2.7 Lesson 7

2.
7 Financial Study
 The financial analysis concepts used for the course include
profitability and vertical and horizontal analysis. Other
performance measurement tools may be added, dependent on the
financial objectives.
 Profitabilitywill measure the gain or return on the owner’s equity
or investment. Vertical analysis matches the amounts or accounts
in a common-size financial statements through the use of
percentages of a common base. For income statements, each
account is computed as a percentage of sales.
 Horizontal analysis involves matching accounts in the financial
statements through percentage change calculations, for two or
more consecutive periods.
Financial Plan
 The financial plan will involve forecasting only the cash
financing requirement of the enterprise.
 Cash receipts are drawn from the forecasted sales value in the
marketing study. Cash disbursements are taken from the cost of
product or service in the operations study. The sample cash
budgets in the annexes may be revised for the period coverage of
the enterprise life, which determined by the academic
communities.
 Working capital is used to purchase the materials and/or supplies
required for the business to operate. It funds, in effect, the cost of
doing businesses. It may be used as the target cash balance or
minimum cash balance in the cash budget form.
 Although it is possible to allow the enterprise groups to
buy the requisite materials and supplies on credit, it may
be practical to enforce only cash transactions for the
course, again due to time constraints. If, however, credit
transactions are permitted, interest charges, or credit
terms need to be documented by the learner
entrepreneurs.
Estimates of the proprietor’s equity are
shown below for typical expenses items
 Salaries and wages
 Number of employees x wage rate per period x period covered
 Materials Expenses (or cost of sales for merchandising projects)
 Number of units x purchase cost per unit
 Supplies Expenses (receipts, office supplies, and/or service supplies)
 Number of units x purchase cost per unit

 Marketing Expenses (posters, flyers, giveaways, and/or product
samples)
 Units x purchase cost per unit
Estimates of the proprietor’s equity are shown
below for typical expenses items (cont.)
 Transportation Expenses
 Gas expense, vehicle hire, and/or vehicle fare
 Communication Expenses
 Phone and internet charges
 Utilities
 Power charges for the period covered
 Water charges for the period covered
 Registration, Taxes, and Licenses
 Representation Expenses
Financial Statements
 The income statement, also called the profit and loss statement, is required
for the BES course.
 As the course is designed for single proprietorships, the minimum accounts for
the income statements, are as follows:
1. Revenue (or Sales)
2. Cost and Expenses
a. Cost of goods sold
b. Selling Expenses
c. Administrative Expenses
3. Net Income or Net Loss

The comparative owner’s equity statement may be used to measure performance for
the business plan execution and implementation.
The Statement of Owner’s Equity has the same accounts as the balance sheet, and
utilizes the accounting equation-
Assets = Liabilities + Owner’s Equity
Financial Analysis
 Horizontal Analysis is a left-to-right comparison of
performance for comparative periods. For the course, a
minimum of three periods may be compared to evaluate
increases or decreases. The trends, increases or
decreases, are expressed as percentage of change, as
shown in the following formula:
Percentage of change = Amount of change/Base period amount x 100
The base period used may be the first period for the project.
Financial Analysis
 Vertical Analysis evaluates financial statement accounts with
each account expressed as a percentage of base account. This
performance measurement determines proper balances for
given accounts. For both service and merchandising enterprise,
the biggest percentages are for salaries and wages. Service
businesses, may also have high percentages for materials
supplies, while merchandising businesses may have high
percentages for cost of goods sold (or the purchase cost of
goods sold). The usual base account used is the sales figure.
 Ratio analysis for the course is limited to profitability ratios.
Liquidity or solvency ratios, if required, may be due to the
financial objectives of the enterprise groups.
 Profitability ratios measure the capability of the enterprise
to earn profits from their operations. Frias (2016) cites the
following profitability ratios:
 Ratio of gross profit to net sales = gross profit/net sales
 Ration of net income to net sales = net income/net sales
 Operating ratio = cost of sales + operating expenses/net sales
 The ratio of gross profit to net sales shows if the gross profit
is enough to cover all business expenses and also earns
income for the owner. The decision on how sufficient the
gross profit is lies with the owner. If a higher gross profit is
desired, the enterprise may be driven out by competition. It
is helpful for start-up enterprises to get gross profit
information from similar businesses so that they can peg their
own gross profit objectives against these organizations.
 The net profit or ratio of net income to net sales measures
profitability for every peso sale. For example, a net profit
ratio of P0.08 says that a net income eight centavo is
earned for every peso sold.
 The operation ratio is useful in evaluating the efficiency
of operations. For example, an operating ratio of P0.92
means that for each peso net sale, ninety-two centavos is
spent for cost of goods sold and operating expenses. It is
obvious that a low operating ratio is preferred, as it
results to higher income after operational expenses.
Other profitability ratio that may be used are:
 Ratio of income to owner’s equity = net income for the
period/average owner’s equity
 Ratio of net income to total assets = net income/total assets
 Ratio of net sales to total assets = net sales/total assets
A high ratio of net income to equity signifies that
the owner is acquiring a high return on
investments. A low net income to total assets
ratio shows that the enterprise has low
operational efficiency, while a high net sales to
total assets ration indicates that the business is
making productive use of it’s assets.
Simulation Activity 8
1. The finance and administration team members meet to

discuss and complete the projected financial plan,
financial statements, and financial analysis for the period
coverage of the enterprise business plan.
2. The owner-proprietor directs discussions and approves the
financial study.
3. The aforementioned content are in Simulation Activity 8.

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 Number of units x purchase cost per unit

3. Net Income or Net Loss

1. The finance and administration team members meet to

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