BMSH2301

THE FINANCIAL ASPECT

Starting a business requires careful planning and preparation to anticipate and prevent financial challenges.
Entrepreneurs must place a high priority on conducting meticulous research and accurately estimating
expenses. This proactive approach ensures a smoother start and helps make informed decisions about
investments and cost control. Good financial management helps businesses prioritize investments based on
their potential return and impact on competitiveness. It also enables tracking and monitoring of asset
utilization and performance for maintenance and replacement decisions (Berry, 2021).

Estimating Business Start-up Costs

Start-up costs refer to the expenses a business incurs before its operations. These costs include the various
bills and expenditures that must be covered in preparation for the business's grand launch. Every business has
its unique start-up costs to consider. However, businesses typically fall into three (3) categories: brick–and–
mortar stores, online ventures, or service–based organizations. A precise estimate of start-up expenses helps
entrepreneurs avoid unnecessary risks and keeps them focused during unpredictable and volatile periods.

Types of Start-up Costs:

Start-up Expenses
These expenses or upfront costs occur before the business's launch and before any revenue is generated. The
expenses should be categorized into two groups: one–time and ongoing. Separating them allows the
entrepreneur to precisely determine the resources required for successfully launching the business.
A. One–time expenses
• Necessary equipment like cash registers, machinery, or vehicles
• Permits and licenses, such as city, county, and state licensing
• Computer or technology equipment
• Down payment for office or store
• Initial inventory
• Initial office supplies
• Signage and office renovation
• Office or business furniture and fixtures
B. Ongoing expenses
• Rent or mortgage payment
• Accounting services
• Taxes and legal services
• Business Insurance
• Payroll and employee benefits
• Office Supplies
• Website hosting and maintenance
• Travel expenses such as flight fees or gasoline
• Utilities like electricity, gas, water, phone, and internet
• Marketing materials
• Ongoing inventory
• Loan or credit payments

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These are just a handful of the potential costs to be considered. Some will remain fixed, others
will operate as variable costs, and some may shift between the two (2) over time. Organizing
expenses from the beginning helps entrepreneurs track their business' costs and find ways to
reduce them.

Start-up Assets
These costs refer to the expenses incurred when acquiring long–term assets to initiate the business. Although
having cash in the bank is undoubtedly essential for any start-up, there are several other valuable assets that
entrepreneurs should consider investing in:
• Starting inventory
• Computers or other technological equipment
• Office equipment
• Office furniture
• Vehicles

It is necessary to separate costs into assets and expenses because expenses are deductible against income,
reducing taxable income. Assets, on the other hand, are not deductible against income. By separating the two,
the business has the potential to save money on taxes.

Cash
Cash requirements provide an essential assessment of a start-up company's initial funds in its checking account
during its commencement. Initially, the entrepreneur's cash balance is the money obtained from investments
or loans minus the money spent on expenses and assets.

Capital Funding Strategies

Utilizing knowledge and context from prior experiences to define a course for the business is essential to
creating and implementing a solid revenue plan. The following models of capital funding strategies are:
• Personal investment. A person invests and manages financial instruments, such as stocks, bonds,
real estate, and others, as a personal investment. Individual investors must create investment
plans and frameworks based on their unique characteristics.
• Love money. It is money given to a spouse, parents, friends, or other loved ones. It is commonly
known as "patient capital," which will be repaid as your business's profits rise.
• Venture Capital. Investors provide venture capital, private equity, and financing to small and start-
up businesses that they believe have long–term growth potential. Wealthy investors, investment
banks, and other financial institutions typically provide venture capital in exchange for shares of
stocks.
• Loans. Loans are the most common form of funding for small and medium-sized businesses. A
sum of money is advanced to the borrower by the lender, typically a government agency, financial
institution, or corporation. The borrower agrees to a set of conditions in return, including any
finance charges, interest, and repayment date.
• Angels. Angels are typically wealthy individuals or retired executives who make direct investments
in privately held small businesses. In addition to their experience and extensive network of
contacts, they frequently serve as leaders in their respective fields and contribute technical and
managerial expertise. In exchange for putting their money at risk, they reserve the right to oversee
the management practices of the business.
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• Business Incubators. Future businesses and start-ups are frequently invited to share incubator
spaces and technical, administrative, and logistical resources with other established businesses.
An incubator, for instance, might let other businesses use its laboratory so that a new business
can develop and test its products for less money before starting production. This support often
helps businesses in cutting–edge fields like biotechnology, information technology, multimedia,
and industrial technology.
• Crowdfunding. A type of fundraising called "crowdfunding" involves a business asking the general
public for money, typically in exchange for equity in the business. Most of the time, it involves a
private business requesting many people for small donations. It contrasts the standard method of
raising capital through venture capitalists or angel investors, in which a small group of actors
invests enormous amounts of money in the business.
• Grants and Subsidies. Grants can be used for specific things and can be paid without repaying. On
the other hand, subsidies are defined as direct contributions, tax breaks, and other special
assistance governments provide to businesses to offset operating costs.

