Financial Aspects in Feasibility

Study
Understanding Key Financial
Components and Evaluation Methods
 Sources of Funds
1. Self-Financing: Utilizing personal savings or reinvesting profits back into
the business. This method involves no external debt and maintains full
ownership control.

2. Loans: Borrowed funds from banks, financial institutions, or lenders. Key

details to note include:
▪ Interest Rate: The percentage charged on the borrowed amount.
▪ Mode of Payment: The repayment plan, such as monthly installments,
quarterly payments, or lump sum.

3. Grants: Non-repayable funds provided by government programs, non-

profits, or private organizations to support business activities. These are
often awarded based on specific criteria and business proposals.

4. Investors: External parties who invest capital in exchange for ownership

equity or a stake in the business. This can include venture capitalists,
angel investors, or private equity firms.
 Project Cost
• Project costs refer to the total expenses required
to plan, develop, and execute a project. They
include all the resources, such as materials, labor,
equipment, and services, needed to complete the
project successfully.
• Project costs are typically divided into categories
like pre-operational costs, capital expenditures,
operational costs, and contingency funds to cover
unexpected expenses.
 Outline for Project Costs
1. Pre-Operational Costs
Market Research and Feasibility Study: Cost of conducting research, surveys, and
feasibility analysis.
Legal Fees: Registration, permits, and licenses.
Consultation Fees: Payments to experts, consultants, or professionals.
Product Development and Prototyping: Expenses for creating samples or
prototypes before production.

2. Capital Expenditures (CapEx)

Land Acquisition: Cost of purchasing or leasing land.
Building and Infrastructure: Construction, renovation, or rental costs for the
facility.
Machinery and Equipment: Purchase of necessary tools, machinery, and
equipment.
Office Furniture and Fixtures: Desks, chairs, computers, and other office
essentials.
Vehicle Purchase: Transportation for logistics, deliveries, or business operations.
3. Operational Costs
Raw Materials: Cost of acquiring raw materials required for
production.
Salaries and Wages: Monthly payments to employees, including
benefits.
Utilities: Electricity, water, internet, and other utility expenses.
Rent: If not purchasing, the cost of renting the facility or workspace.
Insurance: Coverage for assets, operations, and employees.
Marketing and Advertising: Budget for promoting the business,
including digital, print, and other media.
Maintenance: Regular upkeep of equipment and facilities.
4. Administrative and Miscellaneous Expenses
Office Supplies: Stationery, printing, and other office necessities.
Professional Fees: Accounting, auditing, legal, and consulting services.
Licensing and Compliance: Renewal of permits, licenses, and other
regulatory requirements.
Training and Development: Costs associated with employee skill
development.

5. Working Capital
Inventory: Initial stock of raw materials, finished goods, and spare
parts.
Operational Cash Flow: Funds required to cover daily operational
expenses until the business starts generating sufficient revenue.
6. Financial Costs
Loan Interest and Repayments: Interest rates, principal
repayment, and other financial charges.
Investor Returns: Dividends or profit-sharing
arrangements if external investors are involved.
7. Contingency Fund
Reserve Fund: An allocated budget for unexpected
expenses or emergencies, usually a percentage of the
total project cost.
 Financial Assumptions

• - No. of days to operate per month/year

• - Capital distribution and drawing
• - Sales/income percentage increase
• - Expenses percentage increase (can be based on
inflation rate)
• - Receivables
• - Fixed assets subject to depreciation
• - Liabilities and other necessary items
 Projected Financial Statements

• - Statement of Comprehensive Income

• - Statement of Changes in Equity
• - Statement of Cash Flow
• - Statement of Financial Position

Note that every financial statement must have a

discussion followed by the table.
 Statement of Comprehensive Income
The Statement of Comprehensive Income for PASTA POPS from 2024 to 2028 shows a progressive
increase in the business's financial performance. Sales revenue grew significantly over the five-year
period, starting at PHP 2,183,450.00 in 2024 and reaching PHP 8,804,450.14 by 2028, indicating a
successful sales strategy and a potentially expanding customer base. Alongside this, the cost of sales
increased proportionally, reflecting the higher production needed to support the rising sales volume.
Despite the growing costs, the business maintained a positive gross income, demonstrating effective
cost management.
The statement details various selling and administrative expenses, including compensation,
utilities, rent, depreciation, marketing, and office supplies. Compensation expenses are notably the
largest component, rising steadily from PHP 985,670.00 in 2024 to PHP 1,048,696.30 in 2028, likely due
to workforce growth or salary adjustments. Rent expenses also increased, suggesting possible expansion
or changes in rental agreements. Other expenses, such as utilities, marketing, and supplies, showed
consistent growth, reflecting the business's investment in its operations to sustain expansion.
Depreciation expenses across office, kitchen, and furniture equipment remained consistent,
accounting for the gradual wear and tear of assets over the years. Initially, in 2024, PASTA POPS
reported a net loss of PHP 131,961.20. However, the business turned around its financial performance,
leading to positive net income, which peaked at PHP 4,035,478.23 in 2028. This recovery from loss to
profit signifies improved operational efficiency and strategic cost management. As the net income
increased, so did the income tax payments, rising significantly from PHP 90,162.79 in 2026 to over a
million by 2028, reflecting higher taxable earnings.
The net income after tax shows a marked improvement, moving from a negative balance in 2024
to substantial profits by 2028, with earnings of PHP 3,022,334.76. This indicates that PASTA POPS not
only overcame initial financial challenges but also managed to grow its operations effectively, leading to
strong profitability. Overall, the statement highlights a positive trend in financial performance,
supported by effective cost control and strategic investment, pointing towards a stable and profitable
future for the business.
Example of Trading/Manufacturing
Example of Service
Sole Proprietorship
 Partnership/Corporation

