Financial Prospects 

If you do the first three parts of the pre-feasibility study properly, you should now have the raw data to
forecast the financial prospects of your business. Financial forecast represents the monetary
transactions that your enterprise expected to engage in. These forecasts become the ultimate
determinants of enterprise feasibility because they measure profitability. 

Financial forecasting calls for the creation of four different financial statements, namely (1) income
statement, (2) balance sheet, (3) cash flow statement, and (4) funds flow statement. For now, we shall
only discuss how to prepare simple income statement and balance sheet. 

Income statement 
The income statement is financial statement that measures an enterprise performance in terms of
revenues and expenses over certain period of time. Simply put, the formula is: 

Revenues – Expenses = Income or Profit (Loss) 

From the market potential established in the pre-feasibility study, you should have the good basis for
doing a sales and revenue forecast. You should then subtract the corresponding cost of goods sold.  They
should Give the gross profit. deduct operating expenses from the gross profit to derive operating profit.
Then subtract the taxes due to get net profit after taxes. If the enterprise has non-operating revenues
and expenses, they should be added or subtracted from the operating profit before the taxes are
computed. 

TABLE 2.3  Monthly Income Statement of Mang Juan’s Manufacturing

Gross Sales Php 750,600

Less: Cost of Goods Sold 468,487
Gross Profit / margin 282,113
Less: Operating Expenses 166,145
Operating Profit/margin 115,968
Less: Taxes 21,392
Net Profit After Taxes Php 94,576
Note: the costs of goods sold refers to the materials, labor costs and overhead of making a product. For
service establishments, the entrepreneur can compute the costs of servicing the customers directly as
cost of services rendered.

Balance Sheet 
Creating the balance sheet is a bit more complicated, as it looks at three different things, namely assets,
liabilities, and equities. Assets represents all investments in your enterprise, including the initial
investments that you considered in the pre-feasibility study (Investments Requirements). These are your
cash, accounts receivable inventory of goods, equipment and machinery, facilities, vehicles, etc. On the
other hand, liabilities and equity financing sources for the assets. Liabilities represents what you need to
borrow in order to invest in assets (example, money that you need to borrow from you relatives, friends
and financing institutions) while equity represents your personal or other investors resources invested
into the business. 
For the balance sheet, we use a simple equation; 

ASSETS = LIABILITIES + EQUITY 

In other words, the resources that you put into your enterprise (liabilities and equity) should be equal to
the total value of the enterprise itself (assets) 

Actual balance sheets classify assets into current and fixed assets, and liabilities into current and long-
term liabilities. There are lots of other complicated items, but we shall give things simple for now. 

TABLE 2.4  Balance Sheet of Mang Juan’s Manufacturing

ASSETS LIABILITIES
Current Assets Current Liabilities
Cash Php 100,500 Accounts Payable Php 150,000
Accounts Receivable 370,200 Income Taxes Payable 20,500
Inventory 405,350 Wages Payable 75,000
Fixed Assets Short term Debt 125,000
Land 222,100 Long-term Liabilities
Building 200,000 Long-term Debt 777,650
Vehicles 150,000 EQUITY
Owner’s Capital 350,000
Retained Earnings 150,000

Total Assets Php 1,648,150 Total Liabilities and Equity Php 1,648,150
Retained earnings are the accumulated profits or losses of the enterprise over the years which have not
yet been given back to investors as dividends.
 
Remember that both sides of the shield should always balance out with each other. Total assets should
always equal total liabilities and equity. 

Financial ratios and measurements 

If you have a forecasted income statement and balance sheet, you can begin calculating for a new
financial measurement that will help you assess the potential performance of your business
proposal. for instance, in deciding which business opportunities to pursue, it would be helpful to solve
for the playback period of each of your options. The payback period Is the time it takes to earn back the
resources that you initially invested in your business. The formula to pay back period is: 

Income Payback Period =              Total Investments 

Annual Net Income After Taxes 

To illustrate, if Mang Juan had initial investment of Php1,500,000, it would take around 1.32 years (or 16
months) for the entrepreneur to recover the investments. The solution is as follows: 

Income Payback Period =    Php 1,500,000 = 1.32 years 

Php 94,576 x 12months 
 
Generally speaking, the faster you earn back the money you spent, the better the investment is.

Another financial measurement or ratio you can solve for is return on sales (ROS). Solving for ROS
answers the questions of how much profit you are actually earning for each peso you get from selling.
The formula for ROS is as follows:

Return on Sales = Net Profit After taxes

Sales

Using this formula, Mang Juan above had an ROS of 12.6%. This means that for every peso of sales, the
enterprise made a profit of 12.6 centavos. The higher the ROS, the better the return.

Return on Sales = Php 94,576 = 12.6%

Php 750,600

A third ratio is return on assets (ROA). ROA is an indicator of how efficiently the enterprise’s assets can
be used to bring in profits. The formula is as follows:

Return on Assets = Net Profit After taxes

Total Assets

Mang Juan’s monthly ROA is 5.7%. A higher ROA means you will be able to get more profits out of your
investments.

Return on Assets = Php 94,576 = 5.7%

Php 1,648,150

Finally, there is the return on equity (ROE) or net profit after taxes divided by Stockholder’s Equity.

Return on Equity = Net Profit After taxes

Stockholder’s Equity

All in all, you can use payback period, ROS, ROA, and ROE in identifying which opportunities have the
most promising financial prospects. Keep in mind that there are lots of other financial ratios, such as the
current ratio and the asset turnover that will be useful in analyzing business prospects. However, solving
for some of these ratios require a more in-depth knowledge of the other financial statements.

The Feasibility Study

The time and effort required in making prefeasibility study are daunting enough for any
entrepreneur. Fortunately, previous ability studies are usually sufficient to find out whether or not a
business idea is worth pursuing. But for the big projects where millions of pesos are at stake, the
entrepreneur may decide to implement a full-blown feasibility study. Basically, it is a rigorous, more
comprehensive, and more demanding version of the pre-feasibility study. 
These big studies are usually done in order to convince bankers and investors to put money into a
business idea. As such, the feasibility study focuses on the following factors: 
 A more in-depth study of market potential to ensure that the business proposal will
reach the forecasted sales figures; 
 Proof that the product or service being offered as the right design, attributes,
specifications, and preferred features; 
 Proof that the entrepreneur and his or her team have the necessary experience, skills,
and capability to maximize the ventures chances of success; 
 Legal viability (no legal impediments); 
 more detailed costings on the different assets; and 
 more thorough analysis of the technology and its sustainability. 
 

Reference:
Dr. Eduardo  Morato Jr. (2015). A Trilogy on Entrepreneurship. Eduardo Morato Publishing.