Business Financing, Financial Planning, and Financial Statement Preparation

Fundamentals of Business Financial Management

• Entrepreneurial financial literacy requires understanding key financial questions before beginning business operations:
  • How much money is needed to start?
  • How much does the product cost?
  • How much should the product be sold for?
  • How much money is earned from sales?
  • How much is spent on expenses?
  • Is the business making a profit or a loss?
  • How many products must be sold before the business earns a profit?

Basic Accounting Concepts

• Revenue:
  • Verbatim definition: The money earned by a business from selling products or providing services.
• Expenses:
  • Verbatim definition: The costs incurred in operating the business.
• Profit:
  • Verbatim definition: The financial gain that remains when total revenue from a business activity or sale exceeds the total expenses, costs, and taxes involved.
  • Mathematical formula: $\text{Profit} = \text{Revenue} - \text{Expenses}$
• Loss:
  • Verbatim definition: Occurs when expenses are greater than revenue.

Business Financing and Capital Requirements

• Business Financing:
  • Refers to the money used to start, operate, or expand a business.
• Capital Breakdown Example (Fresh Fruit Shake Business):
  • Fruits and ingredients: $\text{₱}2,000$
  • Cups and straws: $\text{₱}500$
  • Ice: $\text{₱}300$
  • Blender: $\text{₱}2,000$
  • Marketing materials: $\text{₱}200$
  • Total Capital Needed: $\text{₱}5,000$

Categories and Sources of Financing

• Internal Sources of Financing:
  • Definition: Money that comes from the owner or the business itself.
  • Specific examples:
  • Personal savings
  • Owner's capital
  • Business profits
• External Sources of Financing:
  • Definition: Money that comes from outside the business.
  • Specific examples:
  • Family and friends
  • Bank or business loans
  • Investors
  • Supplier credit
  • Microfinance

Capital Structure Mechanisms: Debt vs. Equity Financing

• Debt Financing:
  • Definition: Borrowing money that must be repaid based on agreed terms.
  • Core concept rule: DEBT = BORROW AND REPAY
  • Practical scenario: A business borrows $\text{₱}50,000$, creating an obligation to repay the principal amount of $\text{₱}50,000$ under specified terms.
• Equity Financing:
  • Definition: Receiving money from an investor in exchange for ownership or a share in the business.
  • Core concept rule: EQUITY = INVEST AND OWN
  • Practical scenario: An investor provides $\text{₱}50,000$ in capital, and in return receives a $20\%$ ownership stake in the business.

Financing Decision Framework

• To determine the appropriate source of financing, evaluate four sequential questions:
  1. How much money do we need? (Example startup requirement: $\text{₱}10,000$)
  2. How much money do we already have? (Example existing funds: $\text{₱}6,000$)
  3. How much more do we need? $\text{Financing Gap} = \text{₱}10,000 - \text{₱}6,000 = \text{₱}4,000$
  4. What is the best source for the additional $\text{₱}4,000$?
  • Additional member contribution
  • Family support
  • Small loan
  • Investor

Financial Elements: Assets, Liabilities, and Owner's Equity

• Assets:
  • Verbatim definition: Valuable things the business owns or controls.
  • Café Asset Breakdown Example:
  • Cash: $\text{₱}20,000$
  • Coffee machine: $\text{₱}50,000$
  • Refrigerator: $\text{₱}30,000$
  • Total Assets calculation: $\text{Total Assets} = \text{₱}20,000 + \text{₱}50,000 + \text{₱}30,000 = \text{₱}100,000$
• Liabilities:
  • Verbatim definition: The amounts the business owes to other people or organizations.
  • Specific examples:
  • Bank loan
  • Unpaid supplier
  • Borrowed money
  • Café Liability Example: Borrowed money equal to $\text{₱}40,000$
• Owner's Equity:
  • Verbatim definition: Represents the owner's share or interest in the business.
  • Mathematical formula: $\text{Owner's Equity} = \text{Assets} - \text{Liabilities}$
  • Café Owner's Equity Calculation: $\text{Owner's Equity} = \text{₱}100,000 - \text{₱}40,000 = \text{₱}60,000$
• Basic Accounting Equation:
  • Fundamental mathematical rule: $\text{Assets} = \text{Liabilities} + \text{Owner's Equity}$
  • Applied verification: $\text{₱}100,000 = \text{₱}40,000 + \text{₱}60,000$

