Chapter V

Financial Aspect

This chapter determines the profitability of the proposed business. It

covers detailed information on the total project cost, initial capital

requirements, source of funding, financial statements and financial

analysis.

5.1. Financial Forecast

This section represents the financial assumptions, the investment

cost, and the financial statement. The details of calculations are showed in

this part as well as the assumptions and methodology used as basis for

the projections of the expected financial performance of the business.

5.1.1. Financial Assumptions

The following are the financial assumptions to be implemented

by the proposed business, Lave Water Spa, involving financial related

issues of the entity. These data are gathered by the researcher

through interviews with their competitors.

5.1.1.1. Revenue

This part of the study states the financial assumption

with regards to the computation of the revenues for the

proposed business, Lave Water Spa.

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1. Sales will increase by 5% annually starting from its second

year of operation.

2. All cash receipts will be on cash basis.

3. Sales are VAT inclusive.

5.1.1.2. Expenses

This part of the study states the financial assumption

with regards to the computation of the expenses for the

business.

1. All expenses are on cash basis other than the depreciation

expense.

2. Last month cost of SSS, Pag-Ibig and PhilHealth are the

liabilities of the proposed business which will be paid on the

next year.

3. Salaries of the personnel was based on

https://www.payscale.com.

4. Communication expense is constant for five years.

5. Straight line method of depreciation is used in depreciating

the fixed assets.

6. Repairs and Maintenance will be 7% of the cost of inflatable

fixed assets during the first year while 5% for other office

equipment and furniture, and a 4.1% increase for the next

four years.
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7. Advertising expense will established an increase of 4.1%

considering the inflation.

8. Permits and licenses will be constant from year 1 to year 5

except for Community tax.

9. Pre-operating Expenses, start-up, pre-opening, training

cost, advertising and promotional cost are charged to

expense.

10. Income tax rate is 30%.

5.1.1.3. Others

This part of the study states the financial assumptions

that may affect the other sections of the projected financial

statements of the proposed Lave Water Spa. Philippine Peso

is the currency used in preparing the projected financial

statements.

1. The business is to be established in the form of

partnership.

2. There will be two (2) partners who will be equally

contributing P 10,500,000 each in the form of cash.

3. Profit will be divided equally among the partners.

4. Partners are allowed to withdraw 500,000.00 pesos each

during the first five years.

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5.1.2. Investment Cost

The total capitalization of Lave Water Spa will be

₱22,253,005.00. The partners will contribute the cash investment to

the entity. The investment will be used in the acquisition of

machineries and equipment. This will also be used in purchasing land,

construction of building and facilities that are necessary before the

commencement of the operation. Presented on the table below, the

investment cost of Lave Water Spa.

Table 18
INVESTMENT COST
Particulars Amount
Petty Cash Fund ₱ 20,000.00
Cash in Bank 30,000.00
Property Plant and Equipment 22,033,653
Pre-Operating Expense 169,352
Total ₱ 22,253,005.00
5.1.3 Financial Statements

This section provides information about the financial statements

of the proposed business. These financial statements are Balance

Sheet, Income Statement, Cash Flows and Changes in Partners

Equity. Summary of these statements are presented in this section

and its detailed information are shown in exhibit section.

5.1.1.4. Projected Statement of Financial Position

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This section views the financial condition of the firm as a

whole. The purpose of the balance sheet is to show the financial

status of the business. The researcher prepared a 5 year period

of the financial position and condition of the business showing

assets, liabilities and partners’ equity at the year end.

₱60,000,000.00

₱50,000,000.00

₱40,000,000.00

₱30,000,000.00

₱20,000,000.00

₱10,000,000.00

₱-
Year 1 Year 2 Year 3 Year 4 Year 5
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Figure No. 20
Summary of Projected Statement of Financial Position

The summary shows that the assets, liabilities and

equity of the proposed business continue to increase. The

second year of operations resulted to an increase of the

asset. The business’ operations as shown above is

continuing to increase. This increase is an indication that the

total cash flow of the business is increasing.

5.1.1.5. Projected Statement of Financial Performance

This section shows the financial performance of the

proposed Lave Water Spa. This statement provides information

about the summarized earned revenue and expenses incurred in

a particular period of time to measure the profitability of the

business. The researcher prepares a five (5) year period of

financial performance showing the difference of revenues earned

and the expenses incurred.

