FINANCIAL PLANNING

TOOL AND CONCEPT

 PLANNING
 Planning is an important aspect of the firm’s operations
because it provides road maps for guiding, coordinating, and
controlling the firm’s actions to achieve its objectives
(Gitman & Zutter,2012).
 - Management planning is about setting the goals of the
organization and identifying ways on how to achieve them
(Borja& Cayanan, 2015).
 STEPS IN PLANNING
 A . Set goals or objectives.
 B. Identify Resources.
 C. Identify goal-related tasks.
 D. Establish responsibility centers for
accountability and timeline.
 E. Establish the evaluation system for monitoring
and controlling.
 F. Determine contingency plans
 CHARACTERISTICS OF AN EFFECTIVE
PLAN
 The following criteria may be used for effective planning:
 - Specific – target a specific area for improvement.
 - Measurable – quantify or at least suggest an indicator of progress.
 - Assignable – specify who will do it.
 - Realistic – state what results can realistically be achieved, given
available resources.
 - Time-related – specify when the result(s) can be achieved
 FINANCIAL PLANNING
 Financial planning is the plan needed for
estimating the fund requirements of a business and
determining the sources for the same. It essentially
includes generating a financial blueprint for
company’s future activities. It is typically done for
3-5 years-broad in scope and generally includes
long-term investment, growth and financing
decisions.
 FINANCIAL PLANNING PROCESS

 Long term goals set the direction of

the company.
 - Short term goals are the specific
steps or actions that will ultimately
reach the company’s long term goals.
TWO PHASES OF
FINANCIAL PLANNING
 LONG TERM FINANCIAL PLANS
 These are a set of goals that lay out the overall
direction of the company.
 - A long-term financial plan is an integrated strategy
that takes into account various departments such as
sales, production, marketing, and operations for the
purpose of guiding these departments towards
strategic goals.
 - Those long-term plans consider proposed outlays for
fixed assets, research and development activities,
marketing and product development actions, capital
structure, and major sources of financing.
 - Also included would be termination of existing
projects, product lines, or lines of business; repayment
or retirement of outstanding debts; and any planned
acquisitions(Gitman & Zutter, 2012).
 SHORT TERM FINANCIAL
PLAN
 Specify short-term financial actions and the anticipated impact of
those actions. Part of short term financial plans include setting the
sales forecast and other forms of operating and financial data. This
would then translate into operating budgets, the cash budget, and
pro forma financial statements (Gitman & Zutter, 2012).
 - For the purpose of this topic, emphasis will be made on short-term
financial planning.
STRATEGIC VS.
TACTICAL
PLANNING
STRATEGIC PLANNING
(Top-level management)

 Is a top level planning which

involves making decisions about the
organization’s long term goals.
 Strategic planning starts with defining the
organization’s goals/objectives, the major targets
related to the maintenance of the organization’s
stability, and it’s organizational culture, values, and
growth improving its productivity, profitability,
effectiveness and efficiency among others.
 TACTICAL PLANNING
(Middle level management)

 Is middle level management planning

which refers to procedures and
transformation of strategic goals/plans
with specific goals.
 Tactical planning is focused on major actions that
must be done by a unit in order to contribute its
share for the achievement of the strategic plan.
 SALES
The most important account in the
BUDGET
financial statement in making a
forecast is sales since most of the
expenses are correlated with sales.
The following external and
internal factors should be
considered in forecasting
sales
 EXTERNAL
 Gross Domestic Product (GDP)
growth rate
 Inflation
 Interest Rate
 Foreign Exchange Rate
 Income Tax Rates
 Developments in the Industry
 Competition
 Economic Crisis
 Regulatory Environment
 Political Crisis
 INTERNAL
 Production Capacity
 Man Power Requirements
 Management style of managers
 Reputation and Network of the
controlling stockholders
 Financial Resources of the
Company
The following
External and Internal
Factors influencing
sale
MACROECONOMIC VARIABLES
(EXTERNAL)
 Play an important role in
forecasting sales because it tells
us how much the consumers are
willing to spend
 DEVELOPMENTS IN THE INDUSTRY
(EXTERNAL)
 Products and services which have more
developments in its industry would
likely have a higher sales forecast than a
product or service in slow moving
industry
 COMPETITION
(EXTERNAL)
 you have to take account your
competition
 You should also know the
preference of your consumers
 PRODUCTION CAPACITY AND MAN
POWER ( INTERNAL)