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philippines/#:~:text=The%20corporate%20income%20tax%20rate,million%20(US%241.7%20million).
Statement of Changes in Equity
Statement of Cash Flow
Statement of Financial Position
 Notes to Financial Statements

• - Detailed explanations from revenue to

expenses
• - Clarifications on financial data and
assumptions
 Notes to Financial Statements
Breakeven Analysis
• Break-even Analysis is used to determine the
point at which a business's total revenue
equals its total costs, resulting in neither profit
nor loss. It helps businesses understand the
minimum sales volume required to cover
costs.
 Notes to Financial Statements
Breakeven Analysis
• The break-even analysis indicates the sales
volume required to cover all fixed and variable
costs, helping to identify the point at which
the business becomes profitable.
 Components of Break-even Analysis:

1. Fixed Costs (FC): These are costs that do not

change with the level of production or sales, such
as rent, salaries, and insurance.
2. Variable Costs (VC): These are costs that vary
directly with the level of production or sales, such
as raw materials and direct labor.
3. Selling Price per Unit (SP): The price at which
each unit of the product is sold.
4. Variable Cost per Unit (VCU): The cost incurred
for producing each unit of the product.
BEP Formula
 EXAMPLE
Suppose the kakanin business has the following
cost structure:
• Fixed Costs (FC): PHP 300,000 per year
• Selling Price per Unit (SP): PHP 100
• Variable Cost per Unit (VCU): PHP 40
SOLUTION
 Financial Statement Analysis

• - Financial Ratios: Profitability, Liquidity,

Stability
• - Return on Investment (ROI)
• - Payback period (simple & discounted)
Financial Ratios
Financial Ratios
Financial Ratios
 Financial Ratios
Liquidity Ratios:
The Current Ratio and Acid Test Ratio (also known as the Quick Ratio)
measure the company's ability to meet short-term obligations. The Current
Ratio improved from 26.83 in 2024 to 33.03 in 2025, indicating a strong
capacity to cover liabilities. However, it decreased significantly in 2026 and
onward, suggesting increased liabilities relative to assets. The Acid Test Ratio
follows a similar trend, showing a high liquidity level in early years but
declining, reflecting changes in cash or receivables management.

Leverage/Solvency Ratios:
The Debt-to-Equity Ratio and Debt Ratio assess the company’s use of
debt financing. The Debt-to-Equity Ratio remained low from 0.03 in 2024 to
0.14 in 2028, indicating minimal reliance on debt. Similarly, the Debt Ratio
stayed under 0.12, suggesting the company’s assets are primarily financed by
equity rather than debt. The Equity Ratio stayed high, above 0.85, indicating
financial stability and low leverage risk.
Efficiency/Activity Ratios:
The Total Assets Turnover Ratio measures how efficiently the company
uses its assets to generate sales. It started at 4.99 in 2024 and peaked at 6.07
in 2025 before gradually decreasing, reflecting a possible decline in asset
utilization efficiency. Lower ratios in later years could indicate increased
investment in assets or less effective use of resources.

Profitability Ratios:
The Gross Profit Ratio consistently ranged from 0.50 to 0.60, suggesting
stable cost management relative to sales. The Net Profit Ratio improved from
a negative (0.06) in 2024 (indicating losses) to 0.34 by 2028, showing
enhanced profitability. The Return on Assets (ROA) increased from 0.36 to
1.11, indicating more efficient use of assets to generate profit. The Return on
Equity (ROE) also showed growth from 0.37 in 2025 to 1.26 in 2028, reflecting
better returns for shareholders. Lastly, the Return on Sales rose to 0.46 by
2028, suggesting improved profitability per unit of sales.

