Chapter V

FINANCIAL ASPECT

This chapter shows and discusses the financial forecast for the proposed

Green Life Garden Caf including the financial assumptions, the investment cost,

the financial statements and the financial analysis. Moreover, this chapter also

summarizes the source and uses of funds.

5.1 Financial Forecast

This section discusses the financial assumptions, the investment

cost, the financial statements and financial analysis.

5.1.1 Financial Assumption

This section states the financial assumptions to be

implemented by Green Life Garden Caf regarding financial related

issues of the business. These are based on the data gathered by

the researcher from interviews in the competitors in the business

industry.

5.1.1.1 General Assumption

1. The business would be in the form of partnership.

2. The partners would share the profit equally.

3. Philippine Peso will be the currency used in preparing

the projected financial statements.

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4. There will be 2 partners and has a contribution of

1,200,000.00 each in the form of cash.

5. All receipts will be on a cash basis.

6. Indirect method of cash flows will be used.

7. Withdrawal on the amount 10% of the net income is

allowed to partners every year.

5.1.1.2 Revenue

This portion of the study states the financial

assumption with regards to the computation of the revenues

for the proposed Green Life Garden Caf.

1. An increase of 1.91% per year in the sales is

assumed and increase in price by 2.7% each year

due to inflation.

2. The revenue of the proposed business will be coming

from the sales of the different coffee products and

snacks offered by the business.

3. Increase in cost of sale would be proportionate to the

sales of each year and by the inflation rate in the

market as of this date.

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5.1.1.3 Expenses

This portion of the study states the financial

assumption with regards to the computation of the expenses

for the proposed business.

All expenses are on cash basis other than the

depreciation expense.

Last month cost of SSS, Pag-Ibig, Philhealth and

Withholding tax are the liabilities of the proposed

business which will be paid on the next year.

All expenses related to government agencies will be

constant over the years.

Salaries of the personnel will increase by 2% every

after 3 years.

90% of purchased materials will be consumed during

the first year, and the remaining 10% will be the

inventory at year end. Purchases will increase each

year by 2.7 % due to inflation and increased also by

the rate of the increase in sales.

Supplies will increase by 2.7% starting on the second

year due to inflation. And 90% of the amount of

supplies in the year will be expensed.

Straight line method of depreciation is used in

depreciating the fixed assets.

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There will be a miscellaneous expenses during the

operation which would one percent of the total

operating expenses.

Repairs and Maintenance will be 2% of the cost of

fixed assets during the first year end a 2.7% increase

for the next years due to inflation.

Advertising expense will decrease by during the

second year. And for the next years, advertising

expense will be zero because of the help of social

media.

Permits and licenses will be constant from year 1 to

year 5 except for Community tax.

Pre-operating Expenses, start-up, pre-opening,

training cost, advertising and promotional cost are

charged to expense. Since according to PAS38 these

items must be charged to expense in the year

incurred.

Other expenses remain constant every year.

Income tax rate is 30%. And payable would be

recorded for the last quarter of each year.

5.1.2 Investment Cost

The total capitalization of Green Life Garden Caf will be

P2,400,000 pesos. This investment will be used in the acquisition of

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equipment and supplies and for the rental of other supplies needed by the

business. This investment will also be used for the expenses during the

first year of operation. Thus, this will also be used for the rental of the land

area for establishing the coffee house.

The table on the next page summarizes the total investment of

Green Life Garden Caf.

Table 14

Investment Cost

Particular Amount
Cash 144,404
Inventory (raw materials) 395,330
Shop Supplies 1,215
Prepaid rent (land) 360,000
Tools 5,720
Machinery & Equipment 148,951
Furniture & Fixture 36,865
Building 1,200,000
Land Improvement (Landscape Expense) 100,000
Business Permits & Licenses 4,215
Advertising Expenses 3,300
Total Investment 2,400,000

5.1.3 Financial Statement

This section shows the projected financial statements of the

proposed business. Financial statements provide information that is

useful in making decision by a wide range of users. These are

Balance Sheet, Income Statements, Cash Flows and Statement of

Changes in Equity. In line with this, a summary of these statements

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are presented below and its detailed information is shown in Exhibit

section.