 To be able to increase capacity,

you should be able to expand
your operations
 PRODUCTION BUDGET
 A production budget provides
information regarding the number of
units that should be produced over a
given accounting period based on
expected sales and targeted level of
ending inventories.

It is computed as follows
 Required production in units = Expected Sales
+ Target Ending Inventories - Beginning
Inventories
 Note: Ending inventory of current period is
beginning inventory of next period.
• Providethe following example (EASY):
- [A] Company forecasts sales in units for January to May as follows
 Moreover, [A] Company would like to
maintain 100 units in its ending inventory
at the end of each month.
 - Beginning inventory at the start of
January amounts to 50 units.
 - How many units should [A] Company
produce in order to fulfill the expected
sales of the company?
 BUDGETING CASH
 Operations budget refers to the variable
and fixed costs needed to run the
operations of the company but are not
directly attributable to the generation of
sales.
 EXAMPLES OF THIS ARE THE FOLLOWING:

 Rent payments
 • Wages and Salaries of selling and
administrative personnel
 • Administrative Costs
 • Travel and representation expenses
 Professional fees
 • Interest Payments
 • Tax Payments
 CASH BUDGET
 The cash budget forecasts the timing of
these cash outflows and matches them
with cash inflows from sales and other
receipts. The cash budget is also a
control tool to monitor the way the
company handles cash.
Below is the general form of the
Cash Budget
 STEPS IN FORMULATING A CASH
BUDGET
 a)Form the sales forecast, identify how much would be
collected in the cash budget period. Sales may be made
in cash or for credit. Cash sales are translated to cash at
the point of sale while credit sales are collected
depending on the credit period. Credit periods may
range from 10 days to more than a month depending on
the strategy of the company.
 assume selling price is PHP100/unit. Sales for
each month are expected to be collected as
follows:
 ‣ Month of sales : 20%
 ‣ A month after sales: 50%
 ‣ 2 months after sales: 30%
 - How much is total receipts from sales
(DIFFICULT)?
 B) Identify other receipts.
 - Examples:
 ‣ interest received
 ‣ return on principal investments
 ‣ proceeds from sale of non-operating
assets
 ‣ issuance of capital stock
 ‣ proceeds from borrowings
Add these receipts to the collections
from sales to get to total receipts.
C) From the Production Budget, identify how
much of the purchases made will be paid by
the company on the cash budget period. Like
sales, purchases may be made in cash or on
credit depending on the supplier’s credit
terms.
 Continuing from previous example:
 ‣ Assume that cost per unit is PHP50.
 ‣ All purchases this month are paid the
following month. How much is total
cash disbursements for purchases
(AVERAGE)?
 From the operations budget, identify which expenses will be
paid in cash during the cash budget period.
 - The following expense items will be paid based on the following
periods:
 ‣ Rent payments: Rent of PHP5,000 will be paid each month.
 ‣ Wages and salaries: Fixed salaries for the year are PHP96,000,
or PHP8,000 per month. Wages are estimated as 10% of monthly
sales.
 ‣ Tax payments: Taxes of PHP25,000 must be paid in April.
 Identify all other cash payments to be
made.
 - Examples:
 ‣ Fixed-asset purchases in cash
 ‣ Cash dividend payments
 ‣ Principal Payments
 Repurchase of common stock
 ‣ Purchase of stock/bond investments
 - It is important to recognize that depreciation and
other noncash charges are NOT included in the cash
budget.
 - The following items will be paid based on the
following periods:
 ‣ Fixed-asset outlays: New machinery costing
PHP130,000 will be purchased
 and paid for in April.
 Repurchase of common stock
 ‣ Purchase of stock/bond investments
 - It is important to recognize that
depreciation and other noncash charges
are NOT included in the cash budget.

