Chapter 8:

CCHTM 2110:
ENTREPRENEURSHIP IN
TOURISM AND HOSPITALITY
 CHAPTER 8:
Creating Successful
Financial Plan
Learning Objectives:
At the end of this chapter, student should be
able to:
1.Create and interpret financial statements;
2. Create and interpret cash flow statement;
3. Determine the breakeven point;
4. Evaluate investments in working capital and long-
term assets; and
5. Demonstrate proficiency in financial ratio
analysis.
INTRODUCTIO
N
In every business venture, it is important to always consider
how the business will be funded. Putting up a business is not
only physically and mentally draining, more so financially. A
business, whether micro, small, medium, or large, should be
backed up by a sound financial program. Most start-up
businesses are focused on the results of the objective often
neglecting the essential elements on how to achieve those. In
this chapter, a review of some concepts about funding a
business, simple forecasting, and understanding basic financial
statements will be done. Each entrepreneur must be able to
understand simple financial management to know and
understand the business situation.
 BANKS
Banks loan money for capital on either a short or long-
term basis or both for interest. Short-term barrowing
covers a limited period but is often faster and easier to set
up with bank. Long-term barrowing is more flexible but
more complicated in terms of loan repayment schemes,
interest rate computation , and bank requirements. The
amount of loan , conditions of payment, and rate of interest
vary based on the barrower`s assets, track required, and the
soundness and viability of the business plan presented to
them.
 VENTURE CAPITAL
Is a source of funding where capital
providers are active participants in running
the business. Compared to loan capital
which requires arrangement for their
participation and exit from business. They
are directly investing in the venture and are
partly to the risk involved.
 RENT TO OWN AND LEASE
For entrepreneurs on a tight budget or who wouldn't want to spend much for
the use of an asset, an alternative financial facility to utilize is through a lease.
There are two kinds of lease: lease to own and strictly plain lease contract. These
are facilities where an entrepreneur can use an asset for a fixed period for a
regular fee. Lease to own is a scheme where the entrepreneur claims ownership
of the asset after all the required payments have been paid as stipulated in the
contract. In the lease-to-own agreement, it can be specified if the entrepreneur
can automatically claim ownership of the asset or there may be a stipulation that
requires payment of an option-to-purchase fee. The difference with the plain
lease is that the entrepreneur can never claim ownership of the asset. The leasing
firm still claims ownership of the asset or equipment. Use of the equipment lasts
only up to the duration of the contract. Lease agreements can be used for most
types of new equipment such as cars, office equipment, kitchen equipment, and
computers.
 SUPPLIER
A supplier can be a source of funds
through supplier finance and trade credit.
Supplier finance talks about the supplier
offering a loan at favorable rates. In return,
the borrower/entrepreneur should guarantee
outlets for the supplier's products.
 GRANTS
This type of resource funding is a very desirable choice since
the entrepreneur need not necessarily pay back the amount
provided to the business. Consequently, there are very few
foundations, agencies, or NGOs that provide grants to aspiring
entrepreneurs. Oftentimes, the requirements to qualify are
very rigid and thorough that obtaining a favorable response is
small. Most grant providers consider the businesses they
approve if they are related or aligned with their advocacies,
socially relevant, contribute to the conservation and
preservation of the environment, enrich culture, and others.
 INNER CIRCLE
Entrepreneurs call upon their family, friends, and contacts
to supplement funding a new business. This type of funding
may look the easiest and fastest since they are most likely to
respond favorably without asking for collateral or strings
attached. However, there are situations where the fine line
between family relationship and business etiquette are crossed.
Because of familiarity and feeling of having a stake in the
business, interference in running the business is experienced.