5.1.3.1 Projected Statement of Financial Position

This provides a clear picture of the financial condition

of the firm as a whole. It shows the assets controlled,

liabilities owed and the ownership of the business as of a

given date. The purpose of balance sheet is to show the

financial pattern of the business. The researchers have

prepared a five (5) year period of the financial position and

condition for Green Life Garden Caf.

Table 15

Summary of Comparative Statement of Financial Position

Green Life Garden Caf

Statement of Financial Position

Year 1 Year 2 Year 3 Year 4 Year 5

Assets

Current Assets 1,358,392.32 1,464,262.82 1,618,191.16 1,802,864.15 2,029,716.64

Non Current Assets 1,409,830.17 1,328,124.33 1,246,418.50 1,164,712.67 1,083,006.83

Total Assets 2,768,222.49 2,792,387.15 2,864,609.66 2,967,576.82 3,112,723.48

Liabilities & Equity

Current Liabilities 76,873.44 44,428.63 46,272.69 49,911.47 55,323.08

Equity 2,691,349.05 2,747,958.52 2,818,336.98 2,917,665.35 3,057,400.40

Total Liabilities &
Equity 2,768,222.49 2,792,387.15 2,864,609.66 2,967,576.82 3,112,723.48
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5.1.3.2 Projected Statement of Financial Performance

This shows the results of operation during accounting

period. Income Statement summarizes the amount of

revenues earned and expenses incurred by the business in

a particular period to see and to measure the profitability or

fruitlessness of the business. The researchers have

prepared a five (5) year period financial performance for the

proposed business showing the comparison of the revenues

and expenses incurred.

The table below shows the results of the Summary of

Income Statement to determine the profitability of the

proposed business.

Table 16

Summary of Comparative Statement of Financial Performance

Green Life Garden Caf
Statement of Financial Performance
Year 1 Year 2 Year 3 Year 4 Year 5

Net sales 6,323,906.25 6,618,699.57 6,927,234.88 7,250,152.78 7,588,123.73

Cost of Sales 4,297,768.27 5,018,393.54 5,295,085.12 5,545,502.82 5,803,665.58

Gross Profit 2,026,137.98 1,600,306.02 1,632,149.76 1,704,649.96 1,784,458.15

Operating
Expenses 1,492,452.18 1,499,217.68 1,506,473.95 1,527,277.87 1,534,931.27
Net Operating
Profit 533,685.81 101,088.35 125,675.81 177,372.09 249,526.88
Income tax
expense 160,105.74 30,326.50 37,702.74 53,211.63 74,858.06
Net Income after
Tax 373,580.06 70,761.84 87,973.07 124,160.46 174,668.82
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5.1.3.3 Projected Statement of Cash Flows

This shows the cash flow activities, particularly

operating, investing and financing activities of the business.

This is useful in the determination of the firms liquidity in a

given period of time. Cash flow statement shows the

outflows and inflows of cash incurred and received during

the operation. It also assesses the ability of the business to

generate cash in order to pay its obligations.

The table on the next page shows the summary of the

five-year Projected Cash Flows for the Green Life Garden
Caf.

Table 17
Summary of Comparative Statement of Cash Flows
Green Life Garden Caf
Statement of Cash Flow
Year 1 Year 2 Year 3 Year 4 Year 5
Cash Flow from Operating Activities
452,850.28 50,429.53 141,381.94 182,229.37 233,666.85
Cash Flow from Investing Activities
- - - - -
Cash Flow from Financing Activities
(74,716.01) (14,152.37) (17,594.61) (24,832.09) (34,933.76)
Beginning Cash Balance
144,403.74 522,538.01 558,815.18 682,602.50 839,999.79
Ending Cash Balance
522,538.01 558,815.18 682,602.50 839,999.79 1,038,732.87
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5.1.3.4 Projected Statement of Changes in Equity

This explains the changes in equity resulting from

earnings or losses. It also provides useful information on

how the capital or fund of an entity is utilize and use.