The following items will be paid based on the following
-

periods:
 ‣ Fixed-asset outlays: New machinery costing PHP130,000
will be purchased
 and paid for in April.
 ‣ Interest payments: An interest payment of PHP10,000 is
due in May.
 ‣ Cash dividend payments: Cash dividends of PHP20,000
will be paid in January.
 ‣ Principal payments (loans): A PHP20,000 principal
payment is due in February


 Match the receipts and disbursements on the periods they

become collectible and payable, respectively.
 Set a minimum required cash balance. This balance is
maintained in case contingencies arise. Recall from the
steps in planning that we should also plan for contingencies
 If the net cash flow is above the minimum cash balance, the company is
in excess cash and may consider putting it in short term
 investments. If it is below, the company should make a short term
borrowing during that period.
 - Moreover, [A] Company has a beginning cash balance of PHP80,000
and would like to maintain an ending cash balance of PHP100,000
 per month. Prepare [A] Company’s Cash Budget for January to May.
Prepare a cash budget (DIFFICULT).
 Evaluating the Cash Budget:
 ‣ If the ending cash balance after payment of all required disbursements is less than
the required ending balance, the company needs to
 borrow additional cash from short term borrowings to meet its required ending
balance. Should the ending cash balance exceed the
 company’s minimum cash requirement the next period, the company may be able to
repay the loan plus accrued interest.
 ‣ Should the Company have excess cash above its required maintaining cash balance,
the company may invest this cash on short term
 investments so that it will have an opportunity to earn additional profits. If the
company’s cash balance would then fall below its
 minimum cash requirement, the company may withdraw the investment to be able to
meet the required cash balance.
 Projected Financial Statements
 Projected financial statements is a tool of the company to set an overall
goal of what the company’s performance and position will be for
 and as of the end of the year. It sets targets to control and monitor the
activities of the company. The following reports may be
 forecasted:
 ‣ Projected Income Statement
 ‣ Projected Statement of Financial Position
 ‣ Projected Statement of Cash Flows
Sample Income Statement
Sample Statement of Financial Position
 STEPS ON FINANCIAL STATEMENT
PROJECTION
 A. Forecast Sales
 B. Forecast cost of sales and Operating Expenses
 C. Forecast Net Income and Retained Earnings.
 D.Determine the Balance Sheet Items
 E. Determine Payment Schedule for loans
 F. Check other information
 G. Determine External Fund Needed
(EFN)
 H. Determine how EFN may be financed.
 A positive value for EFN, means that the
company needs more funds equivalent to the
positive value of EFN.
 A negative value for EFN, means that
the company has excess cash.
Sample problem:
Forecast Sales
 Forecast Cost of Sales and Operating Expenses

In determining the cost of sales and operating expenses,

variable and fixed costs should be identified.
 Cost of sales are direct costs associated in the
generation of sales
 Operation costs are a mix of variable and fixed costs.
Variable costs usually vary with sales.
Sample Problems
Forecast Cost of Sales and Operating Expenses
 Compute for Cost of Sales, Variable Operating
Expense, and Depreciation Expense
Cost of sales percentage in 2014 = 4,305,000 ÷
5,250,000) x 100%
Cost of sales percentage in 2014 = 82%
Projected cost of sales in 2015 = 82% x 5,775,000
Projected cost of sales in 2015 = 4,735,500
Variable (5% x Sales of 5,775,000) 288,750
 Fixed (depreciation expense)
 (5,200,000 + 1,000,000) x 5%
310,000
 Total operating expenses
598,750
Compute for net PPE.
PPE net, beginning 2,440,000
Additions 1,000,000
Less: Depreciation (310,000)
PPE net, end 3,130,000
 Forecast Net Income and Retained Earnings

