MODULE IN ABM12 Savings Putting money aside for future use.

BUSINESS FINANCE
First Quarter Decisions The act of considering something carefully.
Week 1 Planning The process of thinking about the activities
MOST ESSENTIAL LEARNING COMPETENCY required to achieve a desired goal.
Introduction to Financial Management (ABM_BF12-IIIa-1)
Maximization To increase to the greatest possible amount.
Explain the major role of financial management and the
different Sole Proprietorship A business owned -1- by one person and
individuals involved operated for his or her own profit.
Partnership A business owned by two or more people
OBJECTIVES and operated for profit.
1. Describe the role financial management.
Corporation An entity created by law owned by
2. Differentiate the different individuals involved in
shareholders.
financial management.
Let’s Understand (Study the Concept)
Let’s Recall (Review) Financial Management
Words to Ponder
Finance The science and art of managing money.
(Gitman & Zutter, 2012) planning organizing directing controlling
Budgeting The allocation of your income and expenses
over a span of time. Financial Management is all about strategic:
Investments An acquisition of monetary asset purchased (1) Planning involves laying the company’s goals and taking course
with the idea that the asset will provide of action in order for the company to reach its goals. It also involves
income in the future or will be later be sold in making sure that the company is always pushing forward its
at a higher price for a profit (Investopedia) marketing strategies.
Sources of funds Includes credit, venture capital, donations, (2) Organizing requires the company to have an organizational
structure to make sure that each component in the organizational chart
grants, savings, and taxes.
does its part for the overall welfare of the company.
Profits The financial gain from business activity (3) Directing means quality leadership of the managers in every
minus expenses. department of the company. Managers are expected to set good work
Shareholders A person, company, or institution that owns ethics so that employees will do their part to achieve the company’s
at least one share of a company stock. goals.

-1- -2-
 (4) Controlling refers to the performance of the company that it The Financial System
adheres to its standard operating procedures and should be in
compliance with company policies, rules and regulation as well as
government standards and the law.
These financial activities do not only apply to small and big
businesses but also to all individuals in their everyday life. USERS OF FUNDS
SAVERS FINANCIAL (BORROWERS/
Making a list for your allowances is called Finance. Making Households
INTERMEDIARIES INVESTORS )
a list will be able you to manage or make use of your allowances Banks Households
Individuals
adequately. If your expenses exceed your allowance and when you Insurance companies Individuals
take out the least item that you need to buy or spend for a day or week, Corporations/
Stock exchange Corporations/Compa
then this is what we call Budgeting. When you use your savings to Companies
Stock brokerage firms nies
buy an item to sell in your neighborhood, friends or school, so that Government -2- Government
you can earn money this is called Investment. If you ask more money Agencies Mutual Funds
Agencies
from your parents/guardians or lend money from your friend this is Other Financial
what we call Sources of funds. Institutions

The activity in managing your allowance are also done by The above figure illustrates the overview of the financial
-3-
small and big companies where your allowance would be their system. It shows the different individuals and/or institutions involved
Capital. A finance manager has to think of ways on how to utilize its in the system. As the figure shows, the system permits the transfer of
capital. Other function of a finance manager is choosing the right money efficiently and effectively between savers to financial
sources of funds, like obtaining loans from banks or financial intermediaries and to borrowers or investors. The financial system
institutions. The finance manager also has to decide on the right supports both savings and investments and ultimately creates wealth.
investments to be made in order for the company to have a stable Shareholders Wealth Maximization
income.Once you are done with school and venture out in the real Involves not only the shareholders but also other stakeholders
world to make a living, you may be involved or inter-act with different who may be employees, suppliers, customers, creditors, regulatory
forms of business organizations whether it be sole proprietorship, bodies and of course the community where the company has its
partnership, or corporation. Thus, you may end up being a single business. The company should always make sure that the investment
owner of a business that is sole proprietorship, or you might of their present stakeholders is profitable or earning so that they will
collaborate in business with other people which is called partnership be encouraged to invest more and, in this way, the company can also
or you may end up working for a company or corporation. attract new investors.

