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6.1. Financing

This chapter will help determine how much capitalization will be needed to finance the
project. Who will be the project financiers, and to determine the most adoptable
financing scheme based on the financiers terms and conditions. In this particular
stage, it should always be assumed that all alternative sources of capital have ready
resources and that all external and internal conditions proposed are already
incorporated in the total project cost.

6.1.1. Total Project Cost

o State the total investment costs by presenting all the project costs
requirements from the previous aspects. Itemize them using the following

Ite Category Debt Equity Total

A. Fixed Capital Costs:
1. Land
2. Site preparation and Development
3. Structurals:
a. Buildings and Other Civil Works
b. Auxiliary and other Service Facilities
4. Technology Costs:
a. Technology
b. Royalties
c. Others (Specify)
5. Machineries and
6. Furniture and Fixtures
7. Other Fixed Capital Costs (Specify)
8. Contingencies
Total Initial Fixed Capital Cost

Note: The last two columns could be both divided into Local or foreign if it needs a
detailed presentation.

Ite Category Debt Equity Total

B. Pre-Operating Capital Expenditures:
1. Pre-Investment Studies and
2. Management of Pre-Project Operations:
a. Final Planning
b. Supervision, Coordination, Test Runs,

c. Recruitment and Training of
d. Arrangements for Suppliers
e. Arrangements for Marketing &
f. Building-up of Connections/Networks
g. Procurement of Legal Permits
h. Others (Specify)
3. Other Pre-Operating Capital
4. Contingencies
Total Pre-Operating Capital

Ite Category Debt Equity Total

C. Initial Working Capital
1. Current Assets
a. Inventories
Raw Materials
Work in Process
Finished Goods
b. Cash on Hand (required cash
c. Accounts Receivables
d. Other Current Assets (Specify)
Total Current Assets
2. Pre-Operating Production Costs
a. Salaries and Wages
b. Raw Materials
c. Overheads
Total Pre-Operating Production Costs
3. Contingencies
Total Initial Working Capital

6.1.2. Financiers

1. Sources of Capital
o Enumerate your sources of capital in detail

Ite Category Debt Equity %

m Contributi
1 (Loans from Banking institutions)

Total 100%

2. Terms and Conditions of Creditors

o Present the timetable for the loan application processing and
o State the terms and conditions of the loan sources
o State each of the other sources advantages and disadvantages


6.2.1. Major Assumptions Used

Present by enumeration, all the financial assumptions summarized from all the
previous aspects and new ones that will clearly explain how the projection figures
were obtained. Under this topic, consider the following:

The project timetable/number of projection years

Depreciation formula used
Tax rates exemptions
Inventories: beginning/ending for all raw materials, work-in-process and finished
Dividends to be declared
Inflation rates/price level changes/foreign exchange rates

6.2.2. Projected Financial Statements

1. Pre-Operating Periods Financial Statements

2. Operating Period Projected Financial Statements
Present the projects operating financial statements: Balance Sheet,
Cash Flow and Income Statement and all their corresponding
schedules, if any, for all the projection years. The following pro-forma
statements are guides in the preparation of the statements:

Refer to Summary of Philippine Accounting Terms.

Schedule 1: Cash Disbursements Table:

Schedule 2: Cost of Goods Manufactured and Sold

6.2.3. Financial Analysis

Present the Financial Ratios, Rates of Return and Cash Payback Period for each of the
projection years and the entire projected operations. State also the averages over n
years, if possible.