Financial Statements
The Four (4) Financial Statements
Depending on the business size, preparing general–purpose financial statements can be simple or complex.
Some statements need footnote disclosures, while others can be presented without any. Details generally
depend on the purpose of the financial statements.
A. Income Statement. The income statement is a financial statement that shows a company's
revenues, expenses, and net profit over a specific period of time.

Figure 1: Sample Income Statement

Source: https://slideplayer.com/slide/8884764/

Importance of Income Statement (Tripathi, 2018):

• The income statement helps business owners understand their company's financial situation
and make fast and well–informed decisions about business expenses.
• An income statement gives stakeholders, shareholders, and the business owner insight into
the business's financial state.

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• The income and other financial statements (balance sheet and cash flow statement) will
provide the necessary financial data to calculate business taxes.

B. Statement of Owner’s Equity (Retained earnings). A statement of owner's equity is a financial

statement that shows the changes in the owner's equity during a specific period of time. It includes
information such as the beginning and ending balance of the owner's equity, net income or loss,
additional investments made by the owner, and any withdrawals or distributions taken by the
owner. (CFI, 2022).

Figure 2: Sample Retained Earnings Statement

Source: https://slideplayer.com/slide/8884764/

Importance of Statement of Owner’s Equity

• The statement of owner's equity helps stakeholders understand how the owner's equity has
changed and what factors have contributed to those changes.
• These profits can be kept for a variety of reasons, including spending on new machinery and
equipment, investing in research and development, or engaging in other activities that have
the potential to propel the business forward.
• It is used to evaluate the financial health and performance of the business.

C. Balance Sheet (Statement of Financial Position). Based on the definition provided by Riccio (n.d),
The balance sheet shows a company's financial position at a specific point in time. It provides a
snapshot of its assets, liabilities, and shareholders' equity.

The balance sheet is divided into main sections: assets and liabilities.
1. The assets include cash, accounts receivable, inventory, and property.
2. Liabilities consist of accounts payable, loans, and other obligations.
3. Shareholders' equity represents the owner's investment and retained earnings.

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Figure3: Sample Balance Sheet

Source: https://slideplayer.com/slide/8884764/

Importance of Balance Sheet (Statement of Financial Position)

• The balance sheet can show a company's financial health at a specific time —typically at the
end of a fiscal year or the end of a month.
• It shows how much money the business owes and how much assets are worth right now.
• It helps monitor the company's performance, spot trends, and implement financial support
strategies using balance sheet data.
• It can help businesses assess the ability to pay bills on time and how to use credit to finance
the business.

D. Statement of Cash Flow. According to Stobierski (2020), It shows how cash is generated from
operating activities, investing activities, and financing activities over a specific period.

The cash flow statement is typically broken into three (3) sections:
• Operating activities detail cash flow generated once the company delivers its regular goods
or services, including revenue and expenses.
• Investing activities include cash flow from purchasing or selling assets—physical property,
such as real estate or vehicles, and non–physical property, like patents—using free cash, not
debt.
• Financing activities detail the cash flow from both debt and equity financing.

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Figure 4: Sample Statement of Cash Flow

Source: https://slideplayer.com/slide/8884764

Importance of Statement of Cash Flow

• Whenever a business reviews any financial statement, it should consider it from a business
perspective. Financial documents provide insight into an organization's financial health and
status.
• Cash flow statements can reveal what phase a business is in, whether it is a rapidly growing
start-up or a mature and profitable company. It can also reveal whether a company is going
through a transition or in a state of decline.
• Using the statement of cash flow, an investor might decide that a company with uneven cash
flow is too risky to invest in, or they might decide that a company with positive cash flow is
primed for growth.
• Cash flow also impacts internal decisions, such as budgeting or hiring (or firing) employees.

