Chapter VII

FINANCING AND FINANCIAL ASPECT

Apart from technical and marketing aspects, financing and financial aspect plays

a vital role in planning a business. Finance is business function that pertains to numbers

and analytical tools applied to help managers in decision making. Financing helps the

management to analyze the company’s current financial position that subsequently

determine if the business if financially feasible. Furthermore, this chapter shows the

financial performance of the business through financial statement and analysis to

determine and assess the viability of this project.

7.1 Financing Aspect

Financing aspect refers to how capital investment has been treated and

consumed all throughout the process.

7.1.1 Initial Capitalization

Capitalization is the monetary value of the company’s assets. The initial

capitalization of IGNITE Candles totals ₱ 1,260,147.41. This capital includes

fixed assets, pre-operating and operating expenses.

 256

Table 117.0
Summary of Initial Capitalization

Particulars Cost (₱)

Fixed Assets 302,759.96

Pre-operating Expenses 147,065.68
Operating Expenses 810,321.77

Initial Capitalization 1,260,147.41

Fixed Assets

Assets are the things that owned by the company that have an economic

value that is measureable. These assets enable the production to run and

manufacture the products and carry on with the daily operation.

Table 118.0
Summary of Fixed Assets

Fixed Assets Total Amount

Production Facilities and Equipment 51,741.74

Store Facilities and Equipment 63,422.00

Office Facilities and Equipment 182,719.25

Sanitary Tools and Equipment 4,876.97

Total Fixed Assets 302,759.96

*See Chapter 3 for the breakdown of each fixed assets.
 257

Sources of Funding

The primary source of the business funding is the contribution of the

owners. Each of the owners will have an equal share of funding that constitutes

30% of the business capital. Therefore, a total of 60% is capital investment from

the owner’s equity.

The 40% remaining contribution will be taken from the bank. Bank loan is

one of the substitute sources of capital investment to successfully operate and

purchase the needed materials, tools and equipment determined by the

company. In accordance with, an amortization

Table 119.0
Sources of Funding

Description Percentage Cost Adjusted Amount

Owner 1 30% 381,009.42 390,000.00
Owner 2 30% 381,009.42 390,000.00
Bank loan 40% 508,012.57 520,000.00
TOTAL 100% 1,270,031.41 1,300,000.00

Schedules of Project Cost/ Amortization Schedule

To determine the end period payment of the company, the formula is

expressed as:

𝑖 𝑥 𝑃 𝑥 (1 + 𝑖)𝑛
𝐸𝑛𝑑 𝑜𝑓 𝑃𝑒𝑟𝑖𝑜𝑑 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 =
(1 + 𝑖)𝑛 − 1
 258

Where: i = interest rate = 7%

P = Present loan payable = 520,000

n = number of years = 5 years loan term

0.07 𝑥 520,000 𝑥 (1 + 0.07)5

𝐸𝑛𝑑 𝑜𝑓 𝑃𝑒𝑟𝑖𝑜𝑑 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 =
(1 + 0.07)5 − 1

𝑬𝒏𝒅 𝒐𝒇 𝑷𝒆𝒓𝒊𝒐𝒅 𝑷𝒂𝒚𝒎𝒆𝒏𝒕 = 𝟏𝟐𝟔, 𝟖𝟐𝟑. 𝟏𝟔

Table 120.0
Amortization Schedule

Outstanding Principal
Interest Due at
Principal at the Repaid at the
Period the End of the Payment
Beginning of the End of the
Period
Period Period
1 520,000.00 36,400.00 126,823.00 429,577.00
2 429,577.00 30,070.39 126,823.16 332,824.23
3 332,824.23 23,297.70 126,823.16 229,298.77
4 229,298.77 16,050.91 126,823.16 118,526.52
5 118,526.52 8,296.86 126,823.16 0

7.1.2 Pre-Operating Expenses

These expenses are the ones that are incurred during launching the new

business, IGNITE Candles. It includes advertising, promotional activities and

other expenses carried on.