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The figure on the next page shows the summary of

Projected Statement of Financial Performance of the proposed

Lave Water Spa business.

The Statement of Financial Performance shows a net

income after tax of ₱6,571,343.41 at the end of year 1.

₱20,000,000.00
₱18,000,000.00
₱16,000,000.00
₱14,000,000.00
₱12,000,000.00
₱10,000,000.00
₱8,000,000.00
₱6,000,000.00
₱4,000,000.00
₱2,000,000.00
₱-
Year 1 Year 2 Year 3 Year 4 Year 5
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Figure No. 21
Summary of Projected Statement of Financial Performance

At the end of the second year, it continues to increase which

resulted to a higher net income up to year 5. The projected financial

performance shown above indicates that the increasing income of

the proposed business is a sign that the business is performing well.

5.1.1.5. Projected Statement of Cash Flows

This portion illustrates the cash flow activities, particularly

operating, investing and financing. Statement of Cash Flows shows

the inflows and outflows of cash during the operation. It assesses

the ability of the business to generate cash in order to pay its

obligations and it shows as well the liquidity of the business. This

shows the cash outflows and inflows of the business which enables

the owner to monitor its cash balance account.

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The figure below shows the Summary of Projected

Statement of Cash Flows of the proposed business, Lave Water

Spa.

₱50,000,000.00
₱40,000,000.00
₱30,000,000.00
₱20,000,000.00
₱10,000,000.00
₱-
Year 1 Year 2 Year 3 Year 4 Year 5
₱(10,000,000.00)
₱(20,000,000.00)
₱(30,000,000.00)

Figure 22
Projected Statement of Cash Flow
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The Projected Statement of Cash Flows of the proposed

business shows cash balance of ₱8,239,183.81 by the end of the

first year of operations. The cash balance of the proposed business

continues to increase by approximately 25.04% which resulted to an

ending cash balance of ₱39,586,962.74 at year 5.

5.1.1.6. Projected Statement of Changes in Equity

This section explains the changes in partners’ capital

that results from earnings and losses. It provides as well the

illustration on how the capital or fund has been used.

The figure below shows the Summary of Projected

Statement of Partners’ Equity.

₱30,000,000.00

₱25,000,000.00

₱20,000,000.00

₱15,000,000.00

₱10,000,000.00

₱5,000,000.00

₱-
Year 1 Year 2 Year 3 Year 4 Year 5
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Figure 23
Summary of Projected Statement of Partner’s Equity

The Projected Statement of Partners’ Equity shows that

at the end of the first year of operations, the partners have an

interest of ₱13,851,743.92 each. The balance of the capital of

each partner continue to increase up to the end of year 5.

Although the partners are allowed to withdraw ₱1,000,000.00

every year in their interest, it still maintained to have an

increasing balance in equity.

5.2. Financial Analysis

The used of ratio analysis is to show and explain the analysis from the

given ratios that to be comprehend. The ratios are the liquidity ratio, the

profitability ratio, the solvency or stability ratio and period, discounted cash
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flow adequacy and investment analysis using the payback period and

internal rate of return methods in analysing the financial performance,

position and cash flows of Water Adventure Park for five years of

operation.

5.2.1. Ratio Analysis

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 determined.

5.2.2. 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. The figure on the next page shows the current ratio

analysis of the proposed Lave Water Spa business.

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45,000,000.00
40,000,000.00
35,000,000.00
30,000,000.00
25,000,000.00
20,000,000.00
15,000,000.00
10,000,000.00
5,000,000.00
-
Year 1 Year 2 Year 3 Year 4 Year 5

Figure No. 24
Current Ratio Analysis

Current ratio = Current assets/Current liabilities

The figure shows that the proposed business “Lave Water Spa”

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.
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5.2.3. 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.

The figure on the next page shows the Debt to Equity Ratio

Analysis of Lave Water Spa.

60,000,000.00

50,000,000.00

40,000,000.00

30,000,000.00

20,000,000.00

10,000,000.00

-
Year 1 Year 2 Year 3 Year 4 Year 5
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Figure No. 25
Debt to Equity Ratio Analysis

Debt ratio = Total liabilities/Total equity

In the figure, it shows that the business has low debt

compared to its equity. This is because the business doesn’t

engage in borrowing funds to run the business. This is indicating

that the business depends on the owner’s equity than on debt

financing.