The following table shows the summary of the five-

year projected Statement of Changes in Equity for the Green

Life Garden Caf.

Table 18
Projected Statement of Changes in Equity

Green Life Garden Caf

Projected Partner's Equity

YEAR 0 YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5

Beginning
Capital 2,400,000.00 2,392,485.00 2,691,349.05 2,747,958.52 2,818,336.98 2,917,665.35
Balance
Add:
Net Income
(7,515.00) 373,580.06 70,761.84 87,973.07 124,160.46 174,668.82
(Loss)
Additional
Investment
Total 2,392,485.00 2,766,065.06 2,762,110.89 2,835,931.59 2,942,497.44 3,092,334.17

Less :
Withdrawal 0 74,716.01 14,152.37 17,594.61 24,832.09 34,933.76
Ending
Capital 2,392,485.00 2,691,349.05 2,747,958.52 2,818,336.98 2,917,665.35 3,057,400.40
Balance
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5.2 Financial Analysis

The researchers used ratio analysis showing the liquidity ratio,

the profitability ratio, the solvency or stability ratio and cash flow

adequacy and investment analysis using the payback period,

discounted payback period and internal rate of return methods in

analyzing the financial performance, position and cash flows of

Green Life Garden Caf for five years of operation.

5.2.1 Current Ratio

Current ratio measures the ability of the business to pay its

obligations arising from operations.

On the next page, Table 19 shows the Current Ratio Analysis

of the proposed business.

Table 19
Current Ratio Analysis
YEAR Current Assets Current Liabilities Current Ratio

1 1,358,392.32 76,873.44 17.67

2 1,464,262.82 44,428.63 32.96

3 1,618,191.16 46,272.69 34.97

4 1,802,864.15 49,911.47 36.12

5 2,029,716.64 55,323.08 36.69

Formula: Current ratio = current assets/current liabilities

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The above table shows that it 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.

5.2.2 Debt to Equity Ratio

This is a measure of a company's financial leverage. It

indicates what proportion of equity and debt the company is using to

finance its assets.

Table 20 the Debt to Equity Ratio Analysis of Green Life

Garden Caf.

Table 20
Debt to Equity Ratio Analysis
YEAR Total Liabilities Total Equity Debt to Equity Ratio
1 76,873.44 2,691,349.05 0.0286
2 44,428.63 2,747,958.52 0.0162
3 46,272.69 2,818,336.98 0.0164
4 49,911.47 2,917,665.35 0.0171
5 55,323.08 3,057,400.40 0.0181

Formula: Total Liabilities/Partners Equity

The business results a low debt to equity ratio. This is

because, it does not engage in borrowing funds to be use in its

operations. The table above expresses that it is dependent to the

Owners Equity that on debt financing or borrowings. It shows that

the business is described to be owned than owed.

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5.1.1. Rate of Return on Total Assets

This measures the entitys efficiency in using its assets to earn profits.

Table 21 shows the Rate of Return on Total Assets Analysis of Green Life

Garden Caf.

Table 21

Rate of Return on Total Assets Analysis

YEAR Net Income Average Total Assets Return on Assets

1 373,580.06 2,768,222.49 0.1350
2 70,761.84 2,780,304.82 0.0255
3 87,973.07 2,828,498.41 0.0311
4 124,160.46 2,916,093.24 0.0426
5 174,668.82 3,040,150.15 0.0575

Formula: Return on assets = profit/average total assets

The business has a low return on total assets which indicates that

the entity is earning decreasingly in the first 2 years of operation of the

business, but on the third year, we can see that the return increases and

shall continue to increase in the projected financial statements which

explains how efficient is the management at using its assets to

generate its earnings.