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 2. What are the advantages and disadvantages of Sole
Let’s Apply
proprietorship, Partnership and Corporation? Please give
at least four (4) each.
Questions:
3. From the three (3) business organization which do you
1. What must be the most important goal in having a plan? think would best fit your plans for the future?
-7-

E-search (optional)
2. Why do you think there is a need for financial
Additional resources on the topic may be found on the
management?
following links:
https://doingbusinessinthephilippines.com/list-of-banks-in-the-
philippines/
3. What are the factors that you have considered in planning https://www.bworldonline.com/philippine-financial-system-grows-
your allowance? Explain each briefly. in-2018-as-lenders-assets-expand/
https://www.managementstudyguide.com/financial-
management.htm
https://www.investopedia.com/terms/i/investment.asp

References

Let’s Analyze Business Finance – Teaching Guide for Senior High School
By: The commission on Higher Education in collaboration with the
Philippine Normal
Directions: Please read all questions carefully. Write legibly and University
be as concise as possible. Business Finance by:Arthur S. Cayanan and Daniel Vincent H.
Borja
1. Kindly give 5 examples of Sole proprietorship,
Let’s Try (Evaluation)
Partnership and a corporation.

-5-
-6-
Below are jumbled words that you need to arrange. Then, match B
column A to column B for the meaning. Write your answer on
the space provided. a. the science and art of managing
A money
b. a business owned by two or more
_____ 1. GEGBDINU people and operated for profit
__________________
c. setting money aside for future use
_____ 2. TMTENIVSE
__________________ d. to increase to the greatest
_____ 3. EFNICNA possible amount
___________________ e. financial gain from business
4. STPTRIO activity minus expenses
____________________ f. is the act of estimating revenue and
_____ 5. NCOTPROAOIR expenses over a period of time
__________________ g. the process of thinking about the
_____ 6. NXIAMZATIOMI activities required to achieve a desired
___________________ h. an entity created by law owned by
_____ 7. GSSVNAI shareholders
_________________ i. to consider something carefully
_____ 8. GLNANINP j. the act of putting money to work to
____________________ start or expand a business or project
_____ 9. PPRARNESTIH or the purchase of an asset, with the
____________________ goal of earning income or capital
_____ 10. CISDNOSIE appreciation
____________________ k. A business owned by one person and operated for his or her own
profit.

___________________________________
Signature of Parent over printed name

-7- -8-
 Republic of the Philippines
Department of Education
N a t i o n a l C a pi t a l Re g i o n

12 Sc h o o l s D i v i s i o n O f f i c e o f La s Pi ñ a s C i t y

BUSINESS FINANCE
Quarter 1: Module 1-4
DEVELOPMENT TEAM OF THE MODULE

Writers:

MYLENE BILOG
SANDRA H. GALI
MA. CRISTETA M. MALAMUG
ROMMEL C. CUSI

Team Leader: Gina L. Aguitez

Education Program Supervisor
 MODULE IN ABM12 Insurance Companies – A practice or arrangement by which a
BUSINESS FINANCE company or government agency provides a guarantee of
First Quarter
Week 2
compensation for specified loss, damage, illness, or death in return
MOST ESSENTIAL LEARNING COMPETENCY for payment of a premium.
1. Distinguish a financial institution from financial
instrument and financial Stocks - (also known as equity securities) A security that represents
market Code: ___ ABM_BF12-IIIa-2 the ownership of a fraction of a corporation.
2. Explain the flow of funds within an organization –
through and from the Financial Instruments - Assets that can be traded, or they can also
enterprise—and the role of the financial manager be seen as packages of capital that may be traded.
Code: ___ ABM_BF12-IIIa-5
Stock Brokerage firms - Financial institutions that help one buy and
OBJECTIVES sell securities. They act as the middleman between the buyer and the
seller.
1. Classify a financial institution from financial
instrument and financial market. Financial intermediary - An entity that acts as the middleman
2. Be familiar with financial institution, between two parties in a financial transaction, such as a commercial
financial instrument and financial market. bank, investment bank, mutual fund, or pension fund.
3. Explain the significance of the flow of funds in
an organization. Wealth maximization - The concept of increasing the value of a
4. Know and understand the role of a financial business in order to increase the value of the shares held by its
manager. stockholders.