For cultures that are less attached to the family bond, they
make in writing legally binding contracts for repayment.
BOOTSTRAPPING
When all the possible sources of funding have
been exhausted and the entrepreneur still
encounters funding gaps; bootstrapping can be
the last option just to keep the business on track.
Bootstrapping happens when an entrepreneur
augments the working capital required to finance
the new business from other unlikely sources.
Such sources may include the entrepreneur's
credit cards, private line of credit, home equity
loans, personal savings, foregone or delayed
compensation, etc.
B. FINANCIAL MANAGMENT
Lack of financial liquidity is the major cause of business
failure in the hospitality, tourism, and leisure industries
(Morrison, Rimmington & Williams, 1999). Lack of funds may
be the obvious and pressing problem of any business. But it
can also be a manifestation of many other problems
encountered by the business. It can be the result of improper
financial planning or the control of function within the
business may have been done inadequately. When the start-
up capital dries out, the business will suffer a shortage of
funds. Eventually, the business will be forced to cease
operation and close down.
C. BASIC FINANCIAL STATEMENT
The financial statements, also known as
accounting statements, serve as a form of
financial reports about the performance and
resources of a firm. These financial statements
serve as tools to determine a firm's financial
requirements and assess the financial implications
of a business plan. Below are some of the
financial statements often used in a business plan.
 INCOME STATEMENT
This form of financial statement summarizes a
firm's revenues and expenses over a given period. It
is a report that shows the profit or loss from a
form's operation in a specific period. It answers the
question, "How profitable is the business?" Business
plans usually project the income statement for the
next five years to show how much profit could be
earned in the next five years.
Below is a sample of an income statement covering two years of operation. The
definition of terms or entries found in the statement is located after the
example.
 The firm's profit or income is derived from the sales (revenue)
generated minus the expenses incurred during the period. Revenue
can be products sold or services rendered for a fee or both. These
include the total amount of all the goods and services sold. In a
restaurant, revenue can come from the menu offered, from the
drinks and beverages sold, take out/take-home products, deliveries
served, pastries, frozen products, and other services such as
banquet hosting, catering, and other possible sources of income.
Expenses include the cost of producing the product or service;
operating expenses such as marketing, selling, administrative
expenses, and depreciation; financing costs like interests paid; and
taxes paid.
 BALANCE SHEET
A balance sheet also known as the statement of financial
position is a type of financial statement that provides a picture
of a firm's financial situation at a point in time. The balance
sheet is a report that show's a firm's assets, liabilities, and owners'
equity. Business plans seeking approval for loans, investments, or
grants for the organization include the balance sheet to show the
firm's financial stability. Balance sheets in business proposals or
plans are often projected in five years to show historical data to
support the firm's stability and competitiveness. This financial
report highlights one of the basic financing principles about total
assets equal to debt plus owner's equity.
Current Assets or sometimes referred to as Gross Working Capital are
resources that can be converted to cash within the firm's operating cycle.
Current assets can' be in the form of cash, accounts receivable, and inventory.
Fixed assets, also known as noncurrent assets, are those that are relatively
permanent such as property, plant/building, equipment, and intangible assets
(patents, copyrights, and goodwill that have an estimated value).
Depreciable assets refer to the value of most fixed assets which depreciate
over time. Gross fixed assets are the original value or cost of depreciable assets
before any depreciation expense.
Accumulated Depreciation refers to the total expenses deducted over the
assets' life (length of time used before it gets fully depreciated or it reaches
zero value).