 259

Table 121.0
Summary of Pre-Operating Expenses

Pre-Operating Activities Cost Estimates (₱)

Project Planning and Preparation (Feasibility Study) 5,000.00
Acquiring Finance 1,500.00
Negotiating with the owner of the commercial space for
1,200.00
rent
Discussion and Signing of Rental Agreement 100.00
Obtaining business permits, licenses and other business
34,187.00
requirements
Contact contractor and discuss the details for the
100.00
renovation of the building
Purchasing of the materials for the renovation 12,017.54
Renovation and Installation of Electrical Wiring, water
36,146.54
supply, etc.
Canvassing and Acquisition of materials, furniture,
1,000.00
equipment, supplies, tools, devices and etc.
Setting up the office 13,700.00
Installation of telephone and internet connection, air-
10,429.00
condition, CCTV cameras, fire extinguisher and etc.
Recruitment and Selection of Employees 3,000.00
Orientation and Training of Employees 7,000.00
Planning for the business launching 500.00
Promoting the Business 6,315.60
Finalization in preparing for the business launching 500.00
Business launching 14,370.00
TOTAL 147,065.68

7.1.3 Operating Expenses

Operating expenses pertains to the daily consumption from tools,

equipment and materials needed which enables the production to run and

operate daily activities of the company. These expenses are not directly

associated with the production of the product.

 260

Table 122.0
Operating Expenses

Note 2018 2019 2020 2021 2022

Administrative Expense

Utilities Expense 1 97,768.28 195,569.15 205,347.61 215,614.99 226,395.73

Salaries Expense 3 304,660.40 609,320.80 609,320.80 609,080.80 609,320.80

Rent Expense 5 33,720.00 67,440.00 67,440.00 67,440.00 67,440.00

Permits and Licenses 6 34,187.00 24,660.00 24,660.00 24,660.00 24,660.00

Office Supplies Expense 8 5,379.85 5,770.60 5,886.01 6,003.73 6,123.80

Sanitary Supplies Expense 8 1,710.00 1,834.20 1,870.88 1,908.30 1,946.47

Maintenance Expense 10 2,360.00 6,674.40 6,874.63 7,080.87 7,293.30

Depreciation Expense 12 4,942.00 9,884.00 9,884.00 9,884.00 9,884.00

Total Administrative Expense 484,727.53 921,153.15 931,283.93 941,672.69 953,064.11

Selling Expense

Utilities Expense 1 97,768.28 195,569.15 205,347.61 215,614.99 226,395.73

Salaries Expense 4 196,687.96 393,375.92 393,375.92 393,375.92 393,375.92

Rent Expense 5 33,720.00 67,440.00 67,440.00 67,440.00 67,440.00

Maintenance Expense 10 2,360.00 6,674.40 6,874.63 7,080.87 7,293.30

Depreciation Expense 12 4,942.00 9,884.00 9,884.00 9,884.00 9,884.00

Total Selling Expense 335,478.24 672,943.47 682,922.16 693,395.78 704,388.96

Total Operating Expense 820,205.77 1,594,096.62 1,614,206.10 1,635,068.47 1,657,453.06

 261

7.1.4 Sources of Initial Capitalization

The main sources of initial capitalization are from the personal owners

savings which incorporates 60% of the total initial capitalization. Each partner

has an equal sharing of funding which is responsible for the 30% needed capital

of the business. Furthermore, the remaining 40% will be based on banks offer

short term loans.

7.2 Financial Aspect

The financial aspect of a feasibility study requires a clear understanding towards

the company’s current financial standing and its financial performance. It serves as a

guide for businesses growth to stay in the industry. Specifically, this section discusses

the basic financial statements that are important to have a clearer view on the

businesses status such as Income Statements, Balance Sheets and the Statement of

Cash Flows.