Let’s Recall (Review) Dividends - A payment made by a corporation to its shareholders.

KEY WORDS Financial Market - Broadly refers to any marketplace where the
trading of securities occurs.
Banks – A financial institution licensed to receive deposits and make
loans. It also provides financial services such as wealth management, Bonds - A form of debt that the issuing entity promises to repay at
currency exchange, and safe deposit boxes. some point in the future.

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Philippine Stock Exchange - (PSE or Exchange) is a private non- Financial Institutions:
profit and non-stock organization created to provide and maintain a
fair, efficient, transparent and orderly market for the purchase and sale 1. Commercial banks – Represent the largest group of financial
of securities such as stocks, warrants, bonds, and others. institutions. Individuals deposit funds at commercial banks,
which use the deposited funds to provide commercial loans to
Let’s Understand (Study the Concept) firms and personal loans to individuals, and purchase debt
Financial Markets securities issued by firms or government agencies
2. Insurance Companies – A practice or arrangement by which
Financial markets are venues where the different a company or government agency provides a guarantee of
compensation for specified loss, damage, illness, or death in
stakeholders of security do their act, either lending money or
return for payment of a premium.
borrowing money or invest. In a developed economy different
3. Mutual Funds – These are owned by investment companies
financial market exits. It consists of different kinds of security to cater
which enable small investors to enjoy the benefits of investing
the different kind of individuals and businesses. Of the many different
in a diversified portfolio of securities purchased on their
financial markets these two are the most that a financial manager will
behalf by professional investment manager.
be involved in:
4. Pension Funds – are financial institutions that receive
payments from employees and invest the proceeds on their
1. Primary Market – This is a venue that deals with the new
behalf.
issuance and sale of securities by the government and the
5. Other financial institution – include pension funds like
corporation. The government and the corporations are the
Government Service Insurance System (GSIS) and Social
vendors in this market, this transaction is called Initial Public
Security System (SSS), Unit Investment trust fund (UITF) and
Offering (IPO).
credit unions and others. (Cayanan & Borja, 2017)
2. Secondary Market – This is a venue where the different
individuals and corporation will sell their securities to the
Two major categories of Financial Instruments are:
public which was bought during the IPO. Secondary market
includes:
1. Equity Securities - You own one percent in everything that the
a. Stock Market or Exchange – which exist a physical
company has or may have in the future. Common stocks and
venue (like Philippine stock exchange) where
preferred stocks are common examples of equity securities.
shareholders can buy shares as well as sell their shares
a. Common Stocks - Is a security that represents ownership
to the available buyers.
in a corporation. Holders of common stock elect the board
-3-
b. Over-the- Counter Market (OTC) – this is a venue where
of directors and vote on corporate
-4- policies. This form of
shares can be bought through the use of mail, telephone,
equity ownership typically yields higher rates of return on
online and other system type of communications.