Overall, the financial ratios highlight strong liquidity in the early years,
improving profitability, and controlled leverage, although there are indications
of reduced efficiency and liquidity management in the later years.
 Investment Appraisal Methods
• Payback Period
• - Net Present Value (NPV)
• - Internal Rate of Return (IRR)
• - Explanation of how each method assesses
profitability and risk
 DISCOUNT RATE
Cost of Capital
• The discount rate often represents the average
cost of raising funds for the business, including
both loans (debt) and owner’s investments
(equity). This is known as the Weighted Average
Cost of Capital (WACC).
• Example: If a business has an 8% cost of debt and
a 12% cost of equity, the average (WACC) might
be around 10%. This 10% could serve as the
discount rate.
Opportunity Cost of Savings
• The opportunity cost is the return you could earn if
you left your savings in a different investment. For
example, if your savings could earn 4% per year in a
safe, fixed deposit account or government bond, that
4% becomes your minimum benchmark. You would
want your project to earn more than this rate to justify
using your savings.
• If the project is riskier than leaving the money in a
bank, you should choose a higher discount rate to
reflect that additional risk.
Desired Return on Investment
• Since it’s your own money, think about the return
you would want to make it worthwhile. For
instance, you might decide you need at least a
10% return on your investment to make it
worthwhile, given the effort and risk involved.
This can be your discount rate.
• Using savings means you’re not paying interest
on a loan, but you still want to ensure the
investment earns enough to cover what you
could have earned elsewhere.
Inflation and Risk Adjustment
• Consider inflation: If the inflation rate is around
3%, your discount rate should be higher than this
to ensure your real return (adjusted for inflation)
is positive.
• Risk premium: If the business project is riskier
than other savings options, add a few percentage
points to account for this risk. For example, if a
fixed deposit earns 4%, you might set your
discount rate at 8% or 10% for a business project.
 Example

• Suppose you have PHP 500,000 in savings that

could earn 5% annually if left in a bank
account. You decide to invest this in a new
business. Given the risks of starting a
business, you might set your discount rate at
10% (5% for what you would have earned in
the bank + 5% to account for business risks).
This 10% would then be used to assess
whether the future profits from the business
are worth the investment.
1. Payback Period
Computation Discussion:
The discounted payback period of 2 years, 11 months, and 15 days
means the project begins to generate a positive return within a relatively
short period. The business project is likely to be attractive if the
organization values quick recovery of investments and a moderate level
of risk.
2. Net Present Value (NPV)
The positive NPV suggests that the project is viable and likely to
be profitable, as it is expected to generate PHP 3,204,594.79 in
value over and above the initial investment. This strong positive
figure implies that the project would be a good investment
opportunity.
The Profitability Index (PI) is a financial metric that helps evaluate the
profitability of a project by comparing the present value of future cash inflows
to the initial investment.
It is also known as the Benefit-Cost Ratio.
The PI helps determine how much value is created for every unit of currency
invested.
3. Internal Rate of Return
The IRR of 70.73% means that the project is expected to generate an annual
return of 70.73%. This high rate suggests the project is highly profitable,
especially if the cost of capital or the required rate of return is much lower
than 70.73%.
Legal and Taxation Aspect

This includes the legal requirements such as

building permit, DENR, Mayor’s permit, DTI,
SEC, BIR and others.
This will involve the study of tax implications of
the project possible tax saving measures and
all applicable taxes which should be
incorporated in the estimates of
product/project.
Social and Economic Benefits

This will cover the study of the benefits to be

obtained from an undertaking in terms of its
contribution to the community, to other business
firms and to the national economy as a whole.
The social benefits that may be derived from a
project could be in the nature of:
 Sensitivity Analysis
• Sensitivity analysis is a technique used to
evaluate how the outcome of a project (e.g.,
profit, NPV, IRR) changes when key input
variables fluctuate. It helps determine how
sensitive the project is to changes in factors
like costs, sales volume, and prices. By
understanding these potential impacts,
businesses can identify which variables are
most critical and assess the level of risk
involved.
 Purpose of Sensitivity Analysis in a
Feasibility Study:
1. Risk Assessment: Helps in understanding how
changes in key factors affect profitability and
viability. It highlights which variables could pose
the greatest risk to the project’s success.
2. Decision Making: Assists in making informed
decisions by showing the best and worst-case
scenarios, guiding strategic planning, and setting
realistic expectations.
3. Contingency Planning: Helps in preparing
contingency plans by identifying potential
challenges and areas that need close monitoring.
 Key Variables Typically Analyzed:
1. Sales Volume: What happens if the actual sales
are lower or higher than projected?
2. Selling Price: How does a change in price affect
revenue and profitability?
3. Variable Costs: What is the impact if costs of raw
materials or production increase or decrease?
4. Fixed Costs: What happens if fixed costs, like rent
or salaries, are higher or lower than expected?
5. Discount Rate: How does a change in the
discount rate affect NPV?
Risk Assessment Column: Now provides an assessment of the risk
associated with each scenario, ranging from low to high.
Mitigation Strategy: Offers actionable solutions to manage potential
risks, such as marketing enhancements, pricing adjustments, and
capacity planning.