Elements of Financial Statement

Financial statements comprise different categories such as assets, liabilities, owner's equity, expenses, and
revenue. These categories may vary depending on the size of the company.
A. Assets. Assets are resources owned or controlled by an individual, company, or organization. It
can provide future economic benefits, generate income, or be used in business operations
(Pineda, 2022).
1. Current Assets. These assets can be converted to cash within one business operation year.
They are useful for covering operational expenses and investments of the business. Current
assets include the following sample accounts:
• Cash – Physical money in the form of coins and banknotes.
• Accounts receivable – Unpaid amount for products or services a company delivers to its
customers.

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• Inventory – The stock of goods or materials that a company holds.

• Prepaid Expense – Expenses that are paid in advance.
2. Fixed (Non-current) Assets. These assets are non–current resources that a company uses to
produce goods and services that have a life of more than one (1) year. Fixed assets are
recorded on the balance sheet as property, plant, and equipment (Pineda, 2022).
• Tangible Fixed Assets include the following sample accounts: Trucks, office furniture,
machinery, buildings, and land.
• Intangible Fixed Assets include the following sample accounts: goodwill, patents,
copyrights, trademarks, and franchises.

B. Liabilities. These are obligations that the law requires to be paid to another organization or
individual. Liabilities are creditor's claims on a company's assets. These claims show how much
creditors would own if the company were to sell off its assets. (Pineda, 2022).
1. Current Liabilities. These are debts that the business has to pay back within the next 12
months. Current debts include the following sample accounts:
• Accounts payable – Unpaid amount of products or services of the business
• Salaries and Wages – Compensation paid to employees for their work or services
• Notes payable – Written promissory note for the debt a company owes to another
business
• Mortgage payable – Amount of money owed by the company for a property loan
2. Non-current (Long-term) Liabilities. These debts are not due for more than 12 months. Non–
current liabilities include the following sample accounts:
• Customer Deposits – Amounts received from customers in advance for goods or services
not yet provided.
• Lease Obligations – Long–term agreements with periodic payments for using property,
equipment, or vehicles.
• Pension Liabilities – Obligations arising from employee retirement plans.
• Long–term Debt – Loans and borrowings with more than one (1) year of maturity.
• Warranty Liabilities – Obligations to repair or replace products with defects or issues
within a specified period after the sale.

C. Equity. It is the sum invested in a company by its owners in addition to any earnings that are still
retained. Equity includes the following sample accounts (Pineda, 2022):
▪ Owner’s Capital – Represents the amount of money or assets that the owner has
contributed to the business
▪ Owner’s Withdrawals – Money withdrawn by business owners for personal expenses or
investments.
▪ Common Stocks – Represent ownership in a company.
▪ Retained Earnings – the portion of a company's net income that is retained and reinvested
in the business

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D. Revenue. It is a measurement of a company's total gross activity. Service and product sales are
two (2) examples. Two (2) categories of revenue (Blakely–Gray, R. 2022):
1. Operating Revenue represents the income generated from selling goods or providing services
directly related to the company's main operations. Operating revenue includes the following
sample accounts.
• Sales – Income generated from the sale of goods or services
• Professional Services – Income earned from providing services to customers or clients
• Rental Income – Income earned from leasing out property or equipment
• Commission Earned – Fees earned from facilitating sales or transactions as a commission
agent
2. Non-operating Revenue is money earned from a side business that has nothing to do with the
company's day–to–day operations. Non–operating revenue includes the following sample
accounts:
• Dividends – Income earned from owning stocks or shares in companies
• Investment Income – Profit gained by investors from their investment activities
• Gains or losses from foreign exchange – Changes in the value of a country's currency
compared to another currency
• Sales of assets – Money earned from selling assets such as properties or equipment

E. Expenses. This is when an asset loses value because it is used to make money. Two (2) categories
of expenses (Blakely–Gray, R. 2022):
1. Operating Expense. These are expenses related to the company’s main activities. The business
will incur these expenses from normal, day–to–day activities. Operating expense includes the
following sample accounts:
• Cost of Sales – Expenses directly related to producing goods or providing services
• Utilities Expense – Costs related to the consumption of various utilities, such as electricity,
gas, water, and internet
• Purchases – Costs related to buying goods or services
• Freight expense – Cost incurred by a company for the transportation of goods or materials
• Advertising Expense – Cost incurred for the promotional activities of the company’s
product or services
• Depreciation Expense – The gradual wear and tear, obsolescence, or decline in asset value.
• Interest Expense – Cost incurred by a company for borrowing funds
• Rent Expense – Amount paid by a business to use a property or space.
• Supplies Expense – Cost of supplies used during a given period
• Licenses Fees and Taxes – Amount of taxes a company owes to the government.
2. Discretionary expense. These expenses are considered nonessential spending. Discretionary
expense includes the following samples:
• Company travel – Costs incurred by the company for its employees' business-related
travel activities
• Investments and innovations – Costs incurred for research and development

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• Employee perks – Represent the amount the company spends for rewarding employees
with good performance
• Office improvements – Costs incurred for office renovations or upgrades
• Employee training – Costs related to training and development opportunities for its
employees.