The following table could be used for the presentation of these items:

Financial Ratio Year 1 Year 2 ... Year n

1. Measures of Profitability:
2. Measures of Asset Use:
3. Measures of Liquidity and Use of Debt:

For each of the computed figures in the table above, explain their significance to the

Present the projects Break-Even Points (BEPs) and an analysis for each figure
computed. You could use the following tables for presentation.

a. For a Single Product Project:

Break-Even Points Summary Year 1 Year 2 ... Year n
BEP Selling Price:
Profit BEP Selling Price
Cash BEP Selling Price
Debt-Service BEP Selling Price
BEP Sales Volume
Profit BEP Sales Volume
Cash BEP Sales Volume
Debt-Service BEP Sales Volume

b. For Multiple Product Project:

Break-Even Points Summary Year 1 Year 2 ... Year n

Product No. 1
BEP Selling Price:
Profit BEP Selling Price
Cash BEP Selling Price
Debt-Service BEP Selling Price
BEP Sales Volume
Profit BEP Sales Volume
Cash BEP Sales Volume
Debt-Service BEP Sales Volume

Product No. 2

Present a Sensitivity Analysis of the project. For the proposed product/s, computations
can be summarized using the table below:

PRODUCT Year 1 Year 2 ... Year n
I. On Selling Prices:
( ) % increase as computed
( ) % decrease as computed

II. On Production Expenses

( ) % increase as computed
( ) % decrease as computed
III. On Production Capacity
( ) % increase as computed
( ) % decrease as computed

Try looking for the effects of changes for other financial and/or production items to see
how sensitive the project is. Explain the effects of these changes as they affect
departments/sections of the project or of the entire operations. If the project is part or
related to an existing entity, a side-by-side comparison of present and projected
figures of these same items will be a good presentation for the justifications of the
feasibility of proposals.

6.2.4. System and Forms Design

Present the projects flow of financial operations and standard operating

procedures clearly, showing internal and external relationships, other parts of
the organization and environment and the flow diagram explaining the
proposed system.
Show some sample designs of proposed forms to be used in the financial
operations, their explanations, uses, channels, who and how they will be


There are two types of capital: equity capital and creditors capital. These two and the
possible forms/sources are detailed as follows:

1. Equity Capital capital put into the business from the investors personal
resources. These may be in the form of:
1. Retained Earnings for existing business, these are the undeclared profits
rolled-over from the companys operations.
2. Advance Payment from Customers which may be used to fill-in the needed
capital in the business operations
3. Sale of Stocks whether common or preferred, may also be used to bring in or
increase your operations capital.
4. Accounts Receivables especially in the form of promissory notes may be used
as collaterals or rediscounted (like in the case of post-dated cheques and
converted into additional equity capital.
5. Investors personal resources include capital sources from the proponents
personal funds.

2. Creditors Capital capital or equity sourced from outside sources. These may be
either short-term (those with less than one years maturity), medium term (one
year but less than five years) and long term (more than five years) loans. Some of
the most common sources are:
1. Banks most common sources. Todays borrowers have a large array of banks
to choose their requirements: universal banks, commercial banks, rural banks,
thrift banks, private development banks, merchant banks, etc.
2. Merchant Creditors once, or if one had established a good credit reputation,
suppliers may allow to purchase the needs on account normally on a 30, 60 or
90-day credit. These credit privileges usually are used to offset goods on
account made to the customers in return. Other forms of this type are lease
privileges of goods, installment payments from sources or consignments from
3. Insurance Companies usually offer loans but only on some conditions and
mostly not exceeding the cash value of the policies.
4. Mortgage Bankers these companies help finance the projects by bringing to
the sources of capital with mortgage requirements, usually in the form of real
estate, motorized vehicles or jewelry.
5. Finance Companies these companies also provide numerous financing and
leasing services. They deal mostly on secured loans to persons usually refused
by banks, but give relatively higher interest rates.
6. Pawnshops especially when personal properties are offered as collaterals,
these firms offer capital to small businessmen. These firms are restricted from
doing banking activities other than their authorized activities.
7. Individual Money Lenders these are unlicensed money lenders who lend
capital as friends for business, at an agreed interest. Sometimes, these sources
require also collaterals from their borrowers.
8. Private Voluntary Organizations (PVOs) these are intermediary agents, mostly
between government agencies (with programmed loan budgets but who are
supposed to make money) and certain organizations. These entities receive an
allocation of the budget from main sources and re-lend the capital to individual
borrowers or small groups of persons. They usually charge lower rates than all
above-mentioned sources. These sources are civic, religious or private
organizations or foundations accredited by the main sources to act as re-
lending conduits.
9. Savings and Loan Associations, Credit Cooperatives and Credit Unions these
are usually exclusive organizations where memberships entitle members to
obtain loans for capitalization requirements. The SSS for private employees and
the GSIS for government workers, may be classified under this type of source.


