal assets of the partners who will contribute
Php301,842.275. It is assumed by the researcher that the prospective owner’s
have the capacity to provide the investment need thus, no borrowings will be
required.

5.3.1. Capital Structure

The capital structure used by the proposed business would be

100% equity to finance its overall operations and growth. All the resources
of financing would come from the partners which happen to be the owner
of the proposed venture. The owner’s will invest exact total amount for the
required investment in the venture. Thus, no borrowings in this proposed
business.

5.4. Projected Financial Statement

 The projected Pawfection pet grooming center financial accounts are
discussed in this section. A variety of users can benefit from the information that
financial statements offer. These include the Balance Sheet, Income Statement,
Cash Flows and Changes in Owner’s Equity. Accordingly, a summary of these
assertions is given on the following page, and its full details are shown in the
exhibit section.

5.4.1. Projected Statement of Financial Performance

This section presents the projected Pawfection pet grooming

center’s financial results. A statement of financial performance offers data
on the total earned revenue and outlays incurred over a specific time
period in order to assess the profitability of the company. The researcher
prepares a five (5) year periods of financial performance for the proposed
Pawfection pet grooming center showing the comparison and the
expenses incurred. The table below shows the summary of Projected
Statement of Financial Performance of the proposed business.

Table No. Statement of Financial Performance

5.4.2. Projected Statement of Financial Position

This section illustrates the firm's overall financial situation. It shows

the control asset, owned liability and the owner’s equity of the business on
given dates. The purpose of balance sheet is to display the company's
financial trends. The researcher prepared a five-year period of the
financial status and condition of the company, including assets, liabilities,
and owner’s equity at year-end. The figure on the next page shows the
summary of the Projected Statement of Financial Position of the proposed
business, Pawfection pet grooming center, which indicates a prominent
increase in the assets of the business implying a growth in size. The first
year total assets is 764,739.26, for the second year 931,726.06, third year
1,102,249.73, fourth year 1,289,423.40 and for the last year assets is
amounting to 1,480,831.30.

5.4.3. Projected Statement of Cash Flows

 This section illustrates the cash flow activities including operating,
investing, and financing. The inflows and outflows of cash during

operations are shown on the statement of cash flows. It also demonstrates

the firm's liquidity throughout a specific time period. In addition, it
evaluates the company's capacity to raise cash to meet its debt
obligations. The figure below shows the summary of Projected Statement
of Cash Flows of the proposed business.

5.4.4. Projected Statement of Changes in Equity

This explains the changes in owner’s capital which results from

earnings and losses. It also provides on how the capital or fund has been
used. The table below is the summary of Projected Statement of Changes
in Equity of the proposed business Pawfection pet grooming center.
5.5. Financial Ratios and Analysis

The researcher used ratio analysis showing the liquidity ratio, the
profitability ratio, the solvency or stability ratio and period, discounted cash flow
adequacy and investment analysis using the payback period and internal rate of
return methods in analyzing the financial performance, position and cash flows of
the business. This is a method of financial evaluation whereby the relationship
between the items found in the Statement of financial Performance, Statement of
financial Position, and Statement of Comprehensive Income or both are being
established.

5.5.1. Liquidity Ratio Analysis

Liquidity ratios are ratios that shows the relationship of a firm’s cash
and other current assets to its current liabilities. Liquid assets are assets
that can be converted into cash quickly without having to reduce the
asset’s price very much. Thus, ratios in liquidity measures those liquid
assets.

5.5.1.1. Current Ratio

Current ratio indicates the extent to which current liabilities

are covered by the current assets expected to be converted to cash
in the near future. Table below shows the current ratio analysis of
the proposed Pawfection pet grooming center.
 The current ratio is computed by dividing the current assets
by the current liabilities. The table shows that Pawfection pet
grooming center has an increasing current ratio which indicates that
it has enough assets to pay its maturing obligations for five years. It
indicates that the said project business is capable in paying back its
short-term assets.