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 long term. However, in the event of liquidation, common corporation? If you plan on being an owner of a corporation, you
shareholders have rights to a company's assets only after can actually become one by buying stocks from one of the list of
bondholders, preferred shareholders, and other debtholders leading companies that publicly list their stocks to the market namely
are paid in full. BDO Leasing and Finance, Inc., Bank of the Philippine Islands,
b. Preferred Stocks – Has priority over a common stock in PLDT, Globe, San Miguel Corporation and others.
terms of claims over the assets of a company. If a company
is to be liquidated and its assets have to be distributed, no
asset will be distributed to common stockholders unless all
Let’s say that you bought 20 shares of PLDT at PHP 1,231.00
each on June 21, 2020 which is a total of PHP 24,620. What would
the claims of the preferred stockholders have been given.
happen to the value of your investment if the price goes up to PHP
1,273.00 per share or it goes down to PHP 1,134.00 per share?
2. Debt Securities – Generally have fixed returns due to fixed
interest rates. These financial instruments are sold if a
company is in need of funding and the proceeds of this will be An increase of the share price to PHP 1,273.00 per share
used to finance the company’s plans. means that people are willing to buy the shares for that moment. If
a. Treasury Bonds and Treasury Bills – Are issued by you will sell your share at this point, you will have a profit of PHP
the Philippine government. These bonds and bills 42.00 per share and PHP 840.00 on your whole investment.
have usually low interest rates and have very low risk
of default since the government assures that these will
be paid.
However, a decrease per share means that investors are
b. Corporate Bonds – are issued by publicly listed willing to pay only PHP 1,134.00 per share. If you will sell your
companies. These bonds usually have higher interest shares at this point you will have a loss of PHP 97.00 per share and
rates than Treasury bonds. If the company which your total loss would amount to PHP 1,940.00.
issued the bonds goes bankrupt, the holder of the
bonds will no longer receive any return from their Common factors that influence Stock Market Price
investment and even their principal investment can be
wiped out. (Cayanan
1. Economics - Macro-economic factors such as interest rates,
& Borja, 2017) inflation, unemployment and economic growth often move
stock markets.
Once you are done with your schooling, have your own income 2. Politics - A belief by investors that control of the government
in the future and have saved enough, do you plan on investing your by one party or the other will hurt or benefit them can move
savings? Do you plan of establishing a business on your own (sole the market as whole. This is especially true in times of intense
proprietorship), or going into a partnership, or being an owner of a domestic turmoil.

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 by investors to look at when analyzing a company’s performance.
3. Natural and Man-Made disaster - Natural or man-mad Looking at a cash flow of a company gives the idea of how the
disasters with economic consequences also affect stock company generated cash inflows to pay loans, pay dividends to
markets. shareholders, and making sure that the new investment’s resources
are not coming from loans. In statement of cash flows this is where
4. Market Psychology - At the end of the day, swings in the stock we would know where the increase and decrease of cash is coming
market are caused by human beings. There are boom periods from, hence this is why cash flows are grouped into three basic types
in a rising market when everyone wants to buy. Alternatively, of business activities namely:
there are also periods of panic when almost every investor is
scrambling to sell.

1. Cash from Operating Activities – this is where we

Flow of funds within an organization can measure the amount of cash that the company has made
through its regular business operations. The information
Remember the individuals involved in the financial system -- provided in this statement shows the quality of earnings the
company has made. It is basically a measure of a company’s
the savers, financial intermediaries, and the users of funds? The
operating profit.
financial system permits the transfer of money efficiently and
effectively between savers to financial intermediaries and to
borrowers or investors. Thus, the flow of funds within an organization
gives us a picture of how funds originated and how the funds will be
used. 2. Cash from Investing Activities – this statement
provides the information regarding the buying and selling of
long-term assets such as property, plant and equipment. This
Significance of Cash Flows section shows how the cash is spent in an investment over a
Statement of cash flows is one of the four main financial
given period.

statements. Cash flow statement is an overview of all cash flows made

by the business through operations, investment, and financing
transactions over a period of time. This statement is preferred mostly

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 manager to have a forecast of the cost investment and
the possibility of greater return to be generated from
3. Cash from Financing Activities – In this section one the investment.
can see the amount of cash the company has raised to fund the
company through all forms of debt like stocks bonds etc. If the OPERATING
company have an approved loan, the money they will receive DECISIONS
3. involves in dealing
will be reflected in this statement. This statement would also
with the daily operations of a company that ensures
show the company’s financial strength and how well the
that the company has sufficient
-9- cash to carry on with
company’s capital structure is managed. the day to day operations and keep away from
unnecessary expenses. The VP of finance determines
how to finance working capital accounts such as
Four major types of decisions for a Financial Manager accounts receivables and inventories, would it go for
short-term sources of financing or through long-term
sources of financing.
FINANCING
DECISIONS RETURN OF
1. is one of the crucial CAPITAL OR
DIVIDEND
duties of a financial manager. These decisions are DISTRIBUTION
made in order for the company to have the appropriate DECISIONS
capital structure. This involves how much borrowing a. These
or how much capital is to be allocated in financing for decisions involve the payouts to the shareholders and its
acquiring an asset, long term investments or working proportion of earning per share, how often would these
capital for the day to day operations of the company. payments be made or convince the shareholders to retain the
earnings within the company.
INVESTING
DECISIONS
2. is concerned about the
selection of assets in which funds will be invested by Signature of Parent over printed name
a company. Basically, this is the how and where to
invest the funds. In order for a VP for Finance to
decide, he must have the support of capital budgeting
analysis. This analysis would allow a financial ______________________________________