 To forecast net income, interest expense and income

tax expense should also be considered using the
relevant interest and tax rates.
 Retained earnings is arrived at by adding projected net
income to beginning retained earnings then deducting
dividends to be declared during the year
 Sample Problem for Forecast Net Income and
Retained Earnings

Income tax rate is 30% of the

income before taxes. 75% of the
income tax expense will be paid in
2015 while the balance will be paid
in 2016.
 Balance sheet items that may vary with sales

CASH
 Cash as a percentage of sales in 2014 =
( 1,060,000 ÷ 5,200,000) x 100%
 Cash as a percentage of sales in 2014 = 20.19%
 Projected cash in 2015 = 20.19 % x 5,775,000
 Projected cash in 2015 = 1,165,973
Accounts receivable
 Accounts receivable as a % of sales in 2014 = (2,300,500 ÷
5,200,000) x 100%
 Accounts receivable as a % of sales in 2014 = 43.82%
 Projected accounts receivable in 2015 =
43.82% x 5,775,000
 Projected accounts receivable in 2015 = 2,530,605
Inventories
 Inventories as a % of sales in 2014 =
( 4,850,000 ÷ 5,200,000) x 100%
 Inventories as a % of sales in 2014 = 92.38%
 Projected inventories in 2015 = 92.38% x 5,775,000
 Projected inventories in 2015 = 5,334,945
Other current assets
 Other current assets as a % of sales in 2014 = (1,050,000
÷ 5,200,000) x 100%
 Other current assets as a % of sales in 2014 = 20%
 Projected other current assets in 2015 = 20% x
5,775,000
 Projected other current assets in 2015 = 1,155,000
 Accounts payable
 Accounts payable as a % of sales in 2014 =
(5,050,000.00 ÷ 5,200,000) x 100%
 Accounts payable as a % of sales in 2014 =
96.19%
 Projected accounts payable in 2015 = 96.19% x
5,775,000
 Projected accounts payable in 2015 = 5,554,973
 Payment schedule for loans
 First Loan
Interest from January 1 to June 30, 2015
1,250,000 x 8% x (6 mos ÷ 12 mos) =50,000
Second Loan
Interest from January 1 to June 30, 2015
(1,000,000 + 2,000,000) x 8% x (6 mos ÷ 12 mos)
=120,000
Interest from July 1 to December 31, 2015
(500,000 + 2,000,000) x 8% x (6 mos ÷ 12 mos)=100,000
Total interest expense for 2015= 270,000
 Compute for Income Tax Payable.
 Projected Income Tax Payable in 2015:
 51,225 x (1 – 75%) = 12,806
Compute for current and non-current portion of
long term assets:
Check for other information
 Compute for Retained Earnings

Retained earnings, beginning 2,122,069

Add: Net Income 119,525
Less: Dividends (300,000)
Retained earnings, end 1,941,594
 Determine external funds needed (EFN
 Determine how external funds needed may be
financed
 EFN = change in total assets – (change in total
liabilities + total change in stockholders’ equity)
 Or
 EFN = Squeeze figure to balance assets to Liabilities
and equity
 WORKING CAPITAL
 • Working capital is the company’s investment in
current assets such as cash, accounts receivable,
and inventories.
 • Net Working capital is the difference between
current assets and current liabilities
Flow Of Operating Cycle
 How to Compute the Days of Inventory and Days
of Receivables
 Days of Inventory or inventory conversion period or average
age of inventories, is the average number of days to sell its
inventory.
- A DSI of 20 days means that on the average it takes 20 days to
sell its inventory. The formula is:
- Since the Statement of Financial Position tells the financial
condition of a company at the end of the period, we take
Average Inventory for the year in our calculation
Days of Inventory = 365 or 360 days/ Inventory
Turn over