NOTE: When accumulated depreciation has been deducted from gross fixed
assets, these are called Net Fixed Assets.
Liabilities are also known as debts. Debts are business financing provided by a creditor. The
types of credit include current debt and long-term debt. Current debt, otherwise known as
short-term liabilities, includes the following: accounts payable, accrued expenses, and short-
term notes.
Long-term debts are mortgages and loans that mature beyond one year. A mortgage is a
kind of loan from a creditor for which property or real estate in guaranteed as a form of
collateral.

Balance Sheet
Equity is also called the net worth of the business. The
Owner's Equity l5 the money that the owners invest in the
business. The owners are the perpetual proprietors of the
business but the creditors have the first claim on the assets
of the firm. Retained earnings are the profits minus the
dividends withdrawn from the business.

In summary, to derive Assets:

Current Assets + Fixed To derive Debt and Equity:
Assets + Other Assets Debt + Ownership Equity =
= Total Assets Total Debt and Equity
D. CASH MANAGEMENT
A financial report shows the movement of money as
the business is conducted The statement of cash flows
shows the impact of business activity on cash flow over a
given period. Cash is reflected as income when it is
received and shown as a expense when they are paid.
Cash flow happens in different activities of a business
These activities in the business include operating activities
or during the usual operation, investment activities or
related to the venture in or sale of assets, and financing
activities or related to funding the firm.
Cash flows from the operating activities are
measured by determining the ne cash flow from
operating the business. It is calculated by taking
the sum of the operating income plus
depreciation and deducting the income taxes and
factoring in adjustments or changes in the net
working capital. Net working capital is the money
invested in currents assets minus accounts
payable and accruals.
Cash flows from investment activities are either the inflows or outflows of Kishica
result of either a sale or purchase of equipment or a building (assets). Cash flows
from financing activities include the inward or outward movement of money
resulting from the following: payment of interest or dividends, issuance or
repurchase of stocks, or adjustments in short-term and long-term debts.
E. CASH BUDGET
Financing activities are the fastest source of
increasing cash flow in the business. Increases
in cash flow may come from debt and equity.
When a business acquires new debts, cash is
inserted into the business. Similarly, when
firms issue additional stocks, additional funds
will come in from investors.
F. RATIO ANALYSIS AND INTERPRETING
FINANCIAL RATIOS
Business plans are evaluated for their financial feasibility not only
through the financial statements but also through the financial ratios,
Financial ratios are used to facilitate comparisons between figures and
help standardize the numbers. Ratio analysis is used to determine the
different characteristics of the business such as liquidity, solvency,
profitability, and others. The difficulty of comparing large figures and the
volume of summation and differences can be simplified when ratios are
applied. Furthermore, the weaknesses and strengths of the business are
easier to determine based on the processed data. Analysis can be made
using comparative data between businesses over a given period. The
analysis can consider the trends from each competing business as
compared to the industry situations.
KINDS OF

FINACIAL
 Liquidity Ratio
This ratio reflects the ability of the business to pay its due debts.
Liquidity Is the ability of a firm to convert its assets to cash. The current
ratio and quick ratio are two kinds of liquidity ratios. The current ratio is
computed by dividing the current assets over the current liabilities. The
quick ratio is derived by current assets less inventories and divided by
current liabilities. These ratios are used to compare previous periods to
determine the changes in the business.

Current ratio = current assets divided by current liabilities

Quick Ratio = (current assets-inventories) divided by

current Liabilities
 Solvency Ratio
These ratios measure the long-term viability of a
business. It determines the long-term risks and is of
particular interest to investors and stockholders. Solvency
ratios measure the level of debts of a company as compared
to its assets, annual earnings, or equity. Among the most
utilized solvency ratios include the debt ratio or the debt to
total asset ratio, debt to capital ratio, interest coverage
ratio, and others.
Debt ratio = Total Debt divided by Total Assets
 Profitability Ratio
This kind of ratio reflects the company's profitability in
relation to its assets. It measures the ability of a business to
earn profit in relation to its expenses. Ratios in this category
are used to measure if the company is profitable when
compared to the previous periods or compared against its
competitors.
Return on assets = Operating profits divided by Total assets

Profit Margin = Profits divided by Sales

Return on Equity = Net Profit divided by Owners Equity
 Efficiency ratio or asset and debt management ratios
These ratios determine the right mix between assets
versus sales and debt against equity. It measures the
performance of the business in terms of utilizing its assets
and liabilities to generate sales and earn profits. Among the
important ratios in this category include the different
turnover ratios such as asset turnover, inventory turnover,
payables turnover, working capital turnover, and others.
Profit Margin = Inventory Turnover
Profits divided by Ratio = Net sales
Sales divided by Inventory
 Market Value Ratio
Also called market prospect ratios. These ratios help
predict the possible amount of earnings in the investment.
The earnings of the investors can be through higher stock
value or dividends. Ratios commonly used in this category
include earnings per share, dividend yield, payout ratio, and
others. Earning per share = Net
income divided by Total
number of the outstanding
share