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 MODULE IN ABM12 Planning is an important aspect of the firm’s operations because it
BUSINESS FINANCE
First Quarter provides road maps for guiding, coordinating, and controlling the
Week 3
MOST ESSENTIAL LEARNING COMPETENCY firm’s actions to achieve its objectives. Planning is the fundamental
Financial Planning Process (ABM_BF12-IIIc-d-10) management function, which involves deciding beforehand, what is
OBJECTIVES to be done, when is it to be done, how it is to be done and who is going
1. Describe the financial planning proces to do it. It is an intellectual process which lays down an organization’s
Let’s Recall (Review) objectives and develops various courses of action, by which the
organization can achieve those objectives. It chalks out exactly, how
Directions: Answer the following questions:
to attain a specific goal.
1. How do you see yourself five years from now?
Levels of Planning
2. How will you achieve it (your goal)?
Strategic plans are designed with the entire
3. What are the things that may hinder you to achieve it? How will Strategic
organization in mind and begin with an
you face those difficulties? Planning
organization's mission and vision. Top-level
My dear student, your answer is the long-term goal that you plan to
managers, such as CEOs or presidents, will
achieve in the future. As you may observe, planning plays an
Tactical design and execute strategic plans to paint a
important role in everyday life as you already have in mind a set of Planning
picture of the desired future and long-term goals
plans for the next five years. Some who are not sure of what they want
of the organization. Essentially, strategic plans
five years from now may probably
-1- still have an idea of what kind of
Operational look ahead to -2-
where the organization wants to be
life they want in the future. Moreover, you are still in the process of Planning
in three, five, even ten years. Strategic plans,
planning.
provided by top-level managers, serve as the framework for lower-
“If you fail to plan, you plan to fail.”
level planning.
Let’s Understand (Study the Concept)

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For example, Mr. Lee is a top-level manager for Papa’s Pizza. As a strategic plan is but still help to bring the organization closer to the
top-level manager, Mr. Lee must use strategic planning to ensure the long-term goal.
long-term goals of the organization are reached. For him, that means Operational plans are the plans that are made by frontline, or low-
developing long-term strategies for achieving growth, improving level, managers. All operational plans are focused on the specific
productivity and profitability, boosting returns on investments, procedures and processes that occur within the lowest levels of the
improving customer service and finding ways to give back to the organization. Managers must plan the routine tasks of the department
community in which it operates. using a high level of detail.
Tactical plans support strategic plans by translating them into Operational plans are highly detailed plans that provide a clear
specific plans relevant to a distinct area of the organization. Tactical picture of how a team, section or department will contribute to the
plans are concerned with the responsibility and functionality of lower- achievement of the organization's goals. These plans map out the day-
level departments to fulfill their parts of the strategic plan. -4-
to-day tasks required to run a business.
For example, when Ms. Kasy,-3-
the middle-level manager at Papa’s The plan covers the what, the who, the when, and how much:
Pizza, learns about Mr. Lee’s strategic plan for increasing ● What - the strategies and tasks to be achieved / completed
productivity, Ms. Kasy immediately begins to think about possible ● Who - the individuals who have responsibility for each task
tactical plans to ensure that happens. Tactical planning for Ms. Kasy strategy / task
might include things like testing a new process in making pizzas that ● When - the timeline for which the strategies/tasks must be
has been proven to shorten the amount of time it takes for prepping completed
the pizza to be cooked or perhaps looking into purchasing a better ● How much – the financial resources available to complete a
oven that can speed up the amount of time it takes to cook a pizza or strategy/task
even considering ways to better map out delivery routes and drivers. For example, Mr. John, the frontline manager at Papa’s Pizza, is
As a tactical planner, she needs to create a set of calculated actions responsible for operational planning. Operational planning activities
that take a shorter amount of time and are narrower in scope than the for him would include things like scheduling employees each week;

