Financing, Securing and

Managing It

GROUP 3 (C-S2A1)

Abrogar, Ladyville

Bulawin, Nelson

Estacio, Ella

Payao, Lilibeth
UNDERSTANDING AND MANAGING START-UP FIXED AND VARIABLE COST

What Does It Cost to Operate a Business?

To run a successful business, you will need to keep track of your costs and
have more cash coming in than is going out. The bedrock principle of business
is that it should earn a profit, by selling products or services for more than
they cost. Many costs are associated with the establishment and growth of a
small business. These include start-up purchases, fixed and variable costs,
and cash reserves. All are components of your accounting records, the
documents that are used to classify, analyze, and interpret the financial
transactions of an organization.

Start-Up Investment

Start-up investment, or seed capital, is the one-time expense of opening a

business. In the case of a restaurant, for example, start-up expenses would
include stoves, food processors, tables, chairs, silverware, and other items that
would not be replaced very often. Also included might be the one-time cost of
buying land and constructing a building.

For a hot dog stand, the start-up investment list might look like this:

Hotdog Cart 70,000

Business License 10,000

Business Cards and Flyers 7500

Beginning Inventory (hotdog, 3000

buns,etc.)
Cash box and other 5000

Total Start up investment: P100,000

Brainstorm to Avoid Start-Up Surprises

Before starting your business, try to anticipate every possible cost by thinking
of all components of the investment. Talk to other business owners in your
industry and ask them what start-up costs they failed to anticipate. Once you
have brainstormed a list, take it to your advisors or mentors and have them
look it over. They will probably find start-up costs you have overlooked.
Research the Costs

In addition to brainstorming and consulting with your advisors, you can do

some research to accurately assess your start-up costs. Look at business plan
models in your industry, if possible.

Keep a Reserve Equal to One-Half of Start-Up Investment

Start-up investment should include one more thing: a cash reserve, an

emergency fund of cash resources that equal at least half your start-up costs.
For the previously mentioned hot dog cart example, therefore, the reserve
would be half of P100 000 or P50 000 raising to P150 000 the total start- up
sum required. Entrepreneurs must be prepared for the unexpected; the only
good surprise is no surprise. The reserve will provide a moderate protection
when you need it. If your computer goes down or your biggest supplier raises
prices, you will be glad you had this money on hand.

Predict the Payback Period

When compiling and analyzing start-up costs, one consideration will be how
long it will take for you to earn back your start-up investment. The payback
period is an estimate, for you and your investors, of how long it will take your
business to bring in enough cash to cover the start-up in-vestment. It is
measured in months.

Formula :

Payback= Start-up Investment / Net profit per month

Example:

Ashley's business requires a start-up investment of P50 000 . The business is

projecting a net cash flow per month of P20 000 . How many months will it
take to make back the start-up investment?

P50 000 / P20 000 = 2.5 months (Payback)

Variable and Fixed Costs:

Small business owners divide their costs into two categories.

1. Variable costs - change based on the volume of units sold or produced.

2. Fixed costs -are expenses that must be paid regardless of whether or not
sales are being generated.

Variable costs change with production and sales. They fall into two

Sub categories:

1. Cost of goods sold (COGS) or cost of services sold (COSS). Each is

associated specifically with a single unit of sale, including:

 The cost of materials used to make the product (or deliver the service).
 The cost of labor used to make the product (or deliver the service).

2. Other variable costs. These include:

 Commissions or other compensation based on sales volume.

 Shipping and handling charges.

Fixed costs stay constant whether you sell many units or very few.

Examples of fixed costs include rent, salaries, insurance, equipment, and

manufacturing facilities. Costs, such as rent or the Internet bill, which do not
vary per unit of production or service, are called fixed operating costs. Fixed
operating costs are not included in COGS (or COSS) because they are not
directly related to the creation of the product (or service). Fixed operating costs
are not included in other variable costs because they do not vary directly with
the number of sales made. Whatever is left over after you pay the COGS and
other variable costs is your contribution margin (gross profit). You will pay your
fixed operating costs from the contribution margin. Whatever is left over after
you pay your fixed operating costs (and taxes) is your net profit. Fixed
operating costs can be dangerous because they have to be paid whether or not
the business has a gross profit.

