FINANCIAL

PLANNING
TOOLS AND
CONCEPTS
Learning Objectives:
• 1. Illustrate the financial planning process
• 2. Prepare budgets such as projected collections, sales budget,
production budget, income-projected statement of comprehensive
income, projected of financial position, and projected cash flow
statement
• 3. Describe concepts and tools in working capital management
What is Financial Planning process?
• Planning is very much related to another management function,
controlling.
• These two management functions reinforce each other, and both are
very important for the success of an organization.
• Management planning is about setting the goals of the organization
and identifying ways to achieve them. This maybe be broken down
into long-term plans and short-term plans. Long-term plans reflected
in a company’s business strategy. In the process of planning,
resources have be identified. These resources include work force
resources, production capacity, and financial resources.
Steps in Financial Planning?
• 1. Set goals or objectives. For corporations, long term and short term
identify objectives. These has shown in company’s vision and mission
statements. The vision statement states where the company wants to
be while the mission statement states the plans on how to achieve
the vision.
• Jollibee Foods Corporation (JFC) Vision: To excel in providing great tasting
food that meets local preferences better than anyone; To become one of the
three largest and most profitable restaurant companies in the world by 2020.
• Mission: To serve great tasting food, bringing the joy of eating to everyone.
• 2. Identify resources. Resources include production capacity, human
resources who will operate the operations and financial resources.

• 3. Identify goal-related tasks. In this step, management must figure

out how to achieve an objective.

• 4. Establish responsibility centers for accountability and timeline. If

we identified the task to achieve goals, the next important step to do
is to identify which department held accountable for this task.
• 5. Establish an evaluation system for monitoring and controlling. For
corporations, the management must establish a mechanism to allow
plans to monitor. This has been done, through quantified plans such as
budgets and projected financial statements. The management will then
compare the actual results to the planned budgets and projected
financial statements. Any deviations from the budgets will undergo
investigations.

• 6. Determine contingency plans. In planning contingencies or

unforeseen events must be considered as well. Budgets and projected
financial statements anchored on assumptions.
Preparation of Budgets and Projected
financial statement
What is budget?

• Budget is a description in quantitative usually monetary terms of

desired future result.
Examples of Budgets:
• Sales Budget - is a prediction of the firm’s sales over a specific period,
based on external and internal information.
• Production Budget- is a financial planning related to the units of
production that the management think that the business should
produce in the upcoming period to match the estimated sales
quantity, based on the management’s judgement related to the
competition in the market, economic conditions, production capacity,
consumer prevailing market demands and past trends.
• Cash budget- is a statement of the firm that has planned inflows and
outflows of cash. It forecasts the timing of theses 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.
• Example: Assume selling price is Php 100/unit sales for
each month that has expected to be collected as follows:
Month of sales: 20%
A month after sales: 50%
2 months after sales: 30
• 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.
• Forecast or calculate the following reports:
• Projected Income Statement
• Projected Statement of Financial Position
Application of the Projected Financial Statements Approach be

• Step 1. Forecast the Income Statement

• a. Establish a sales projection
• b. Project the cost of sales
• c. Prepare the production schedule and project the corresponding
production costs, direct materials, direct labor and overhead for
manufacturing companies)
• d. Estimate selling and administrative expenses.
• e. Consider financial expenses if any
• f. Determine the net profit
• Step 2. Forecast the Statement of Financial Position.
• a. Project the assets needed to support projected sales.
• b. Project funds generated (through accounts payable and accruals) and
by retained earnings through profits generated.
• c. Project liability and stockholder’s equity accounts that will not rise
spontaneously with sales (e.g., notes payable, long-term bonds,
preferred stock, and ordinary shares) but may change due to financing
decisions made later.
• d. Determine if additional funds needed by using the following formula.

• Additional Funds Needed (AFN) = Required Increase in Assets –

Spontaneous Increase in Liabilities - Increase in Retained earnings
• Step 3. Raising the Additional funds needed.
• The financing decision will consider the following factors:
• a. Target capital structure:
• b. Effect of short-term borrowing on its current ratio;
• c. Conditions in the debt and equity markets; or
• d. Restrictions imposed by existing debt agreements.

• Step 4. Consider financing feedbacks.

• Depending on whether additional funds borrowed or has raised through
ordinary shares, consideration has given on additional interest in the
income statement or dividends, thus decreasing the retained earnings.
Problem:
The firm is expecting a 20% increase in sales next year, and
management is concerned about the company’s need for external
funds. The increase in sales expected to carry out without any
expansion of fixed assets, but rather through more efficient asset
utilization in the existing store. Among liabilities, only current liabilities
vary directly with sales.