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assessing, ordering and stocking inventory; creating a monthly Many businesses develop strategic planning within a short-term,
budget; developing a promotional advertisement for the quarter to medium-term and long-term framework. Short-term usually involves
increase the sales of a certain product (such as the Hawaiian pizza) or processes that show results within a year. Companies aim medium-
outlining an employee's performance goals for the year. term plans at results that take several years to achieve. Long-term
plans include the overall goals of the company set four or five years
Figure 1. Steps in Financial Planning in the future and usually are based on reaching the medium-term
targets. Planning in this way helps you complete short-term tasks
WHAT ARE THE STEPS IN FINANCIAL PLANNING? while keeping longer-term goals in mind.
1. Set goals or objectives. It is the process of Short-Term Planning

-5-
Short-term planning looks at the characteristics of the company in the
-6-
present and develops strategies for improving them. Examples are the
Establish Establish an Determine
skills of the employees and their attitudes. The condition of
Set goals Identify responsibilit valuation
Identify the
and goal-related
objectives
resources
tasks
y centers for
accountabili
system for
monitoring
contingency production equipment or product quality problems are also short-term
plans
ty and and
concerns. To address these issues, you put in place short-term
solutions to address problems. Employee training courses, equipment
identifying something that is to be accomplished and establishing servicing and quality fixes are short-term solutions. These solutions
measurable goals and timeframes. For corporations, long-term and set the stage for addressing problems more comprehensively in the
short-term objectives are usually identified. These can be seen in the longer term.
company’s vision and mission statements. The vision statement states Medium-Term Planning
where the company wants to be while the mission statement states the Medium-term planning applies more permanent solutions to short-
plans on how to achieve the vision. term problems. If training courses for employees solved problems in
the short term, companies schedule training programs for the medium

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term. If there are quality issues, the medium-term response is to revise 4. Establish responsibility centers for accountability and timeline.
and strengthen the company's quality control program. If the tasks are already identified to achieve goals, the next important
Where a short-term response to equipment failure is to repair the goals step is to identify which department should be held accountable
machine, a medium-term solution is to arrange for a service contract. for this task. There must also be timeline for the activities, especially
Medium-term planning implements policies and procedures to ensure for those activities which are not normally done on a daily basis.
that short-term problems don't recur. 5. Establish an valuation system for monitoring
Long-Term Planning and controlling. The company must establish a
In the long term, companies want to solve problems permanently and mechanism which will allow plans to be
-8-
to reach their overall targets. Long-term planning reacts to the monitored. This can be done through quantified
-7-
competitive situation of the company in its social, economic and plans such as budgets and projected financial statements. The
political environment and develops strategies for adapting and management will then compare the actual results to the planned
influencing its position to achieve long-term goals. It examines major budgets and projected financial statements. Any deviations from the
capital expenditures such as purchasing equipment and facilities and budgets should be investigated.
implements policies and procedures that shape the company's profile 6. Determine the contingency plans. In
to match top management's ideas. planning, contingencies must be considered as
2. Identify resources. Resources include well. Budgets and projected financial
production capacity, human resources who statements are anchored on assumptions. If these assumptions do not
will man the operation and financial become realities, management must have alternative plans to
resources. minimize the adverse effects on the company (Borja & Cayanan,
3. Identify goal-related tasks. In this step, 2015).
management must figure out how to achieve
an objective.