Inventory Turnover= Cost of Goods Sold/

Beginning Inventory+ Ending Inventory/2
 Formula can be used without computing for
inventory turnover

 Days of Inventory = Average

Inventory/ Average COGS per day
 Days of Sales Outstanding (DSO)

 is the average time for the company to collect its

receivables.
For example, a DSO of 40 days means that a customer who purchased
on the company on account will pay his/her balance in 40 days

 Days of Inventory= 365 or 360 days/ Receivable

turnover

 Receivable Turnover= Net Credit Sales/

Beginning Accounts Receivable + Ending
Accounts Receivable/2
 Cash Conversion Cycle
 also called the net operating cycle, is computed as the
operating cycle less days of payable .

 Cash Conversion Cycle = Operating Cycle -

Days of Payables
 Cash Conversion Cycle = (Days of
Inventory + Days of Receivables) - Days of
Payables
 The Cash Conversion Cycle is the length of time it
takes for the initial cash outflows for goods and services
purchased (materials, labor,
 etc.) to be realized as cash inflows from sales (cash
sales and in the collection of receivables)
 Days of Payables Outstanding (DPO)

 is the average number of days for the company to pay its creditors.
A DPO of 30 days means that the company waits for 30 days
before paying its creditors.
 The formula for DPO is:
 Days of Inventory= 365 or 360 Days
Payables Turnover

Payables Turnover= Net Credit Purchases

Beginning Accounts Payable +Ending
Accounts Payables/2
 Purchases are taken from the Statement of
Comprehensive Income and Accounts Payables are
taken from the Statement of Financial Position
 Since the Statement of Financial Position tells the
financial condition of a company at the end of the
period, we take Average payables for the year in our
calculation
 For purchases we are generally concerned about the
credit purchases so the learner may have to exclude cash
purchases from the total sales figure
 Working Capital Management is the administration and
control of the company’s working capital.
 The primary objective is to achieve a balance between
profitability and risk. Basically, there are
 three types of working capital financing policies the
management can choose from:
 - Maturity-matching working capital financing policy
 - Aggressive working capital financing policy
 Conservative working capital financing policy
 Permanent Working Capital is the minimum
level of current assets required by a firm to
carry-on its business operations given its
production capacity or relevant sales range
 Temporary working capital is the
excess of working capital over the
permanent working capital given its
production capacity or relevant sales
range
 Working Capital Financing Policies
1.Maturity-matching working capital
financing policy
 permanent working capital requirements
should be financed by long term sources while
temporary working capital requirements
should be financed by short-term sources of
financing.
2. Aggressive Working Capital Financing Policy
2.Aggressive Working Capital Financing Policy
 some of the permanent working capital requirements are
financed by short-term sources of financing

 3. Conservative Working Capital Financing Policy

some of the temporary working capital requirements are
financed by long term
sources of financing
 Management of Working Capital Accounts
 A. CASH
cash is an important account in the
balance sheet that will affect the liquidity,
and solvency of a company. It is also the
most vulnerable when it comes to theft.
 Motives For Holding Cash
 Primary Reasons
a. Transactional. This is the cash used for paying expenses such
as salaries, utilities, rent and
taxes, among others.
b. Compensating balance. This is the cash held to meet bank
requirements such as the minimum cash
balance you maintain for checking accounts and if you have
existing loans, banks may also require a minimum amount of
deposit with them
 2. Secondary Reasons
 a. Precautionary. This is the cash maintained
for emergencies such as the additional cash you
keep during political and economic uncertainties
 B. Speculative. This refers to the cash held by
the company to take advantage of opportunities
 B. ACCOUNTS RECEIVABLE
Proper management of accounts receivable
entails having a good billing and collection system
 5 C’S OF CREDIT
 1.Character-–the willingness of the borrower to repay the loan
 2. Capacity – a customer’s ability to generate cash flows
 3. Collateral – security pledged for payment of the loan
 4. Capital – a customer’s financial resources
 5. Condition – current economic or business conditions
 C. INVENTORIES
Proper inventory management involves the
determination of reasonable levels of
inventories considering the size and nature of
business
 THREE TYPES OF
 RawINVENTORY
materials – these are purchased materials not yet
put into production.
 - Work in process – these are goods and labor put into
production but not yet finished.
 - Finished goods – these are goods put into production
and finished. These are ready to be sold
 FINANCING
 It means to provide funding for a particular need.
 TWO MAJOR
CATEGORIES
 Debt Financing - borrowing money from lenders and
not giving up ownership
 Equity Financing - the method of raising capital by
selling company stock to investors (stockholders) in
exchange of ownership interests in the company
 SHORT TERM FINANCING

