Don Mariano Marcos Memorial State University College of Graduate Studies

Republic of the Philippines
Don Mariano Marcos Memorial State University

Mid La Union Campus
COLLEGE OF GRADUATE STUDIES
City of San Fernando 2500 La Union Philippines
Telefax: 072 6075798 http://www.dmmmsu.edu.ph/gs/
------------------------------------------------------------------------------------ … designing change! ---
Name: Hilsam Joyce P. Garcia

Course/Major: MDA – BA
Subject: DAP 229 – Financial Management
Professor: Dr. Rosa M. Novencido
FINANCIAL PLANNING
- involves an identification of the financial needs of a company; a selection of the best

sources of finances for meeting those needs and chalking out policies, programs and
budgets for ensuring an optimum utilization of finances towards the most effective and
efficient attainment of the common objectives of the company.
- It is the process of determining the objectives; policies, procedures, programs and

budgets to deal with the financial activities of an enterprise.
- Proper financial planning is necessary to enable the business enterprise to have right
amount of capital to continue its operations efficiently. Financial planning involves taking
certain important decisions so that funds are continuously available to the company and
are used efficiently. These decisions highlight the scope of financial planning.
Elements of Financial Planning
1. Determination of Financial Objectives - For effective financial planning, it is essential to

clearly lay down the financial objectives sought to be achieved. The financial objectives
should be based on the overall objectives of the company. The objectives of financial
management may be set up in the areas, namely, investment, financing and dividend.
Financial objectives of an organisation may be of two kinds:

a. Short-term Financial Objectives - It includes maintenance of adequate liquidity in the
organization
b. Long-term Financial Objectives - It includes procurement of adequate finance from
different sources so as to increase the efficiency of the organisation
2. Estimation of Capital Requirements
- Capital is required for various needs of the business. The finance managers do the
sales forecast and if the future prospects appear to be bright and expect increase in
sale, then firm needs to increase its production capacity which means more requirement
of long-term funds. Higher level of production and increase in sales will require higher
fixed as well as working capital.
Separate assessment is to be made of the requirements of fixed and working capital.

Fixed capital is needed for acquiring fixed assets such as land and building, plant and
machinery, furniture, etc. Working capital is required for holding current assets like stock,
bills receivable, etc. and cash for meeting day-to-day expenses in running the business.
3. Determination of Form and Proportion of Different Sources of Finance
- The capital structure is the composition of capital, i.e., the relative kind and proportion
of capital required in the business. This includes decisions of debt- equity ratio- both
short-term and long- term. Finance may be internally generated by the business or
capital may have to be raised from external sources such as equity shares, preference
shares, debentures, loans, etc.
4. Determination of Financial Policies
- Financial planning leads to formulation of policies so that financial objectives could be

achieved and these will help in taking vital decisions for the administration of capital and
achieving coordination in financial activities. e.g. capitalisation policy, capital structure
policy, fixed assets management policy, dividend policy, working capital management
policy, credit policy, etc.
Importance of Financial Planning
1. Adequate funds have to be ensured.
2. Financial Planning helps in ensuring a reasonable balance between outflow and inflow of
funds so that stability is maintained.
3. Financial Planning ensures that the suppliers of funds are easily investing in companies
which exercise financial planning.
4. Financial Planning helps in making growth and expansion programs which helps in long-
run survival of the company.
5. Financial Planning reduces uncertainties with regards to changing market trends which
can be faced easily through enough funds.
6. Financial Planning helps in reducing the uncertainties which can be a hindrance to

growth of the company. This helps in ensuring stability and profitability in concern.
FINANCIAL FORECASTING
- processing or estimating or predicting how a business will perform in the future.