Example picture below:

Using Accounting Records to Track Fixed and Variable Costs

Now you are ready to set up your financial records. Nothing that you learn as
an entrepreneur will be more important than keeping accurate records of the
money flowing in and out of your business. The systematic recording,
reporting, and analysis of the financial transactions of a business (keeping
statistical records of inflows and outflows) is called accounting. Before you can
create financial statements, however, you must be able to keep track of your
daily business transactions. If you develop record keeping into a habit, you will
be well ahead of the many businesspeople that tend to get careless when it
comes to keeping good records consistently.
Three Reasons to Keep Good Records Every Day

1. Keeping good records will show you how to make your business more
profitable.

- Did your expenses go up? Maybe you need to try lowering your costs. Did
your sales drop? Maybe you are not spending enough on advertising. Use
accurate records as a base to constantly improve your business.

2. Keeping good records will document your business profitability and

cash position.

- If you want people to invest in your business, show them that it is profitable.
Remember, you will always need to maintain your business's financial
statements so that you will be up to date on your company's performance.

3. Keeping good records proves that payments have been made.

- Accurate, up-to-date records help prevent arguments because they prove you
have paid a bill or that a customer has paid you. Records can also prove that
you have paid your taxes. If you keep good records and pay your taxes in a
timely fashion, you will have nothing to fear from audits.

Suggestions for Keeping Good Records

1. Accounting Software

- There are many excellent computer software programs on the market to help
the small business owner keep good records and generate financial statements
and analytical reports.

2. Receipts and Invoices

- A receipt is a slip of paper with the date and amount of the purchase on it.
Always get a receipt for every purchase you make. Issue a receipt for all sales if
you have a retail business.

3. Keep at Least Two Copies of Your Records

4. Use Business Checks for Business Expenses

- An invoice, or bill or statement, shows the product or service sold and the
amount the customer is to pay. Keep a copy of each invoice in an organized
fashion (i.e., numerically, alphabetically, or in order by date), and record all
payments.
 - Get a checking account to use only for your business. It is inadvisable to
commingle your personal and business funds, regardless of your
business type. Financial institutions routinely require business checks to
be deposited into business accounts rather than personal ones, so any
customer check payments made out to your business name will have to
be deposited into a business account.

FINANACIAL STATEMENTS FOR BUSINESS

What is Financial Statement?

Financial statement is a written record that conveys the business activities and
the financial performance of a company. It shows the sources of company’s
revenue, how the money is spent, its assets and liabilities and how it manages
its cash flow.

Three main types of Financial Statement

1. Income statement

2. Cash Flow statement

3. Balance Sheet

Income Statement

It is one of the company’s core financial statement that shows if the company is
gaining or loss profit over a period of time. It i the difference between revenue
(sale) and expenses (cost). Income statement serves as the scorecard of an
entrepreneurs which help them determine if their decisions kept them on the
right track.

Parts of Income Statement

1. Revenue - Income from sales of the company's products or services.

2. Cost of goods sold (COGS) /Cost of service sold (COSS) - the cost of
materials used to make the product plus the cost of direct labor used to make
the product.
3. Gross profit - The result of revenues minus COGS/COSS 4. Other variable
costs (VC) - Costs that vary with sales.

5. Contribution margin - The result of revenues minus COGS and other

variable costs, or gross profit minus other variable costs.

6. Fixed operating costs - Costs of operating a business that do not vary with
sales. The most common fixed operating costs are utilities, salaries,
advertising, insurance, interest, rent, and depreciation (USAIIRD).

7. Earnings before interest and taxes (EBIT) - The result of gross profit
minus other variable costs minus fixed costs, except interest and taxes. 8. Pre-
tax profit - EBIT minus interest costs. This is a business's profit after all costs
have been deducted, but before taxes have been paid. Pre-tax profit is used to
calculate how much tax the business owes.

9. Taxes - A business must pay taxes on the income it earns as a separate

entity from the owners' personal taxes. It may have to make monthly or
quarterly estimated tax payments.

10. Net profit (loss). This is the business's profit or loss after taxes have been
paid.

Figure 3.0 Income

Statement
Balance Sheet

The balance sheet displays the company’s total assets, and how these assets
are financed, through either debts or equity. It can also be referred to as a
statement of net worth, or statement of financial position.

