Module 5 Preparing A Financial Analysis

Module 5
PREPARING A FINANCIAL ANALYSIS

This module will serve as a tool for students to learn how to quantify the results of
marketing, technical, management, taxation, and legal phases of the project study and how
to express in peso terms the possible outcome of operating the project. Moreover, this will
help students understand that a feasibility study requires skillful coordination of the various
information of all the factors pertinent to an intended venture, and the investigation should
move on to the study of the finance cost.
Objectives:
At the end of the module, the students will be able to:
1. Determine the total project cost of the proposed business/ project;
2. Identify the sources of financing for the proposed business/ project;
3. Prepare the five year projected financial statements; and
4. Prepare financial ratios and analysis.
 A. Total Project Cost
This section of the financial analysis includes determining:

 the total project cost for five years,
 the financial assumptions to be made, and
 the initial capital of financing.
 B. Sources of Financing
 Alternative sources of financing to be considered are listed.

 Terms of payment and interest rates shall be considered such as Mode of
payment; Forms of security; and Interest and other features
 Further considerations involved I the financing of contingencies and
fluctuations in working capital are specified.
 C. Projected Financial Statements
In preparing the financial statements of the firm’s project, the proponents must
consider the demand and supply projections as bases for financial projections.
The following should be prepared:
1. projected income statements for the next five years- – it shows the income,
expenses, and profits of a firm over a period of time. It provides basic data to help the
prospective financier to analyze the reasons for the projected profits.
2. projected balance sheets for the next five years - it shows the financial condition of
the business as of a given date. The information provided by this statement is useful
not only to the entrepreneur but also to the prospective creditors.
3. projected cash flow statements for the next five years- – is also a very useful tool for
business planners. It projects what the business plan means in terms of pesos. It is
used for operational planning and estimates the amount of cash inflows and outflows
of the business during a specified period of time.
 D. Financial Ratios and Analysis
It is an examination of financial data of an entity to determine its probability,

growth, solvency, stability, and effectiveness of its management. The following
tools and techniques can be used in financial analysis.
1.1 liquidity ratios. These shows the relationship of a firm’s cash and other
current assets to its current liabilities. The two commonly used liquidity ratios are
the current ratio ad acid test ratio. The Formulas are:
1.2 Profitable ratios. A group of ratio that shoes the combined effects of
liquidity, asset management, and debt on operating results.
1.3 Solvency ratio. There are several indicators of short-term and long-term
solvency ratios. Some of these have been presented in liquidity ratio. Some
indicators of long-term solvency ratio are debt-equity ratio, debt ratio and
proprietary ratio.
1.4 Activity ratios. These ratio measures how the firm is effectively using it
resources:
a) Inventory turnover- This is a calculated by dividing sales by the average
inventories. Average inventory is determined by adding beginning and ending
inventories and then dividing by two. A high inventory turnover of say 10 could
mean that the firm does not hold excessive stocks on hand, reflecting high
liquidity.
b) Average collective period- This is calculated by dividing receivable by
sales per day is determined by dividing annual sales by 360 days. This ratio
measures the average length of time before the firm can collect cash out of
credit sales. An average collection period of more than the firm’s sales terms
could mean that the customers do not pay on time.
c) Fixed asset turnover- This is calculated by dividing sales by the net
fixed turnover of plant and equipment. A fixed asset turnover ratio equal to 2
indicates that the firm is not using its fixed assets in full capacity.
d) Total asset turnover- This is calculated by dividing sales by total asset.
It measures the turnover of the firm’s total assets. A total asset turnover ratio
of 2 could mean that the firm is not generating sufficient volume of sales
relative to the size of its asset investment.
 E. Breakeven Point Analysis

Break-Even Point Analysis - This is a test of operating leverage which indicates
how the projects employ assets for which it pays a fixed cost.
 F. Capital Recovery Internal rate of Return(IRR).
This refers to the rate of return that a long investment earns. It is also called the
discounted or time adjusted rate of return. Procedure: Compute for the payback period
With the playback period as the present value factor, locate it on annuity table
considering the economic life of the investment. The corresponding interest rate for the
column in which it can be found is the IRR.
 Net Present Value- It is an excess of the present value of cash returns

discounted at a chosen cut-off rate over the amount of investment.
Present value of annual cash returns discounted at the cut-off rate minus investment.
Methods of Projection
A. Arithmetical Straight Line- This is a very simple tool of projection It assumes that the
annual increase in the future will be the same although the rate if increase in percent
will keep on going down. This may be used in making quick nut rough estimates. In
formal studies, this method may be used only if the annual increments in the figures
are always positive and do not vary greatly. Ditablan,2005.
Steps:
1. Obtain the difference between the first year and the last year figures of the historical
data.
2. Subtract 1 from the number of years of the historical data.
3. Divide the difference obtained in step 1 using the number of years obtained in step 2 to
get the average annual increase.
4. Add the average annual increase (Step3) to the recorded figures the previous year to
get the projected figures.
References
Calayag, E.H. & Valenzuela, E.E. (2019). Feasibility Study Guidelines for Undergraduate
Courses. Great Books Trading.
Flores, M. F. (2016). Methods in Business Research Education. Unlimited Books Library
Services & Publishing Inc.
Masanja, N.W. (2020). A Practical Guide in Writing a Feasibility
Study.https://www.researchgate.net/publication/341134813

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Module 5

PREPARING A FINANCIAL ANALYSIS

 A. Total Project Cost

This section of the financial analysis includes determining:

 Alternative sources of financing to be considered are listed.

 C. Projected Financial Statements

 D. Financial Ratios and Analysis

It is an examination of financial data of an entity to determine its probability,

 E. Breakeven Point Analysis

 F. Capital Recovery Internal rate of Return(IRR).

 Net Present Value- It is an excess of the present value of cash returns

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