The Accounting Equation

According to an article by Byjus (n.d.), the accounting equation is the fundamental element of the balance
sheet and the primary principle of accounting. It aids the business in preparing the Balance Sheet and
determining whether the total enterprise's assets, liabilities and owner’s equity are equal.

Assets = Liabilities + Owner’s equity

Table 1. Accounting Equation

The six (6) conclusions to having a balanced equation are:

1. An increase in assets has a corresponding increase in liability.
2. An increase in assets has a corresponding capital increase.
3. An increase in one asset has an opposite decrease in another asset.
4. A decrease in assets has a corresponding decrease in liability.
5. A decrease in assets has a corresponding decrease in capital.
6. An increase in liability has a corresponding decrease in capital.

Take an example to understand the calculation of the Accounting Equation formula in a better manner.
• Problem #1. Suppose you have just started a new business selling cupcakes. Now, you invested
P10,000.00 of your money into the business. The money will be your equity investment and become an
asset for the company.

Asset = Liabilities + Owner’s Equity

P10,000.00 = 0 + P10,000.00

P10,000.00 = P10,000.00
It is balanced.

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• Problem #2. Now, after two (2) years, you want to expand the business but lack the funds to do so.
You decided to get a loan of another P10,000.00 to expand the operations. This will increase your assets
and increase your liabilities.

Asset = Liabilities + Owner’s Equity

P10,000.00 + = P10,000.00 + P10,000.00
P10,000.00

P20,000.00 = P20,000.00
So, it is balanced.

• Problem #3. Now, you have expanded your business; you have suppliers of raw materials. You are not
paying the suppliers in cash but agreed to pay them P4,000.00 after some time. The transaction will be
recorded as payables. This will increase assets and liability as well.

Asset = Liabilities + Owner’s Equity

P10,000.00 = P10,000.00 + P10,000.00
+ P10,000.00 + P4,000.00
+ P4,000.00

P24,000.00 = P24,000.00
Again, it is balanced.

References
Accounting Tools ( 2022) The elements of financial statements https://www.accountingtools.com/articles/what–are–the–elements–of–financial–
statements.html
Bdc (n.d) 8 sources of start–up financing https://www.bdc.ca/en/articles–tools/start–buy–business/start–business/start–up–financing–sources
Bhasin, H (2022) Books of Accounts – Definition, Formats and Types https://www.marketing91.com/books–of–account
Blakely–Gray, R. (2022) What Are the Types of Revenue Small Business Owners Need to Know?
www.patriotsoftware.com/blog/accounting/what–are–types–of–revenue–accounts/
Byjus (n.d.) what is the Accounting Equation? https://byjus.com/commerce/what–is–accounting–equation/
Cabrera, M. B. (2016). Fundamentals of Accountancy, Business & Management Volume 1. Manila: GIC Enterprises & Co., Inc.
CFI Team (2022) Accounts Expenses. https://corporatefinanceinstitute.com/resources/accounting/accounts–expenses/
Frias, A. S. (2016 ). Fundamentals of Accountancy, Business, and Management: A Textbook in Basic Accounting 1 . Quezon: Phoenix Publishing House.
Gordon, J. (2022) Expanded Accounting Equation Explained. https://thebusinessprofessor.com/en_US/accounting–taxation–and–reporting–
managerial–amp–financial–accounting–amp–reporting/expanded–accounting–equation–definition
Hayes, A. (2021) Double Entry: What It Means in Accounting and How It's Used. https://www.investopedia.com/terms/d/double–entry.asp
Rabo, J. S., Tugas, F. C., & Salendrez, H. E. (2016). Fundamentals of Accountancy, Business and Management 1. Quezon: Vibal Group, Inc.
Reyes, V. D. (2016). The Fundamentals in Accounting. Manila: GIC Enterprises & Co., Inc.
Srivastav, A. (2020) Financial Statements. https://www.wallstreetmojo.com/financial–statements/2020
Thakur, M. (n.d.) Accounting Equation Formula https://www.educba.com/accounting–equation–formula/
Weygandt, J. J., Keiso, D. D., & Kimmel, P. D. (2012). Accounting Principles. United States of America.

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