Formula:

ASSETS = LIABILITIES + OWNER’S EQUITY

Three Major Category

1. Assets – things that a company owns. These are the resources of the
company that have been acquired through transactions, and have future
economic value. It also includes cost paid in advance that has not yet expired.

2. Liabilities – are obligations of the company; they are the amounts owed to
creditors for a past transaction and they usually have the word “payable” in
their account title.

3. Owner’s Equity – along with liabilities, it can be thought of as a source of

company’s assets. It is sometimes referred to as the book of value of the
company, because owner’s equity is equal to the reported asset amount minus
the reported liability amounts.

Short and Long-Term Assets

Current Asset - cash or items that can be quickly turned into cash.

 Accounts Receivables
 Inventory
 Supplies

Long-term assets – items that would take the business more than one year to
use.

 Equipment
 Furniture
 Machinery
 Real estate
Current and Long-term Liabilities

Current Liabilities – debts that must be paid within one year.

 Bills
 Lines of credits
 Short-term loans

Long-term Liabilities – debts that will be paid over more than one year.

 Bank loans
 Mortgages

Figure 4.0 Balance Sheet

Income Statement Ratio

To create income statement ratios, simply divide sales into each line item and
multiply by a hundred. In this way, line items are expressed as a percentage of
sales. Expressing an item on the income statement as a percentage of sales
makes it easier to see the relationship between items than when dollar values
are used.
 Figure

5.0 Income Statement

Return on Investment (ROI)

 Investment- something you put time, energy, or money into because you
expect to gain profit or satisfaction in return.
 Retum on investment (ROI) - the net profit of a business divided by the
start-up investment, expressed as a percentage of that investment.

Formula of ROI

ROI = Net Profit/Investment X 100

Three thing to measure ROI

1. Net profit. The amount the business has earned beyond what it has spent
to cover its costs.

2. Total investment in the business. This includes start-up investment (the

amount of money that was required to open the business plus all later
additional funding).

3. The period of time for which you are calculating ROI. This is typically
one month or one year.
Return on Sales (ROS)

Is the percentage created when sales are divided into net income. This is an
important measure of the profitability of a business. It is also called as profit
margin.

Formula:

Return on Sales = Net Income/Sales x 100

Balance Sheet Analysis

Quick and Current Ratio

 Liquidity - the ability to convert assets into cash.

 Current ratio - liquidity ratio consisting of the total sum of cash plus
marketable securities divided by current liabilities.
 Marketable securities - investments that can be converted into cash
within 24 hours.
 Quick ratio - the calculation of cash in relation to covering current debt.

Formula

Quick Ratio = Cash + Market securities/ current liabilities

Quick Ratio = Current asset - (inventory + payments) / current liabilities

Current Ratio = Current Asset / current liabilities

Debt Ratios : Relationship between Debt and Equity

 Debt-to-equity ratio - the comparison of total debt to total equity.

 Debt ratio - the comparison of total debt to total assets.

Formula:

Debt-to-Equity-ratio = Debt/equity

Debt ratio = total debt/total asset

 Cash flow and Philippine Taxes

Cash Flow

- Is the movement of cash into or out of a business, it is usually measured

during a specific period of time. It provides information about a
company’s receipt and cash payments during and accounting period,
showing how these cash flows linked to the ending cash balance to the
beginning balance shown in the company’s balance sheet.

3 Sections of Cash Flow Statements

1. Operating activities
- It is the cash received or spent as a result of a company’s business
activities. In this section it explains sources and uses of cash from
ongoing business activities. Some common operating activities includes
cash receipts from goods sold, payments to employees, payment of taxes,
and payments to the suppliers.
2. Investing Activities
- Cash flow from investing activities is one of the sections on the cash flow
statement that reports how much cash has been generated or spent from
various investment-related activities in a specific period. Investing
activities includes purchases of physical assets, investments in
securities, or the sale of securities or assets.
3. Financing Activities
- It shows the net flows of cash that are used to fund the company.
Financing activities include transactions involving debt, equity and
dividends.