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 MODULE IN ABM12 income tax expense is also expected with higher sales. The decision
BUSINESS FINANCE
First Quarter to expand production capacity is based on projected increase in sales.
Week 4
MOST ESSENTIAL LEARNING COMPETENCY Moreover, if you look at the accounts in the SFP, almost all of them
Budget Preparation and Projected Financial Statement
are also correlated with sales. The amount of cash that the company
(ABM_BF12-IIIc-d-11)
maintains, its accounts receivable and inventories, PPE and trade
OBJECTIVES
payables are affected by sales.
The learner shall be able to illustrate the formula and format
for the preparation of budgets and projected financial Given the importance of the sales forecast, the following external and
statement.
internal factors should be considered in forecasting sales:

Let’s Recall (Review)

Direction: Based on the previous activity in the Let’s Create part EXTERNAL FACTORS INTERNAL FACTORS
of module 3, answer the following questions: • Gross Domestic Product • Production capacity
(GDP) growth rate • Manpower
1. What is a budget?
• Inflation Requirements
2. What is the importance of a budget? • Interest Rate • Management Style of
3. What will happen if the budget was not met? • Foreign Exchange Rate the Managers
Let’s Understand (Study the Concept) • Income Tax Rates • Reputation and Network
• Development in the of the Controlling
1. SALES BUDGET industry Stockholders
Sales is the most important financial statement account because • Competition • Financial Resources of
almost all other accounts are affected by it. If you analyze the SCI, • Economic Crisis the Company
• Regulatory
the accounts such as the Cost of Sales, Gross Profit, Operating
Environment
Expenses and other expenses are based on the sales figure. Higher • Political Crisis

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Macroeconomic variables (external) such as the GDP rate, inflation prefer to buy more bread from you, then you should increase your
rate, and interest rates, among others play an important role in sales forecast.
forecasting sales because it tells us how much the consumers are Production Capacity and manpower (internal). Suppose that you
willing to spend. A low GDP rate coupled by a high inflation rate have already evaluated the macroeconomic factors and identified that
means that consumers are spending less on their purchases of goods there is a very strong market for your product and consumers are very
and services. This means that we should not forecast high sales of the likely to buy from you. You forecasted that you will be able to sell
periods of low GDP. 1,000 units of your product. However, you only have 20 employees
Developments in the Industry (external). Products and services who are able to produce 20 units each. Your capacity cannot cover
which have more developments in its industry would likely have a your expected demand hence, you are limited by it. To be able to
higher sales forecast than a product or service in slow moving increase capacity, you should be able to expand your operations.
industry. Consumer trends are always changing, thus the industry What will be the implications if sales budget is not
should be competitive to be able to appeal to more customers and stay correct? If understated, there can be lost
in the market. opportunities in the form of forgone sales. If it is too
Competition (external). Suppose you are selling bread and you know optimistic, the management may decide to
that each person in your community eats an average of one loaf of unnecessarily increase capacity or hire more employees and end up
bread a day. The population of your community is 500 people. If you with more inventories.
are the only person selling bread in your town, then your sales forecast
is 500 units of bread. However, you also have to take account your 2. PRODUCTION BUDGET
competition. What if there are 4 other sellers of bread? You will need Production budget is a schedule which provides information
to have to divide the sales between the 5 of you. Does this mean your regarding the number of units that should be produced over a given
new forecast should be 100 units of bread? Not necessary. You should accounting period based on expected sales and targeted level of
also know the preference of your consumers. If more of them would ending inventories.

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 It is computed as follows: be the beginning inventory level of the next quarter. The target level
of ending inventories of the fourth quarter is the same as that of the
Required production in units = Expected Sales + Target Ending year while the beginning inventory of the first quarter is the same as
Inventories - Beginning Inventories the beginning inventory for the year.
Note: Ending inventory of current period is beginning inventory of From the number of units that is expected to be produced, the cost of
next period. production can be estimated especially if the company has developed
Table 1.1. DCD Company standard production cost per unit.
Production Budget (in units)
for the year ending December 31, 2019

QUARTER YEAR
3. OPERATING BUDGET
1 2 3 4
Projected 20,000 22,000 25,000 30,000 97,000 Operations budget refers to the variable and fixed costs needed to run
Sales the operations of the company but are not directly attributable to the
Target Level
of Ending 3,000 3,500 5,000 3,500 3,500 generation of sales.
Inventories
• Rent payments
Total 23,000 25,500 30,000 33,500 100,500
Less: • Wages and Salaries of selling and
Beginning 2,500 3,000 3,500 5,000 2,500 administrative
-6-personnel