- a systematic projection of the expected action of finance through financial statements.
- estimates a company's future financial outcomes by examining historical data. It allows
management teams to anticipate results based on previous financial data.
Purpose and Need for Financial Forecasting
1. The future profitability base on projected sales levels

2. How much and what type of financing will be needed
3. Whether the firm will have adequate cash flows
Forecasting a firm’s future financing needs can be thought of in terms of three basic steps:
Step 1: Construct a Sales Forecast

- Sales forecast is generally based on:
1. past trend in sales; and

2. the influence of any anticipated events that might materially affect that trend.
Step 2: Prepare Pro Forma Financial Statements

- Pro forma financial statements help forecast a firm’s asset requirements needed to
support the forecast of revenues.
- The most common technique is percent of sales method that expresses expenses,
assets, and liabilities for a future period as a percentage of sales.
Step 3: Estimate the Firm’s Financing Needs

- Using the pro forma statements, we can extract the cash flow requirements of the firm.
Sample Illustration:
Construct Pro Forma Income Statement and Pro Forma Balance Sheet based on AA, Inc.’s
2017 Financial Statements and following assumptions:
- AA Inc.’s financial analyst estimates the firm will have projected sales increase of 25% in
2018.
- AA, Inc. plans to distribute 30% of its earnings as dividends.
- The firm’s need for assets to support firm sales is forecasted using percent of sales
method, where current assets and payable/accrual in the balance sheet are assumed to
vary in accordance with its percent of sales for 2017.
AA, Inc.
Statement of Comprehensive Income
For the Year 2017
Sales P12,000,000.00
Cost of Goods Sold (6,600,000.00)
Gross Profit 5,400,000.00
Operating Expenses 3,960,000.00
Earnings before Interest and Taxes 1,440,000.00
Interest (240,000.00)
Earnings before Taxes 1,200,000.00
Taxes (30%) (360,000.00)
Net Income P 840,000.00
Dividends (30%) (P 252,000.00)
Addition to Retained Earnings P 588,000.00
AA, Inc.
Statement of Financial Position
December 31, 2017
Cash P 300,000.00
Accounts Receivable 2,400,000.00
Inventory 4,500,000.00
Current Assets P 7,200,000.00
Net Fixed Assets 5,000,000.00
Total Assets P 12,200,000.00
Accounts Payable P 1,500,000.00

Accrued Expenses 180,000.00
Notes Payable (10%) 600,000.00
Current Liabilities P 2,280,000.00
Long-term Debt (12%) 1,500,000.00
Ordinary Shares 6,000,000.00
Retained Earnings 2,420,000.00
Total Liabilities and Equity P 12,200,000.00
Solution:
Statement of 2017 Actual Amount Computation 2018 Projection

Comprehensive
Income
Sales 12,000,000.00 25% increase 12 M * 1.25 15,000,000.00
(15/12)
Cost of Goods Sold (6,600,000.00) 55% of Sales 15 M * 55% (8,250,000.00)
(6.6/12)
Gross Profit 5,400,000.00 6,750,000.00
Operating Expenses (3,960,000.00) 33% (3.96/12) 15 M * 33% (4,950,000.00)
EBIT 1,440,000.00 1,800,000.00
Interest (240,000.00) No change (240,000.00)
EBT 1,200,000.00 1,560,000.00
Taxes (30%) (360,000.00) (468,000.00)
Net Income 840,000.00 1,092,000.00
Dividends (30%) (252,000.00) (327,600.00)
Addition to RE 588,000.00 764,400.00
Statement of 2017 Actual Amount Computation 2018 Projection

Financial Position
Cash 300,000.00 2.5% of Sales 15 M * 2.5% 375,000.00
(0.3/12)
Accounts Receivable 2,400,000.00 20% (2.4/12) 15 M * 20% 3.000.000.00
Inventory 4,500,000.00 37.5% (4.5/12) 15 M * 37.5% 5,625,000.00
Current Assets 7,200,000.00 9,000,000.00
Net Fixed Assets 5,000,000.00 No change 5,000,000.00
Total Assets 12,200,000.00 14,000,000.00
Accounts Payable 1,500,000.00 12.5% (1.5/12) 15 M * 12.5% 1,875,000.00

Accrued Expenses 180,000.00 1.5% (0.18/12) 15 M * 1.5% 225,000.00
Notes Payable 600,000.00 No change 600,000.00
Current Liabilities 2,280,000.00 2,700,000.00
Long-term Debt 1,500,000.00 No change 1,500,000.00
Ordinary Shares 6,000,000.00 No change 6,000,000.00
Retained Earnings 2,420,000.00 + 764,400.00 3,184,400.00
Total Liabilities and 12,200,000.00 13,384,400.00
Equity
Total Needed/ 14,000,000.00
Projected Assets
Additional Funds 615,600.00
Needed/Discretionar
y Financing Needs
¿ Additional Funds Needed=Required increase∈assets−Spontaneous Increase∈ Liabilities−Increase∈Retained Earning
Where:
Current Assets( present )