Income Statement shows the revenues, expenses, gains and losses of the

business that subsequently shows the profitability of the business during one periodic

year. Balance Sheets summarize the company’s assets, liabilities and partner’s equity

at a specified period of time. It pertains to the balance financial statements of assets

with the summation of liabilities and owner’s equity. Cash flows are the net amount of

cash and cash equivalents that moves into or out of the business. Positive cash flow

means that the company’s assets are increasing in which it provides finance against

future financial challenges.

 262

7.2.1 Projected Income Statements

Table 123.0
Projected Income Statement

IGNITE Candles
Projected Income Statement
As of December 31, 2018-2022
Note 2018 2019 2020 2021 2022
Revenue
Sales 36 1,151,868.75 2,322,935.31 2,555,228.84 2,810,751.73 3,091,826.90
Less:
Administrative Expense
Utilities Expense 1 97,768.28 195,569.15 205,347.61 215,614.99 226,395.73
Salaries Expense 3 304,660.40 609,320.80 609,320.80 609,080.80 609,320.80
Rent Expense 5 33,720.00 67,440.00 67,440.00 67,440.00 67,440.00
Permits and Licenses 6 34,187.00 24,660.00 24,660.00 24,660.00 24,660.00
Office Supplies Expense 8 5,379.85 5,770.60 5,886.01 6,003.73 6,123.80
Sanitary Supplies Expense 8 1,710.00 1,834.20 1,870.88 1,908.30 1,946.47
Maintenance Expense 10 2,360.00 6,674.40 6,874.63 7,080.87 7,293.30
Depreciation Expense 12 4,942.00 9,884.00 9,884.00 9,884.00 9,884.00
Total Administrative Expense 484,727.53 921,153.15 931,283.93 941,672.69 953,064.11
Selling Expense
Utilities Expense 1 97,768.28 195,569.15 205,347.61 215,614.99 226,395.73
Salaries Expense 4 196,687.96 393,375.92 393,375.92 393,375.92 393,375.92
Rent Expense 5 33,720.00 67,440.00 67,440.00 67,440.00 67,440.00
Maintenance Expense 10 2,360.00 6,674.40 6,874.63 7,080.87 7,293.30
Depreciation Expense 12 4,942.00 9,884.00 9,884.00 9,884.00 9,884.00
Total Selling Expense 335,478.24 672,943.47 682,922.16 693,395.78 704,388.96
Total Expense 820,205.77 1,594,096.62 1,614,206.10 1,635,068.47 1,657,453.06
Net Operating Income 331,662.98 728,838.69 941,022.75 1,175,683.26 1,434,373.84
Income Tax (30%) 99,498.89 218,651.61 282,306.82 352,704.98 430,312.15
Net Income 232,164.08 510,187.08 658,715.92 822,978.28 1,004,061.69
 263

7.2.2 Projected Balance Sheets

Table 124.0
Projected Balance Sheets

IGNITE Candles
Projected Balance Sheet
As of December 31, 2018-2022
Note 2018 2019 2020 2021 2022
ASSETS
Current Assets
Cash 44 1,262,414.14 1,725,268.46 2,329,878.93 3,091,504.97 4,026,460.36
Prepaid Rent 5 28,100.00 28,100.00 28,100.00 28,100.00 28,100.00
Total Current Assets 1,290,514.14 1,753,368.46 2,357,978.93 3,119,604.97 4,054,560.36
Non-Current Assets
Fixed Assets 15 302,759.96 302,759.96 302,759.96 302,759.96 302,759.96
Less: Accumulated Depreciation 13 (24,710.01) (74,130.03) (123,550.06) (172,970.08) (222,390.10)
Total Non-current assets 278,049.95 228,629.93 179,209.91 129,789.88 80,369.86
Total Assets 1,568,564.08 1,981,998.39 2,537,188.83 3,249,394.85 4,134,930.22