Rules to Keep Cash Flowing

1. Collect cash as soon as possible

- When you make a sale, try to get paid immediately. If you must extend
credit, make sure to collect the money on the scheduled date.
2. Pay your bills by the due date, not earlier
- A bill comes in and then it gets paid with no consideration for how that
payment may impact the overall financial health of your business.
Paying bills too soon may negatively impact to the company. Look for
 the due date and send your payment so it arrives by that day. This will
conserve the cash flow.
3. Check your available cash daily
- Always know how much cash you have on hand. Your cash flow will be
reflected in your up-to-date accounting journal.
4. Lease instead of buying equipment when practical
- The primary advantage of leasing business equipment is that it allows
you to acquire asset with minimal initial expenditures. Because
equipment leases rarely require a down payment, you can obtain goods
you need without significantly affecting your cash flow.
5. Avoid buying inventory (stock) that you do not need
- Find a way where you stock minimal inventory necessary to satisfy
your customer demand. Inventory directly affect the business if not
handled properly it can result in either losing money on potential
states that can’t be filled, or wasting money by stocking too much
inventory.

Figure 6.0 Cash flow

Statement
Other Cash Flow Concerns

1. Credit Squeeze
- Credit is the ability to borrow money and pay it back in a specific period.
It enables you to buy something without spending cash at the time of
purchase. For example, you own a college bookstore, you might be able
to buy to your supplier books for the upcoming school year in June and
pay them 60 days after the sales. If the business is not managing the
cash carefully, this will result to credit squeeze between you and your
supplier. Credit squeeze is a period when profits decline due to the
increasing cost or decreasing revenues. If you get into position where you
cannot pay the supplier, you will have no additional inventory , thus, no
business.
2. Burn Rate
- Burn rate refers to the rate in which a company spends capital to cover
overhead cost before generating a positive cash flow. Burn rate is a
mainly issue for a startup business that typically unprofitable in the
early stages and are usually in high growth industries. It may take years
for a company to generate profit from it sales or revenue and as a result,
they will need an adequate amount of cash on hand to meet the
company’s expenses.

Philippine Taxes

Another factor that affects cash flow for a business is taxes. Like other
creditors, tax-levying bodies expect payment within the specific date given. Tax
payments must be updated because it can result in business closure and
penalties if not paid on time. Businesses must register their business or
services offered so invoice and receipt can be issued. It would also be beneficial
if the expenses are monitored so the net income will be determined. There are
several tax laws in the Philippines that every business owner or sole proprietor
should know. In the Philippines, taxpayers pay more taxes to the national
government than to the local government through the BIR. Local government
taxes are paid to the municipal or city government. Tax may be paid monthly,
quarterly or annually.
Taxes that are encountered by entrepreneurs doing business in the
Philippines:

1. Value Added Tax

- VAT is a 12% sales tax collected from the sale of products, services, and
leases. The VAT, reflected in receipts and sales invoices of a business, is
paid to the Bureau of Internal Revenue on a monthly or quarterly basis.
A product or service with a large profit margin will have a greater value
added tax regardless if there is net profit or not. Some transactions are
VAT-exempt such as; agricultural products, tuition fees, lending
activities, real properties, books, transportation and so on.
2. Percentage Tax
- These are paid by small business enterprises with annual gross sales
under 3 million pesos. These businesses are non-VAT establishments
and are subjected to 3% sales tax on their monthly gross sales and could
go high as 30%. Percentage tax is imposed for sold or leased goods,
properties or services Percentage tax is paid at any BIR-authorized bank
or at any BIR office in the locality of the business.
3. Income Tax
- It is the tax paid on the net earnings of an individual or establishment.
For corporations, a minimum of 30% tax on gross income is paid after
the fourth taxable year when the company started operating. Income of
residents in Philippines is taxed progressively up to 32% which makes
the country the highest income tax rate in Southeast Asia.
4. Withholding Tax
- Withholding tax is when a business withholds a portion of a payment for
services or goods to a supplier and remits that portion to the government
on behalf of its supplier. This is a tax compliance method used by the
government to ensure that the taxes are remitted properly by a business
on a timely basis.

FINANCING STRATEGY AND TACTICS

What is financing?

Financing is investing your money in order to gain profit.

TYPES OF FINANCING:

1. Finance with earnings- If a company is profitable and has positive cash

flow, it can use some of its profits to finance expansion. This will help ensure
that the company does not take on too much debt, or grow more quickly than
its finances can handle.