Startup Costs and Expense Classification

• Startup Costs:
  • Verbatim definition: Expenses a business pays or incurs before it officially begins operations.
  • Small Milk Tea Business Startup Cost Model:
  • Initial ingredients: $\text{₱}2,000$
  • Cups and straws: $\text{₱}500$
  • Blender: $\text{₱}2,500$
  • Signage: $\text{₱}500$
  • Marketing materials: $\text{₱}500$
  • Transportation: $\text{₱}500$
  • Total Startup Cost calculation: $\text{Total Startup Cost} = \text{₱}2,000 + \text{₱}500 + \text{₱}2,500 + \text{₱}500 + \text{₱}500 + \text{₱}500 = \text{₱}6,500$
• Fixed Costs:
  • Verbatim definition: Costs that generally remain the same even if the number of products sold changes within a relevant period.
  • Specific examples:
  • Rent
  • Equipment rental
  • Monthly internet
  • Signage
• Variable Costs:
  • Verbatim definition: Costs that change depending on how many products or services are sold.
  • Variable Cost Breakdown per Cup of Milk Tea:
  • Tea: $\text{₱}15$
  • Milk: $\text{₱}10$
  • Sugar: $\text{₱}5$
  • Cup and straw: $\text{₱}5$
  • Total Variable Cost Calculation per Cup: $\text{Total Variable Cost per Cup} = \text{₱}15 + \text{₱}10 + \text{₱}5 + \text{₱}5 = \text{₱}35$

Pricing Methods and Strategies

• Definition of Pricing:
  • Verbatim definition: The method a business uses to set the financial cost for its products or services, determining how much money a customer pays in exchange for an item.
• Cost-Plus Pricing Strategy:
  • Mathematical formula: $\text{Cost} + \text{Desired Profit/Markup} = \text{Selling Price}$
  • Milk tea application:
  • Production cost per unit: $\text{₱}35$
  • Desired markup: $\text{₱}25$
  • Selling Price Calculation: $\text{Selling Price} = \text{₱}35 + \text{₱}25 = \text{₱}60$
• Competitive Pricing Strategy:
  • Involves evaluating competitor prices (e.g., benchmark market prices for milk tea at $\text{₱}55$, $\text{₱}60$, and $\text{₱}65$) to set prices within a reasonable market range based on product quality and value.
• Promotional Pricing Strategy:
  • Involves offering temporary discounts to attract customers.
  • Example structure: Regular Price of $\text{₱}60$ reduced to an Opening Promo price of $\text{₱}50$
• Value-Based Pricing Strategy:
  • Involves setting prices based on perceived customer value rather than underlying production cost.
  • Example: A standard tour priced at $\text{₱}1,000$ is upgraded to a higher premium price point when bundled with private transportation, meals, dedicated tour guide services, and an exclusive experience.

Break-Even Analysis

• Definition of Break-Even Point:
  • Verbatim definition: The exact level of sales where a company's total revenue equals its total expenses, meaning the business makes no profit and suffers no loss.

• Contribution Margin Formula: $\text{Contribution Margin} = \text{Selling Price} - \text{Variable Cost per Unit}$

• Break-Even Point Formula: $\text{Break-Even Point} = \frac{\text{Fixed Costs}}{\text{Selling Price} - \text{Variable Cost per Unit}} = \frac{\text{Fixed Costs}}{\text{Contribution Margin}}$

• Milk Tea Stand Worked Calculation Example:

  • Fixed Costs (Table rental): $\text{₱}1,000$
  • Selling Price per cup: $\text{₱}60$
  • Variable Cost per cup: $\text{₱}35$
  • Step 1: Calculate Contribution Margin: $\text{Contribution Margin} = \text{₱}60 - \text{₱}35 = \text{₱}25$
  • Step 2: Calculate Break-Even Units: $\text{Break-Even Point} = \frac{\text{₱}1,000}{\text{₱}25} = 40\,\text{cups}$
  • Operational performance thresholds:
  • Selling 30 cups: Yields a net loss
  • Selling 40 cups: Achieves break-even state
  • Selling >40 cups: Generates a net profit