LIABILITIES AND EQUITY

Current Liabilities
Interest Payable 16 36,400.00 30,070.38 23,297.68 16,050.90 8,296.84
Total Current Liabilities 36,400.00 30,070.38 23,297.68 16,050.90 8,296.84
Non-Current Liabilities
Loan Payable 520,000.00 429,576.84 332,824.06 229,298.58 118,526.32
Total Non-Current Liabilities 520,000.00 429,576.84 332,824.06 229,298.58 118,526.32
Total Liabilities 556,400.00 459,647.22 356,121.74 245,349.48 126,823.17
Partner's Capital
Capital, Beginning Balance 17 780,000.00 1,012,164.08 1,522,351.17 2,181,067.09 3,004,045.37
Net Income 232,164.08 510,187.08 658,715.92 822,978.28 1,004,061.69
Total Capital 1,012,164.08 1,522,351.17 2,181,067.09 3,004,045.37 4,008,107.06
Total Liabilities and Equity 1,568,564.08 1,981,998.39 2,537,188.83 3,249,394.85 4,134,930.22
 264

7.2.3 Projected Statement of Cash Flows

Table 125.0
Projected Statement of Cash Flows

IGNITE Candles
Projected Cash Flows
As of December 31, 2018-2022

Note 2018 2019 2020 2021 2022

Cash Flow for Operating Activities
Net Income 39 232,164.08 510,187.08 658,715.92 822,978.28 1,004,061.69
Depreciation Expense 15 24,710.01 49,420.02 49,420.02 49,420.02 49,420.02
Interest Expense 2 36,400.00 30,070.38 23,297.68 16,050.90 8,296.84
Prepaid Rent 10 (28,100.00) - - - -
Net Cash Provided by Operating Activities 265,174.10 589,677.48 731,433.63 888,449.20 1,061,778.55
Cash Flow for Investing Activities
Fixed Asset Acquisition 3 (302,759.96) - - - -
Proceeds from Sales of Fixed Assets - - - - -
Net Cash Provided by Investing Activities (302,759.96) - - - -
Cash Flow for Financing Activities
Cash Invested 1 780,000.00 - - - -
Cash Borrowed from the Bank 520,000.00 - - - -
Loan Payable 2 - (126,823.16) (126,823.16) (126,823.16) (126,823.16)
Net Cash Provided by Financing Activities 1,300,000.00 (126,823.16) (126,823.16) (126,823.16) (126,823.16)
Net Increase in Cash 1,262,414.14 462,854.32 604,610.47 761,626.04 934,955.39
Add: Cash at the Beginning of the Year - 1,262,414.14 1,725,268.46 2,329,878.93 3,091,504.97
Cash at the End of the Year 1,262,414.14 1,725,268.46 2,329,878.93 3,091,504.97 4,026,460.36
 265

7.2.4 Financial Performance

Financial performance visualizes the financial statements and analysis to

determine and justify the viability of the proposed project. Also, this will serve as

basis for the assessment of the company’s sustainability to the changing

economy.

Current Ratio – is a measure of liquidity which meets its short-term obligations.

This means that the business has a limited amount of time to pay liabilities in

which it dues within the next year.

Debt-to-Net Worth Ratio – is the total liabilities over with tangible net worth.

This indicates what proportion of the equity and debt is utilized to finance the

assets.

Debt-To-Equity Ratio – it measures the debt component of a firm’s capital to

support the businesses operation and growth. The lower the ratio, the lower the

pressure and greater protection for creditors.

Net Profit Margin – it is the ratio of the net profit to revenues of the business.

Return on Net Operating Profit – obtained by dividing the profit before interest

and taxes by total tangible assets. This ratio indicates the relationship between

owner’s share of operations before taxes for the year and the capital shared by

the owners.

Asset Turnover – used as an indicator of the efficiency the business is

deploying its assets in generating revenue.

 266

Return on Asset – Return on assets indicates how profitable the business is in

accordance with its total assets. It also gives idea on how efficient the

management in using its assets to generate earnings.

Rate of Return on Partner’s Equity – is a measure on the ability of the

business to generate profit from its partner’s investment in the company.

