The Financial

Plan
Financial Plan
 Financial
plan includes the financial projections of
the new venture.
 First, it must provide a summary projected sales, the cost of
good sold, and general and administrative expenses of the
business, at least for first year, and typically for three years.

 Second, it must anticipate the amount and timing of

expected cash inflows and outflows over a period of
several years so as to ensure that the business will have
sufficient working capital to sustain operations.

 Third, it must provide a summary of the assets the business

will own, its projected liabilities, and the potential retained
earnings.
 Preparing Financial
Projections
 Table 7.1 shows the sales forecast 0f
hypothetical shoe retailer named Pinoy
Corporation. For illustration purposes, we
assumed that each pair of shoes sells for
PHP 1,000. The reality is that a retailer will
sell different type of shoes at different
prices. Therefore the sales forecast must
consider the product line and the varying
level price.
Preparing Financial Projections
Table 7.1 Sales Forecast of Pinoy Corporation, First Year by Month

Month Projected sales (units) Projected sales

(pesos)
January 120 120,000
February 192 192,000
March 288 288,000
April 420 420,000
May 480 480,000
June 500 500,000
July 600 600,000
August 600 600,000
September 480 480,000
October 640 640,000
November 720 7 20,000
December 780 780,000
Total 5820 5,820,000
 In 7.2, we can see the Pinoy Corporation’s
proposed operating budget. This budget assumes
that the company will have five employees who will
each be paid PHP 15,000 per month. It also assumes
that the business will incur the following expenses:

 Monthly rental of PHP 30,000 for office store space

 Electricity and water bills for amounting to PHP 4,000 per
month
 Fix sales expense of PHP 15,000 per month for promotional
activities
 Insurance expense of PHP 2,000 per month
 Depreciation expense of PHP 3,000 per month
Table 7.2 Operating Budget of Pinoy Corporation for the First
Three Months

Expenses January February March

Salaries 75,000 75,000 75,000
Rent expense 30,000 30,000 30,000
Utilities 4,000 4,000 4,000
Sales expense 15,000 15,000 15,000
Insurance expense z2,000 2,000 2,000
Depreciation 5,000 5,000 5,000
expense
Total expenses 131,000 131,000 131,000
Projected Income Statement
 The sales forecast and operating budget
illustrated will then be transferred to the
projected income statement, which
summarizes the profit (loss) the company
expects to generate within the year.

 This income statement also includes an

estimate of the cost of good sold, which as
shown in Table 7.3, is assumed of total sales
per month.
Table 7.3. Pinoy Corporation, Projected
Income Statement, First Year by Month
(in thousand pesos)
 Table 7.4 Pinoy Corporation, Projected Income
Statement, First Three Years (in thousand pesos)
Year 1 % Year 2 % Year 3 %
Sales 5820 100.00 6402 100.00 7042.2 100.00
Less: Cost of goods sold 2328 40.00 2560.8 40.00 2816.88 40.00

Gross margin 3492 60.00 3841.2 60.00 4225.32 60.00

Operating expense
Salaries 900 15.46 1080 16.87 1134 16.10
Rent 360 6.19 360 5.62 360 5.11
Utilities 48 0.82 48 0.75 48 0.68
Sales expense 180 3.09 198 3.09 198 2.81
Insurance 24 0.41 24 0.37 24 0.34
Depreciation 60 1.03 60 0.94 60. 0.85
Total operating 1572 27.01 1770 27.65 1824 25.90
Expenses
Net Profit (loss) 1920 32.99 2071.2 32.35 2401.32 34.10
Cash Flow Projection
 Afterprojecting the income, the
entrepreneur should also anticipate the
cash inflows and outflows.