Operational Business Case Study: Campus Coolers

• Business Name: Campus Coolers
• Location: Inside Cebu Eastern College
• Product: Fresh fruit drinks

Financial Breakdown

• A. Startup Costs:
  • Blender: $\text{₱}2,000$
  • Initial ingredients: $\text{₱}1,500$
  • Cups and straws: $\text{₱}500$
  • Signage: $\text{₱}300$
  • Marketing: $\text{₱}200$
  • Total Startup Cost: $\text{Total Startup Cost} = \text{₱}2,000 + \text{₱}1,500 + \text{₱}500 + \text{₱}300 + \text{₱}200 = \text{₱}4,500$
• B. Variable Cost per Drink:
  • Fruits: $\text{₱}20$
  • Sugar: $\text{₱}5$
  • Ice: $\text{₱}3$
  • Cup and straw: $\text{₱}7$
  • Total Variable Cost per Drink: $\text{Variable Cost per Drink} = \text{₱}20 + \text{₱}5 + \text{₱}3 + \text{₱}7 = \text{₱}35$
• C. Selling Price Determination:
  • Unit Cost: $\text{₱}35$
  • Desired profit/markup: $\text{₱}25$
  • Selling Price: $\text{Selling Price} = \text{₱}35 + \text{₱}25 = \text{₱}60$
• D. Fixed Cost:
  • Table rental: $\text{₱}1,000$
• E. Break-Even Point Calculation: $\text{Break-Even Point} = \frac{\text{₱}1,000}{\text{₱}60 - \text{₱}35} = \frac{\text{₱}1,000}{\text{₱}25} = 40\,\text{drinks}$
• F. Operational Scenario (Sales of 100 drinks in a single day):
  • Total Revenue: $\text{Revenue} = 100 \times \text{₱}60 = \text{₱}6,000$
  • Total Variable Costs: $\text{Variable Costs} = 100 \times \text{₱}35 = \text{₱}3,500$
  • Fixed Cost: $\text{₱}1,000$
  • Total Operating Cost: $\text{Total Cost} = \text{₱}3,500 + \text{₱}1,000 = \text{₱}4,500$
  • Net Profit: $\text{Profit} = \text{₱}6,000 - \text{₱}4,500 = \text{₱}1,500$

Financial Plan vs. Financial Statement Comparison

• Financial Plan:
  • Verbatim definition: A document or section of a business plan that shows the financial side of the business.
• Financial Statement:
  • Verbatim definition: A formal report that summarizes the financial activities and results of a business, explaining what happened to the money of the business.

Comparative Matrix

• Projection vs. Actual report
• Prepared before selling vs. Prepared after selling
• Based on estimates vs. Based on actual records
• What we EXPECT vs. What ACTUALLY happened
• Forecast vs. Historical record
• Estimated revenue vs. Actual revenue
• Estimated expenses vs. Actual expenses
• Projected profit vs. Actual profit/loss

Financial Reporting Purpose and Statement Types

• Purposes of Preparing Financial Statements:
  1. Measure business performance (determine profit or loss)
  2. Track money (verify sources and destinations of capital)
  3. Support decision-making (evaluate product continuation)
  4. Identify problems (analyze expense overruns)
  5. Evaluate the financial plan (assess baseline accuracy)
  6. Demonstrate accountability (provide verifiable audit trails)
• The Four Primary Types of Financial Statements:
  • Balance Sheet: Shows what a company owns (assets) and owes (liabilities), plus owner or shareholder equity, at a specific point in time.
  • Income Statement: Tracks revenue, expenses, and overall profit or loss over a specific period.
  • Cash Flow Statement: Measures how much cash moves in and out of the business through operations, investing, and financing.
  • Statement of Shareholders' Equity: Tracks how the net worth or ownership value of a company changes from the start of an accounting period to the end.