5.2.4. Rate of Return on Total Assets

Rate of return on total assets is an indicator of how

profitable a company is relative to its total assets. It gives an idea

on how efficient is the management in using its assets to

generate its earnings.

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60,000,000.00

50,000,000.00

40,000,000.00

30,000,000.00

20,000,000.00

10,000,000.00

-
Year 1 Year 2 Year 3 Year 4 Year 5

The figure below shows the rate of return on total assets

analysis of Lave Water Spa business.

Figure No. 26
Rate of Return on Total Assets Analysis

Return on Total Assets = Net Income/Total Assets

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The rate of return on total assets of the proposed business

from first to fifth year is 0.23, 0.19, 0.18, 0.16, and 0.14,

respectively. It shows that it has a high rate on the first year and

continuously decreasing up to its fifth year. As the net income

increases, the total asset also increases.

5.2.5. Rate of Return on Sales

Rate of Return on Sales is used to evaluate an

entity’s operating performance. It indicates how much profit an

entity makes after paying all the expenditures to be paid.

Chart Title
25,000,000.00

20,000,000.00

15,000,000.00
Axis Title

10,000,000.00

5,000,000.00

-
Year 1 Year 2 Year 3 Year 4 Year 5
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Figure No. 27
Rate of Return on Sales Analysis

Rate on Sales= Profit/ Sales Revenue

The return on sales for the first year is 56%, 59% for the

second year, 60% for the third year, 60% for the fourth year; and

57% for the fifth year. The figure shows that the proposed

business has a high rate of return on sales. This implies that the

operating cost is relatively low which indicates an excellent result

as it will operate.

5.2.6. Rate of Return on Investment

Rate of Return on Investment or the Return on Owner’s

Equity measures the percentage of profit generated by

investment.
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60,000,000.00

50,000,000.00

40,000,000.00

30,000,000.00

20,000,000.00

10,000,000.00

-
Year 1 Year 2 Year 3 Year 4 Year 5

The figure shown below is the percentage of net income

with respect to the partner’s equity.

Figure No. 28
Rate of Return on Investment Analysis

Return on Investment= Profit/ Average Equity

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The figure shows that the Lave Water Spa does have a

moderate rate of return on investment. This indicates that the

partners should expect a return on their investment for a number

of years.

5.2.7. 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.

60,000,000.00

50,000,000.00

40,000,000.00

30,000,000.00

20,000,000.00

10,000,000.00

-
Year 1 Year 2 Year 3 Year 4 Year 5

The figure below shows the Total Asset Turnover

Analysis of the proposed business, Lave Water Spa.

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Figure No. 29
Total Assets Turnover Analysis

Return on Total Assets= Net income/ Average total Assets

The figure shows that the proposed business has a

moderate total assets turnover indicating that it is not really

generating more sales given its total assets. It indicates that the

business operates and performs well but then it is just

decreasing up to its fifth year.

5.3. 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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5.3.1. Payback Period

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

Php22,249,188.30. The Lave Water Spa has a payback period of

2.50 years. This indicates that the business will recover its

investment cost within 2 years and 5 months.

Lave Water Spa

Schedule No. 24
Payback Period
Annual Cash Flow Unrecovered Cost Payback
Year 0 ₱ (22,249,188.30)
Year 1 9,023,648.81 (13,225,539.49) 1
Year 2 8,767,055.21 (4,458,484.28) 1
Year 3 8,585,006.59 4,126,522.31 1
Year 4 9,068,693.43 13,195,215.74 1
Year 5 8,927,023.70 22,122,239.44 -1.478
2.522
Payback period: 2.50 years or 2 years and 5 months
5.4. Sources of Fund

The total investment will be obtained from the personal

assets of the prospective partners who will contribute to the

business, Php10, 500,000.00 each. It is assumed by the researcher

that the prospective partners have the capacity to provide the

investment need thus, no borrowings will be required.

The total investments Php22,249,188.30 will be used in the

acquisition of machineries and equipment, furniture and fixtures,

land and for land improvements of Lave Water Spa and other
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necessary expenditures in order for the proposed business to start

its operation.