is debt scheduled to be paid within a year


SOURCES OF SHORT TERM
1. Supplier’s Credit-refers to the extension of payment due date by suppliers
 FUNDS
2. Advances from stockholders or other owners – personal funds advanced by a stockholder to a
company that usually requires interest.
 3. Credit cooperatives – provided lending services to its members. Members usually pay
contributions to the cooperative
 4. Banks – provides several loan products catering to different types of needs.
 5. Credit Cards – just take note of the high interest rates on this source of funds.
 6. Lending Companies – companies that are dedicated to lending. They usually charge higher interest than
banks but their credit requirements are more lenient compared to banks.
 7. Pawnshops – provides funds in exchange for collateral, usually jewellery, or other items of value.
 8. Informal lending sources (5/6)
 factors considered in selecting the source of short-
term financing
 • Cost (Interest)
 • Availability of short-term funds
• Risk
 • Whatever the source of fund is, if the company defaults, the lenders
may foreclose some of
 the company’s properties or even the entire business itself to settle the
loan.
 • Flexibility
 Restrictions
 LONG TERM FINANCING
is debt to be paid in more than a year
 SOURCES OF LONG-TERM
FINANCING
 Equity investors – these are the individuals/corporations which are issued common stock.
 Internally generated funds – not all profits are distributed to stockholders. Most of the
profits are re-invested and used by companies to finance their needs
 • Banks – they provide long-term loans, depending on the nature of the need. For example,
a 5-year to 10-year loan may be granted if the purpose of the loan is construction of an
office building.
 • Bonds – these are debt investments where an investor loans money to an entity which
borrows the funds.
 • Lending companies – they can also provide long-term loans
 INTEREST

• the cost of holding money. It is the amount
charged by the lenders to the borrowers/
users of money, and is usually paid at
regular intervals
- earned or incurred for the use of the
principal amount over the relevant time
period
 SIMPLE
INTEREST
 • Simple Interest – the charging interest rate r based
on a principal P over T number of years.
 Interest = P x r x T
If the interest earned or incurred is always based on
the original principal, then simple interest is assumed.
 Sample problem
 For example you invested P10,000 for 3 years at 9% and the proceeds
from the investment will be collected at the end of 3 years.

YEAR PRINCIPAL RATE TIME INTEREST CUMULATIV TOTAL

E INTEREST

1 Php 10,000 9% 1 Php 900 Php 900 Php 10,900

2 Php 10,000 9% 1 Php 900 Php 1800 Php 11,800

3 Php 10,000 9% 1 Php 900 Php 2700 Php 12,700

 Compound Interest
 Is simply earning interest on interest.
 This means that the basis for the computation
of the applicable interest for a certain period
is not only the original principal but also any
interest earned in the previous period.
  SAMPLE PROBLEM

YEAR PRINCIPAL RATE TIME INTEREST CUMULATIVE TOTAL

CUMULATI INTEREST
VE
INTEREST
1 Php 10,000 9% 1 Php 900 Php 900 Php 10,900

2 Php 10,900 9% 1 Php 981 Php 1881 Php 11,881

3 Php 11,881 9% Php 1069.29 Php 2950.29 Php 12950.29