EXAMPLES
Inventories
Required -5- • Administrative
Production 20,500 22,500 26,500 28,500 98,000
Costs
• Travel and
Table 1.1 shows that the required production in the first quarter is representation
20,500 units. The ending inventory level of the present quarter will expenses

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 • Professional fees for and as of the end of the year. It sets targets to control and monitor
• Interest Payments the activities of the company. The following reports may be
• Tax Payments forecasted:
‣ Projected Statement of Comprehensive Income (SCI)
‣ Projected Statement of Financial Position (SFP)

3. CASH BUDGET
A cash budget itemizes the projected sources and uses of cash in a
future period. This budget is generally used to estimate whether a
company has a sufficient amount of cash to uphold regular operations.
If not, management must find additional funding sources. It can also **Let us use the SCI and SFP of PAPA Company for years ending
be used to determine whether too much of a company’s cash is being December 31, 2012-2016 below to forecast the different financial
spent in unproductive ways. statements.
If the ending cash balance after payment of all required disbursements
(expenses) is less than the required ending balance, the company
needs to borrow additional cash from
-7- 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.
5. 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

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 2016 2015 2014 2013 2012
ASSETS
PAPA COMPANY
Current Assets
Statement of Comprehensive Income Cash 1,062,527 996,904 777,415 766,805 883,416
For the Years Ending December 31, 2012-2016 Accounts Receivables 2,300,500 1,921,799 1,722,513 1,454,426 1,396,639

December 31, 2012-2016 Inventories 4,849,304 4,499,998 3,797,668 3,293,030 3,351,933

Other Current Assets 1,050,000 983,746 984,786 735,608 998,763

2016 2015 2014 2013 2012 9,262,331 8,402,447 7,282,382 6,249,869 6,630,751
38,340,25 Noncurrent Assets
Net Sales 52,501,085 47,345,223 42,174,283 7 35,336,643 Property, Plant, and
31,439,01 Equipment, net 12,200,000 11,300,000 9,050,000 9,350,000 9,500,000
Cost of Sales 41,954,730 37,988,628 33,980,174 1 29,329,413
Other Noncurrent Assets 835,689 925,681 896,842 876,235 827,490
Gross Profit 10,546,355 9,356,595 8,194,109 6,901,246 6,007,230
13,035,689 12,225,681 9,946,842 10,226,235 10,327,490
Operating
Expenses 6,497,659 6,196,804 5,393,621 4,926,723 4,505,422 Total Assets 22,298,020 20,628,128 17,229,224 16,476,104 16,958,241
LIABILITIES AND
Operating Income 4,048,696 3,159,791 2,800,488 1,974,523 1,501,808 EQUITY
Interest Expense 250,000 250,000 250,000 450,000 300,000 Current Liabilities
Income before Accounts Payables 5,050,810 4,746,252 4,137,815 3,298,699 2,874,911
Taxes 3,798,696 2,909,791 2,550,488 1,524,523 1,201,808
Income Taxes Payable 433,051 283,705 267,801 149,441 115,330
Taxes 1,139,609 872,937 765,146 457,357 360,542 Current Portion of Long-
term Debt 2,250,000 2,500,000 1,000,000 2,000,000 2,000,000
Net Income 2,659,087 2,036,854 1,785,342 1,067,166 841,266
Other Current Liabilities 85,600 28,700 40,990 30,688 37,890
7,819,461 7,558,657 5,446,606 5,478,828 5,028,131
Noncurrent Liabilities
Long-term Debt, Net of
2,000,000 1,000,000 3,000,000
Current Portion 1,250,000
PAPA COMPANY Total Liabilities 9,819,461 8,808,657 5,446,606 6,478,828 8,028,131
Statement of Financial Position Stockholders' Equity
Capital Stock 8,000,000 8,000,000 8,000,000 8,000,000 8,000,000

Retained Earnings 4,478,559 3,819,472 3,782,618 1,997,276 930,110

Total Stockholders'
Equity 12,478,559 11,819,472 11,782,618 9,997,276 8,930,110
Total Liabilities and
Equity 22,298,020 20,628,129 17,229,224 16,476,104 16,958,241

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