Dividend yield = Total Market value per share = Total

dividend payments paid per market value of the share
year divided by Market price Divided by Total number of the
of the stock outstanding share.
 Limitation of Financial Ratio Analysis
Financial ratios are effective tools to measure the
status of businesses, but these have limitations and
potential problems. Because each firm is independent
of the other, the comparisons between competitors
and even with industry standards may be difficult
because of some glaring differences in the operations.
The manner and timing of financial reporting may also
cause discrepancies in the data gathered.
Furthermore, external factors unique to certain
businesses can affect the results of the analysis.
G. Break-even Analysis
To determine the acceptability of a set price for both the business
and the customers, it is important to know also the volume or level at
which a product will generate enough revenue for the company to
become profitable. This stage is known as the break-even point.
Particularly, it is where the total sales revenue is equal to the total
costs. To determine the breakeven, the total fixed costs, semi-variable
costs, expenses are divided by the contribution margin. The
contribution margin is the selling price minus unit costs and expenses.
Break even = total fixed
costs and expenses divided
by (contribution margin)
H. Pricing Strategies and tactics
In this chapter, the students will be given a refresher on
the concept of pricing or putting the price on your products
and services. At the onset, when prices are determined,
the objective is to gain profit. But setting up a price is more
than earning a revenue. Pricing is done to ensure that the
firm will continue to exist, gain patronage, and become a
market leader for a long period. In essence, the ultimate
objective of pricing is to earn profit but has evolved its
function to be a part of sustaining the existence of the firm.
 Cost-based Pricing
This approach in pricing considers the costs of
the goods sold, expenses incurred in the selling,
and the overhead costs. The costs and expenses
may include raw materials, labor, and overhead.
Prices are derived by adding the costs and the
profit margin.
Price = Direct Cost +
Overhead Costs +
Profit Margin
 Competition-based Pricing.
This approach considers the prices set by other companies
in the same market. In essence, a company sets its prices
based on the prevailing prices of its competitors. It does not
mean that the firm should set its prices the same as its
competitors but only to refer to the price on how the firm
should be positioning itself. Competition-based pricing
happens when firms offer homogenous products and services
or simply there are no distinct differences in the products
offered. In this situation, customers tend to choose the
cheapest choice.
 Value-based Pricing.
This approach is focused on the perceived value received by
customers when they purchase the product or service. Zeithaml,
Gremler, and Bitner 2017) identified this approach as demand-based
pricing while Wirtz and Lovelock (2018) termed it value-based pricing.
Both discussed this concept of pricing based on the customers'
perception of value. Value is the benefit received over the cost
required. Perceived value is the customers' expectations, wants, and
requirements over an amount they are willing to part with. Customer
expectations and requirements may be quantified in volume, quality,
level of experience, and satisfaction. More than just monetary costs
can be in the form of time, effort, and others. Knowing value would
guide a business on how to properly set the prices of its products.
 Synchro Pricing
Using price to manage demand by capitalizing on customer
sensitivity to prices (Zeithml, 2017). This technique is often used
in consideration of time, place, quantity, and incentive differences
to structure prices. Time factors are affected by instances such as
beyond office hours, holidays, peak and lean season, or priority
lanes and passes. Place considerations include the location
(conveniently accessed) and proximity to interests (front row
seats, executive lounges, hotel room views). Quantity factors refer
to the volume of product purchase such as advance purchases and
corporate discounts. Incentives are rates for new customers or
premiums for loyal and frequent buyers.
 Market-Segment pricing
Prices are set based on the different set
of target markets. Prices are determined
based on the perceived value of the
goods and services of each market
segment. Prices are related to the level
of quality provided to each group.
 Complementary Pricing
Prices of goods and services are set based
on closely interrelated products. A price
premium is offered when customers
purchase related products with the primary
product purchased. Customers may be
offered peripheral products/services or an
upscale of the previous product offered.
THANK
YOU!
In life, we are not just learning but
sometimes we also need to unlearn
ideas or principles that aren’t
helping us to grow. We need to
listen, study and evaluate our
learnings everyday because not all
ideas we heard or seen in other
people fits in our situation. Never
afraid to try acquire new ideas, to
change your decisions and LEARN
again.
-
Ma’am Jinni