 Itmust be noted that profit and cash flow

are not the same thing. That is because
there are transactions that do not
necessarily result into actual payments.
 Table 7.5 Sample Calculation of Net Cash Flow
Step Calculation Result
Cash flow from operating activities
1. Take net profit (loss) from the income PHP 600,000 PHP 600,000
statement
2. Subtract depreciation PHP 600,000 – PHP 60,000 PHP 5400,00
3. Add increase (+) or decrease (-) in PHP 540,000 + PHP 50,000 PHP 590,000
accounts receivable
4. Add increase (+) or decrease (-) in PHP 590,000 + PHP 20,000 PHP 610,000
inventory
5. Add increase (+) or decrease (-) in
prepaid expense (e.g., insurance)
6. Add increase (+) or decrease (-) in PHP 610,000 + (-PHP PHP 570,000
accounts payable 40,000)
7. Subtract capital expenditures (-) PHP 570,000 – PHP 100,000 PHP 470,000
8. Subtract debt payments (-) PHP 470,000 – PHP 40,000 PHP 430,000
9. Subtract dividends paid (-) PHP 330,000 + PHP 60,000 PHP 370,000
10. Add sale of stock (+) PHP 370,000 + PHP 50,000 PHP 420,000
Net cash flow PHP 420,000
Projected Balance Sheet
 Assets
- These refers to everything that the business owns that can be used
to create value. Assets can be current, which includes cash and
other things that can be easily converted into cash or consumed
in the operation of the business in less than a year.
- Fixed assets are those, like land, building, or equipment, which the
business can use over a long period of time.
 Liabilities
- These represent everything that the business owes to banks and
other creditors.
- Current liabilities, those that must be paid within a year.
- Long-term liabilities, those must be paid beyond one year.

 Owners’ equity/ Shareholders equity

- Representing the excess of all assets over all liabilities, this is also
known as the net worth of the business.
Table 7.6 Sample Projected Balance Sheet, as
of End of First Year (in pesos)
ASSETS
Current assets
Cash 80,000
Accounts receivable 32,000
Inventories 36,000
Total current assets 148,000
Fixed assets
Equipment 400,000
Less: Depreciation 40,000
Total fixed assets 360,000
Total assets 508,000
LIABILITIES AND OWNERS’ EQUITY
Current Liabilities
Accounts payable 35,000
Accrued expenses 20,000
Total current liabilities 55,000
Breakeven Analysis
 Breakeven – refers to the volume of sales at which the
business neither makes profit nor incurs loss.
- the breakeven sales point indicates how many units
of product the business must sell to cover both
variable and fixed costs and expenses.
- The breakeven formula:

𝑇𝑜𝑡𝑎𝑙 𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡 (𝑇𝐹𝐶)

𝐵𝑟𝑒𝑎𝑘𝑒𝑣𝑒𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝐵𝐸𝑄 =
𝑉𝐶
𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 𝑆𝑃 − 𝑉𝑎𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡/ 𝑢𝑛𝑖𝑡 ( 𝑈 )
 In the projected income statement of Pinoy
Corporation (Table 7.3), the cost of goods sold is 40%
of sales. Given assumed average selling price of PHP
1,000 per pair of shoes, the variable cost per unit is PHP
400 Fixed costs, on the other hand, in Year 1 is PHP
1.572 million. Using these figures, the breakeven point
will be computed as follows:

𝑇𝐹𝐶
𝐵𝐸𝑄 =
𝑉𝐶
𝑆𝑃 − 𝑈

1,572,000.00
𝐵𝐸𝑄 =
𝑃𝐻𝑃 1,000 − 𝑃𝐻𝑃 400

1,572,000.00
𝐵𝐸𝑄 =
𝑃𝐻𝑃 600

(𝐵𝐸𝑄)= 2,620 units

 Each pair of shoes sold beyond the BEQ of 2,620 will
result in profit of PHP 400 per unit, while sales below
the BEQ will result in a loss for the company.

 IfPinoy Corporation plans to sell several types of

shoes at different price points, it is possible to
allocate fixed costs for each type of shoes.

 Consequently, the breakeven point for each type

of shoe can be computed based on a weighted
basis.

 Thus if 45% of the company’s sales projections can

be assumed to be for Shoe A, then 45% of fixed
costs should be allocated for the product.