5.5.1.2. Quick Ratio

Quick ratio measures firm’s ability to pay off short-term

obligations without relying on the sales of inventories. Inventories
are typically the least liquid of a firm’s current assets; and if sales
slowdown, they might not be converted to cash as quickly as
expected. Table below shows the current ratio analysis of the
proposed Pawfection pet grooming center.

The quick ratio is computed by deducting inventories in the

total current assets to get the most liquid assets composing in the
business. The amount then is divided in the total current liabilities of
 the proposed business to get each quick ratio every year. Majority
of the composition of the business assets is cash, and thus
acquires higher ratios every year, as business asset’s has more
liquid asset.

5.5.2. Solvency Ratio Analysis

Solvency ratio is a performance metric that helps examine a

company’s financial health. In particular, it enables to determine whether
the company can meet its financial obligations in the long term.

5.5.2.1. Debt-to-Equity Ratio

Debt-to-Equity is one of the most used debt solvency ratios.

It is an important metric which is used to evaluate a company’s
financial leverage. This ratio helps understand if the shareholder’s
equity has the ability to cover all the debts in case business is
experiencing a rough time.

The debt-to-equity ratio is computed by dividing the total

liabilities by the total equity. The figure above shows that the
proposed business has a low debt equity ratio. This means that the
business is facing low risks.
 5.5.5.2. Debt Total Assets Ratio

Debt to assets ratio measures a company’s total debt to its

total assets. It measures a company’s leverage and indicates how
much of the company is funded by debt versus assets, and
therefore, its ability to pay off its debt with its available assets.

The debt total asset ratio is computed by dividing the total

liabilities by the total asset equity. The figure above shows that the
proposed business has a low debt total assets ratio. Therefore, the
lower the ratio, the safer the business.

5.5.3. Profitability Ratio Analysis

Profitability ratio reflects the net result of all of the firm’s financing
policies and operating decisions. These are the ratios that show the
combined effects of liquidity, assets management, and debt on operating
results.

5.5.3.1. Profit Margin

This ratio provides substantial data/result of the percentage

of the result of the operations from its revenue/sales. This is often
called as net profit margin as well.
 The profit margin ratio is computed by dividing net income to
the total sales of the business. The ratios each year is somehow
higher, as the business incurred lower operating expenses. It can
also be seen that ratios are climbing higher each year, because of
the assumptions that sales are increasing at a rate of 2.9% while
some operating expenses remain constant.

5.5.3.2 Return on Total Assets

This measure describes the ratio of net income to the total assets.
This measures percentage of the net income/operational results in
the total assets of the business. Table on the next page shows the
ratio of the return on total assets of the proposed business
Pawfection pet grooming center.
 The return on total assets is calculated by dividing net
income into total assets which measures the extent of income
considering the total assets of the business. It can also be seen
that ratios are getting higher each year indicating a higher return on
total assets as business operation continues.

5.6. Capital Investment Analysis

An investment analysis is a review of prior investment decisions and the

reasoning behind those decisions. Examining and evaluating economic and
market trends, earnings prospects, earnings ratios, and several other indicators
and factors are part of this section's process for deciding on appropriate
investment strategies.

5.6.1. Payback Period

This is the length of time required to recover the cost of an

investment.

Table on the next page shows the payback period of the

proposed Pawfection pet grooming center.
 The proposed business initial investment will be recovered within a 5
year’s. Hence, the proposed business will be profitable and can generate
cash from its operation equal to the partner’s investment.
5.6.2. Net Present Value
Net present value method is a primary discounted cash flow technique
which involves discounting net cash flows to their present value and
comparing the present value with the capital outlay required by the
investment.
5.6.3. Internal Rate of Return
The internal rate of return finds the interest yield of the potential
investment. This is the rate which causes the of the proposed capital
expenditures to equal to the present value of the expected net annual
cash flows or NPV is equal to zero.