Fixed Assets Turnover – is the ratio of sales to the value of fixed assets. It

indicates how well the business is using the fixed assets to generate sales.

Payback Period – is the length of time required to cover the cost of investment.

Table 126.0
Current Ratio

Current Ratio
2018 2019 2020 2021 2022
Current Assets 1,290,514.14 1,753,368.46 2,357,978.93 3,119,604.97 4,054,560.36
Current Liabilities 36,400.00 30,070.38 23,297.68 16,050.90 8,296.84
Ratio 35.45 58.31 101.21 194.36 488.69

Table 127.0
Debt-To-Net Worth Ratio

Debt-To-Net Worth Ratio

2018 2019 2020 2021 2022
Total Liabilities 556,400.00 459,647.22 356,121.74 245,349.48 126,823.17
Total Assets 1,568,564.08 1,981,998.39 2,537,188.83 3,249,394.85 4,134,930.22
Ratio 0.35 0.23 0.14 0.08 0.03
 267

Table 128.0
Debt-To-Equity Ratio

Debt-To-Equity Ratio
2018 2019 2020 2021 2022
Total Liabilities 556,400.00 459,647.22 356,121.74 245,349.48 126,823.17
Total Owner's Equity 1,012,164.08 1,522,351.17 2,181,067.09 3,004,045.37 4,008,107.06
Ratio 0.55 0.30 0.16 0.08 0.03

Table 129.0
Net Profit Margin

Net Profit Margin

2018 2019 2020 2021 2022
Net Income 232,164.08 510,187.08 658,715.92 822,978.28 1,004,061.69
Sales 1,151,868.75 2,322,935.31 2,555,228.84 2,810,751.73 3,091,826.90
Ratio 0.20 0.22 0.26 0.29 0.32

Table 130.0
Return on Net Operating Profit

Return on Net Operating Profit

2018 2019 2020 2021 2022
Income before Tax 331,662.98 728,838.69 941,022.75 1,175,683.26 1,434,373.84
Total Tangible Assets 1,290,514.14 1,753,368.46 2,357,978.93 3,119,604.97 4,054,560.36
Ratio 0.26 0.42 0.40 0.38 0.35

Table 131.0
Asset Turnover

Asset Turnover
2018 2019 2020 2021 2022
Total Tangible Assets 1,290,514.14 1,753,368.46 2,357,978.93 3,119,604.97 4,054,560.36
Sales 1,151,868.75 2,322,935.31 2,555,228.84 2,810,751.73 3,091,826.90
Ratio 1.12 0.75 0.92 1.11 1.31
 268

Table 132.0
Return on Asset

Return on Asset
2018 2019 2020 2021 2022
Net Income 232,164.08 510,187.08 658,715.92 822,978.28 1,004,061.69
Total Tangible Assets 1,290,514.14 1,753,368.46 2,357,978.93 3,119,604.97 4,054,560.36
Ratio 0.18 0.29 0.28 0.26 0.25

Table 133.0
Rate of Return on Partner’s Equity

Rate of Return on Partner's Equity

2018 2019 2020 2021 2022
Net Income 232,164.08 510,187.08 658,715.92 822,978.28 1,004,061.69
Partner's Equity 1,012,164.08 1,522,351.17 2,181,067.09 3,004,045.37 4,008,107.06
Ratio 0.23 0.34 0.30 0.27 0.25

Table 134.0
Fixed Assets Turnover

Fixed Assets Turnover

2018 2019 2020 2021 2022
Sales 1,151,868.75 2,322,935.31 2,555,228.84 2,810,751.73 3,091,826.90
Fixed Assets 302,759.96 302,759.96 302,759.96 302,759.96 302,759.96
Ratio 3.80 7.67 8.44 9.28 10.21

Table 135.0
Payback Period
Payback Period
Initial Investment Losses Average Net Income Year Month Day
1,300,000.00 645,621.41 2.01 24.16 724.88