Semifinal Project Final Report Structure

• Formal Cover Page
• Part 1 – Business Information:
  • Business Name
  • Product/Service
  • Selling Period
  • Target Market
• Part 2 – Financial Plan:
  • Startup Capital
  • Sources of Financing
  • Estimated Cost
  • Selling Price
  • Projected Sales
  • Projected Expenses
  • Projected Profit
  • Break-Even Point
• Part 3 – Actual Selling Record (Example Data Set):
  • Sept. 1: Lemonade | Quantity Sold: 20 | Selling Price: $\text{₱}40$ | Total Sales: $\text{₱}800$
  • Sept. 2: Lemonade | Quantity Sold: 30 | Selling Price: $\text{₱}40$ | Total Sales: $\text{₱}1,200$
  • Sept. 3: Lemonade | Quantity Sold: 35 | Selling Price: $\text{₱}40$ | Total Sales: $\text{₱}1,400$
  • Total Units Sold: 85 | Total Revenue Generated: $\text{₱}3,400$
• Part 4 – Actual Expense Record (Example Data Set):
  • Sept. 1: Ingredients (Lemons/Sugar) = $\text{₱}950$
  • Sept. 1: Packaging (Cups/Straws) = $\text{₱}500$
  • Sept. 1: Transportation (Delivery) = $\text{₱}200$
  • Sept. 1: Marketing (Posters) = $\text{₱}150$
  • Sept. 1: Others (Miscellaneous) = $\text{₱}350$
  • Total Actual Expenses: $\text{₱}2,150$
• Part 5 – Financial Statements Governing Formulas:
  • Income Statement: $\text{Revenue} - \text{Expenses} = \text{Net Profit/Loss}$
  • Cash Flow Summary: $\text{Beginning Cash} + \text{Cash In} - \text{Cash Out} = \text{Ending Cash}$
  • Balance Sheet: $\text{Assets} = \text{Liabilities} + \text{Owner's Equity}$
• Part 6 – Financial Plan vs. Actual Variance Analysis Table:
  • Units Sold: Planned = 100 | Actual = 85 | Difference = $-15$
  • Revenue: Planned = $\text{₱}4,000$ | Actual = $\text{₱}3,400$ | Difference = $-\text{₱}600$
  • Expenses: Planned = $\text{₱}2,200$ | Actual = $\text{₱}2,150$ | Difference = $-\text{₱}50$
  • Profit: Planned = $\text{₱}1,800$ | Actual = $\text{₱}1,250$ | Difference = $-\text{₱}550$
• Part 7 – Business Analysis Framework Questions:
  1. How much did the business actually sell?
  2. How much did the business actually spend?
  3. Did the business earn a profit or suffer a loss?
  4. How much cash remained after the selling activity?
  5. What assets does the business still have?
  6. Does the business have any liabilities?
  7. Does the Balance Sheet balance?
  8. Did actual results meet the Financial Plan?
  9. What was the biggest difference between projected and actual results?
  10. What would you change if you were to operate the business again?

Practical Activity Submission Rules and Guidelines

• Document physical specifications:
  • Paper size: Short-size bond paper
  • Format requirement: Handwritten (NEAT & CLEAR)
  • Margins: 1 inch on all sides

Entrepreneurial Mindset and Strategic Workflows

• Entrepreneurial Philosophy Quote: "A good entrepreneur does not only know how to sell. A good entrepreneur knows the cost of the product, sets the right price, monitors expenses, and understands whether the business is truly making a profit."
• Strategic Financial Management Process Flow:
  • KNOW YOUR COST → SET YOUR PRICE → TRACK YOUR SALES → CONTROL EXPENSES → REACH BREAK-EVEN → EARN PROFIT
• Operational Business Lifecycle Workflow:
  • PLAN → SELL → RECORD → COMPUTE → REPORT → ANALYZE
• Execution Principle: Financial plans represent expectations; selling activity generates transactions; financial records document transactions; financial statements organize records; analysis explains numeric meaning. Do not merely state money was made; prove it with precise figures.