5.1.2. Rate of Return on Sales

It indicates the entitys ability effectively utilize its advantage in shaping the

pricing policy.
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Table 22
Rate of Return on Sales Analysis
YEAR NET INCOME REVENUE Net Profit Margin
1 373,580.06 6,323,906.25 0.0591
2 70,761.84 6,618,699.57 0.0107
3 87,973.07 6,927,234.88 0.0127
4 124,160.46 7,250,152.78 0.0171
5 174,668.82 7,588,123.73 0.0230

Formula: Return on sales = profit/ net sales

It shows that the Green Life Garden Caf will have a low rate of return on

sales indicating a decreasing result in net income in the starting years of the

business. It also indicates though that it is still in good condition because after

several years, the rate of return on sales will increase.

5.1.3. Rate of Return on Investment

Rate of Return on Investment or the Return on Owners Equity measures

the percentage of profit generated by investment.

Table 23
Rate of Return on Investment Analysis

YEAR NET INCOME Average Equity Return on Investment

1 373,580.06 2,691,349.05 0.1388
2 70,761.84 2,719,653.79 0.0260
3 87,973.07 2,783,147.75 0.0316
4 124,160.46 2,868,001.16 0.0433
5 174,668.82 2,987,532.88 0.0585

Formula: Return on investment = profit/ average equity

The above table shows that the Green Life Garden Caf will have a low

Rate of Return on Investment indicating on the first 2 years and that partners are
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to expect low return on their investment in just a short term perspective but could

surely hope for an increasing return as the business operates on longer periods.

5.1.3.1 Total Asset Turnover

The asset turnover ratio calculates the total revenue for every amount of

assets a company owns. It measures the ability of a company to use its assets to

efficiently generate sales.

Table 24
Total Asset Turnover Analysis
YEAR Sales Total Assets Asset turnover
1 6,323,906.25 2,768,222.49 2.28446
2 6,618,699.57 2,792,387.15 2.37027
3 6,927,234.88 2,864,609.66 2.41821
4 7,250,152.78 2,967,576.82 2.44312
5 7,588,123.73 3,112,723.48 2.43778
Formula: Asset turnover = revenue/ total assets

It shows that Green Life Garden Caf has increasing total asset

turnover indicating that it is generating higher sales than total assets. The

proposed business has a good performance and it shows a good

measure in the ability of a company to use its assets to efficiently

generate sales.

5.2. Investment Analysis

An investment analysis is a look back at previous investment decisions

and the thought process of making the investment decision. This section involves

examining and assessing economic and market trends, earnings prospects,

earnings ratios and various other indicators and factors to determine suitable

investment strategies
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5.2.1.1. Payback Period

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

Table 25
Payback Period Analysis

Payback Period
YEAR Annual Cash Flow Cumulative Total
0 (2,400,000.00)
1 522,538.01 (1,877,461.99)
2 558,815.18 (1,318,646.81)
3 682,602.50 (636,044.31)
4 839,999.79 203,955.48
5 1,038,732.87 1,242,688.35
Payback Period is 3.76 years

The proposed business has a payback period of 3.76 years. It indicates

that Green Life Garden Caf will recover its investment cost within 3 years and 9

months. It expresses that proposed Green Life Garden Caf is desirable for

investment positions.

5.3. Sources and Uses of Funds

The total investment will be obtained from the personal assets of the

prospective partners who will contribute 1,200,000 pesos each. The researcher

assumed that the prospective partners have the capacity to acquire the total

investment needed thus, no borrowings will be required.

The 2,400,000.00 total investments will be used in the acquisition of

machineries and equipment, furniture and fixtures, supplies and inventories, and

other necessary expenditures in order for Green Life Garden Caf to start its

operation.