Required Increase∈ Assets=Change∈Sales x
Sales( present )
Current Liabilities( Present )

Spontaneousincrease∈liabilities=Change∈Sales x
Sales( Present )
Increase ∈Retained Earnings=Earnings after Taxes−Dividend Payment

7,200,000.00 1,680,000.00
(
AFN = 3,000,000.00 x
12,000,000.00 )(
− 3,000,000.00 x
12,000,000.00 )
−( 1,092,000.00−327,600.00 )
AFN =1,800,000.00−420,000.00−764,400.0 0
AFN =615,600.00
Sources of Spontaneous Financing – Accounts Payable and Accrued Expenses

 Accounts payable and accrued expenses are typically the only liabilities that vary directly
with sales.
 Accounts payable and accrued expenses are referred to as sources of spontaneous
financing. The percent of sales method can be used to forecast the levels of both these
sources of financing.
Sources of Discretionary Financing
 Raising financing with notes payable, long-term debt and common stock requires
managerial discretion and hence these sources of financing are called discretionary
sources of financing.
 The retention of earnings is also a discretionary source as it is the result of firm’s
discretionary dividend policy.
Summarizing AA, Inc.’s Financial Forecast
 The firm has to raise P 615,600 with some combination of borrowing (short-term or long-
term) or the issuance of stock.
References:
 http://www.yourarticlelibrary.com/company/financial-planning-company/financial-
planning-of-a-company-definition-and-its-break-down/69599
 http://www.yourarticlelibrary.com/financial-planning/financial-planning-its-meaning-
importance-and-elements-discussed/27964
 http://www.yourarticlelibrary.com/management/3-important-process-of-financial-
planning/1032
 http://www.yourarticlelibrary.com/planning/the-objectives-and-importance-of-financial-
planning-for-an-organization/8740
 https://www.managementstudyguide.com/financial-planning.htm
 https://corporatefinanceinstitute.com/resources/knowledge/modeling/financial-
forecasting-guide/
 http://www.accountingnotes.net/financial-management/financial-forecasting-meaning-
elements-and-applications/6498
 https://www.investopedia.com/ask/answers/042215/whats-difference-between-
budgeting-and-financial-forecasting.asp
 https://prezi.com/xelm5jvbytjz/forecasting-financial-requirements/
 http://oktato.econ.unideb.hu/domician/Downloads/ppt/C17a_new.pdf

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Republic of the Philippines

Don Mariano Marcos Memorial State University

Name: Hilsam Joyce P. Garcia

- involves an identification of the financial needs of a company; a selection of the best

- It is the process of determining the objectives; policies, procedures, programs and

Elements of Financial Planning

1. Determination of Financial Objectives - For effective financial planning, it is essential to

Financial objectives of an organisation may be of two kinds:

2. Estimation of Capital Requirements

Separate assessment is to be made of the requirements of fixed and working capital.

4. Determination of Financial Policies

- Financial planning leads to formulation of policies so that financial objectives could be

Importance of Financial Planning

1. Adequate funds have to be ensured.

6. Financial Planning helps in reducing the uncertainties which can be a hindrance to

- processing or estimating or predicting how a business will perform in the future.

Purpose and Need for Financial Forecasting

1. The future profitability base on projected sales levels

Step 1: Construct a Sales Forecast

1. past trend in sales; and

Step 2: Prepare Pro Forma Financial Statements

Step 3: Estimate the Firm’s Financing Needs

Accounts Payable P 1,500,000.00

Statement of 2017 Actual Amount Computation 2018 Projection

Statement of 2017 Actual Amount Computation 2018 Projection

Accounts Payable 1,500,000.00 12.5% (1.5/12) 15 M * 12.5% 1,875,000.00

¿ Additional Funds Needed=Required increase∈assets−Spontaneous Increase∈ Liabilities−Increase∈Retained Earning

Current Assets( present )

Current Liabilities( Present )

Increase ∈Retained Earnings=Earnings after Taxes−Dividend Payment

Sources of Spontaneous Financing – Accounts Payable and Accrued Expenses

Sources of Discretionary Financing

Summarizing AA, Inc.’s Financial Forecast

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