2. Finance with equity- It is selling the company’s ownership/shares in

exchange with cash. If a company is incorporated, it can sell stock privately, or
publicly via the stock market, to raise capital. People who purchase shares of
stock are getting equity.

3. Finance with debt- It involves borrowing money to a financial institution or

to an individual, who has a large amount of financial capability in order for
the company to fund its expenditures for a specific business operation that a
company cannot afford. Any type of business, depending upon its
creditworthiness, and that of its owner(s), can borrow money. An incorporated
company can also sell bonds, and people who are purchasing bonds will receive
interest to the loan they are making with the company.

FORMS OF DEBT FINANCING:

1. Commercial loans- Business loans typically provided by a bank or other

financial institution.

Examples: Bank Loans, Real Estate Loans, SBA loans, Equipment loans,
Short-term loans.

2. Personal loans- Loans taken out on your personal credit and used for the
business. May have a fixed term (length) or a revolving one.

Examples: SSS Loans, Pag-Ibig Loans, Credit Cards, Title Loans

3. Leases- Debts incurred for the rights to use property, such as automobiles,
trucks, or equipment, or even land.

4. Bonds- Long-term debt instruments used by corporations to raise large

sums of money or it can be a payment of a certain sum of money on a certain
date, or after an accomplishment of a specified condition.

Debt Advantages:
• The lender has no say in the management or direction of the business, as
long as the loan payments are made and contracts are not violated.

• Loan payments are predictable; they do not change with the fortunes of the
business.

• Loan payments can be set up so that they are matched with the seasonal
sales of the business.

• Lenders do not share in the business's profits.

Debt Disadvantages:

• If loan payments are not made, the lender can force the business into
bankruptcy.

• The lender may be able to take the home and possessions of the owner(s) to
settle a debt in case of default-when the borrower fails to meet the repayment
agreement.

• Debt payments increase a business's fixed costs, thereby lowering profits.

• Repayment reduces available cash.

• Lenders expect regular financial reporting and compliance with the loan
contracts.

FORMS OF EQUITY FINANCING:

1. Angel Investors- Angel Investors are usually investors with a high amount
of assets that provide financing for start-ups. They are wealthy individual or
groups who are looking for a high return on investment.

2. Venture Capital- Venture Capitalist firms provide funding in exchange for

ownership, or shares of your business.

3. Royalties- Royalty financing is an financing investment for future sale of a

product. It usually deals with the payment for the right to use for intellectual
property like copy rights , patents, and trademarks.

Examples: A payment to the author for each copy of the book sold.
The 5 C’s of Credit:

1. Collateral- Property or other assets pledged against the loan that the lender
can take and sell if the loan is not repaid. Examples of such assets are
business real estate, equipment, inventory, an owner's home, certificates of
deposit, money market accounts, stock certificates, and bonds. Commercial
lenders never want to have to take such assets, but they need collateral so that
they can be confident of some level of repayment.

2. Character- Typically analyzed in the form of the owner's personal credit

(ability to borrow money) for a small business. Before a financial services
company will lend you money, it will want to know your credit history, which is
the record of how reliably and punctually you or your company has repaid past
loans. The lender will obtain your credit report from a credit reporting agency
(CRA). These companies, primarily TransUnion, Equifax, and Experian, collect
and analyze information supplied by financial institutions and others that
extend credit.

3. Capacity. The business cash flow must be sufficient to cover the monthly
loan payments and expenses. You will have to report your projected cash flow,
so the lender can determine whether you will be able to repay the loan. Your
debt service is the amount you will have to pay over a given period of time,
until the loan is repaid.

4. Capital- How much of your own money have you invested in your business?
Have you gotten friends or family to invest? As we have noted, a banker wants
to see that you are risking your own resources before he or she risks the
bank's.

5. Conditions- This is the state of the industry and economic climate at the
time the loan is made and during its anticipated term. If inflation is on the rise,
for example, the bank may be concerned that your earnings will not keep pace
with it, thus reducing your capacity to repay the loan.

CATEGORIES OF FINANCIAL INVESTMENT:

1. Stocks-Share of company ownership (equity).

 2. Bonds- Loans (debt) made to companies or government entities for more
than one year.

3. Cash-Savings accounts, Treasury bills, or other investments that can be

liquidated (turned into cash) within 24 hour.