A. Considerations
When obtaining a loan, it is very important that one should consider the
following as they will be very valuable in the financial capability computations:
1. Source of funds/suppliers terms and conditions in the procurement of
machineries and all other equipment and accessories
2. Debt-Equity Requirements of the project
3. Funding sources collateral requirements and assessment/appraisal
4. In case of foreign funding, the currency of repayment.
5. Interest Rates
6. Maturity (Repayment) date/amortization and date(s)
7. Application and Processing Fees
8. Withholding Taxes and Tax Exemptions of the proposed project
9. Processing Time from filing of application up to loan release
10.Deposit requirements

B. Requirements
Requirements of financial institutions normally mean collaterals. The most
accepted forms are:
1. Real Estate Properties
2. Motorized vehicles
3. Machineries and Equipment/Accessories
4. Jewelry
5. Merchandise (good, crops, etc.)
6. Stocks and Bonds (Corporate Securities)
7. Instruments of Ownerships of commodities like Bills of Lading, Advance
Payment Receipts, Post-dated cheques, etc.
8. Personal belongings (for pawnshops)

C. Procedures
Banking procedures vary from sources. It is thus advised that depending on the
most suited/practical financing scheme for the project, one must get a copy of
the sources borrowing guidelines and suit the requirements especially in the
projects financial computations.

Annex 3. List of Financial Ratios

1. Measures of Profitability
a. Sales and Profits comparison Ratios
Net Income After Taxes to Net Sales
Total Raw Materials Cost to Net Labor Costs
Direct Labor Costs to Net Sales
b. Profits Compared to Assets Ratios
Net Income to Total Assets (Return on Over-all Assets)
Net Operating Income to Total Assets
Income Before Taxes to Total Assets
Income After Taxes to Total Assets

The Return on Assets Ratios will help analyze the total earnings with the
projects assets. Compare the companys total earnings with the other types of
Assets (Current Assets, Fixed Assets, Intangible Assets, etc.).

Return on Investments is computed by:

Net Income
Total Owners Equity

For Corporations, a useful method for determining rates of returns on owners

investments is the Return on Common Stockholders Equity with the

Net Income less Dividend Requirements on Preferred Stocks

Average Common Stockholders Equity

The Average Common Stockholders Equity in this formula is the residual

equity, i.e., the total equity remaining after the provisions have been made for
the claims of all other equity holders.

Another method that compares stockholders invested capital to future dividends is

the Discounted Cash Flow Method. This method tries to determine a certain rate of
return wherein future dividends are discounted to equal total stockholders initial
capital investments.

Another method is the Payback Period, which refers to the time needed for
stockholders to fully recover their initial investments. This method may be computed
by means of any of the following:

Net Investment to Annual Cash Flows

Bail-Out Payback Period
Present Value Payback Period
Profitability (or Desirability) Index Method
Book Values per Share of Stock
Price Earning Rate (Earnings Per Share)
Market Value to Earnings Per Share
Payout Rate (Dividends per Share to Earnings per Share)

2. Measures of Asset Use

A good measure of asset use is given by the formula:
Year-end Receivables
Average Days Sales

For the Current Assets Turnover, the formula is:

Cost of Goods Sold and Operating Expenses less Depreciation

Current Assets

The Accounts Receivables Turnover is evaluated by the formula:

Net Sales for the Period

Average Accounts and Notes Receivables

The Number of Days Sales in Receivables, or the average time required to

collect receivables is computed as follows:

Average Receivables
Average Daily Sales