• Using the percent-of-sales method, determine whether the company

has external financing needs or a surplus of funds.
What is Cash Flow Statement?
• It is a process of closely monitoring of in and out of cash in the
business.
• Example: Ms. Amelia Enriquez engaged in a laundry shop. It was
already her 2 year of operation and all the in and out of cash for the
month as follows:
• Let us assume that Amelia laundry shop projected 3 months of cash
flow for planning an expansion of her business. Let us say that there is
an increase of collection of 25% and all expenses will stay the same.
By month of May, Amelia granted a loan amounted Php 150,000. How
much is the cash flow ending balance of Amelia for the month of
May?
• how and when cash comes into your business
• how and when it goes out again, and
• Where it has tied up in the meantime (in inventory and equipment,
for example).
WORKING CAPITAL MANAGEMENT?
• Working capital refers to company’s investment in short term asset
such as cash, inventory, short-term marketable securities, and
account receivable.
• Net Working capital refers to the difference between the firm’s
current assets and current liabilities. If the firm’s current assets
exceed its current liabilities, the firm has a positive working capital.
• Working Capital Management specifically refers to the efficient
management of the firm’s current assets (cash, receivables, and
inventory) and current liabilities (short-term payables).
Cash Management System
• A financial officer has the following specific objectives in monitoring
cash balances:
• To meet the ash disbursement needs (payments schedule)
• To minimize the funds committed to transactions and
precautionary cash balances; and
• To avoid misappropriation and handling losses in the normal
course of business
Reasons for Holding Cash
• 1. Transaction Motive - cash needed to facilitate the normal transactions of the
business, that is, to carry out its purchases and sales activities.
• 2. Precautionary Motive - Cash may held beyond its normal operating
requirement level in order to provide for a buffer against contingencies such as
unexpected slow-down in accounts receivable collection, strike or increase in
cash needs beyond management’s original projections.
• 3. Speculative Motive- cash held ready for profit making or investment
opportunities that may come up such as a block of raw materials inventory
offered at discounted prices or a merger proposal.
• 4. Contractual Motive-A company may be required by a bank to maintain a
certain compensating balance in its demand deposit account as a condition of a
loan extended to it.
• Cash Conversion Cycle
• The operating cycle of a firm is mainly composed of two current asset
categories: inventories and accounts receivable.
• It measures as the sum of the Average Age of Inventory and Average
Collection Period.
• The average age of inventory refers to the time that lapsed when a good
manufactured and eventually sold.
• The average collection period refers to the time when the sale made and
collected.
• Both measured in days.
• Operating cycle= Average Age of Inventory + Average Collection
Period

• Cash Conversion Cycle = Operating Cycle – Average Payment Period

• Cash conversion cycle = Average Age of Inventory + Average Collection

Period – Average payment period.
• Illustration:
Bloom Manufacturing had an average age of inventory of 18.5
days, an average collection period of 48.5 days and an average payment
period of 53.5 days. Bloom is operating and cash conversion cycle
obtained as follows:
Operating Cycle = Average Age of Inventory + Average Collection Period
= 18.5 days + 48.5 days
= 67days
• Cash Conversion Cycle = Operating Cycle – Average Payment period
= 67days - 53.5 days
= 13.5 days
• Inventory Management- The objective in managing inventory is to
convert it as quickly as possible to cash without losing sales due to
stock outs.
• Inventory in A Manufacturing Company - In a manufacturing
company, there are three types of inventory:
• a. Raw materials – these are purchased materials not yet put into production
• b. Work in process – these are goods and labor put into production but not
finished.
• c. Finished goods – these are goods put into production and finished. These
are ready to be sold.
• ABC Inventory system/ABC Analysis. Inventories classified as
• A are high valued items, which should safeguarded the most.
• B items, on are average-cost items that should be safeguarded more than C
items but not as much as A items.
• C items have low cost and is the least safeguarded.
• Accounts Receivable Management - represents assets of the entity
that expected to be collected and thus converted to cash.
• sound accounts receivable management practices would form
three parts:
• credit selection
• credit terms
• credit monitoring.
One popular credit selection technique is the
use of the 5 C’s of credit:
• a. Character: The applicant’s record of meeting its past obligations has
judged.
• b. Capacity: This emphasizes the customer’s ability to repay its
obligations in reference to its current financial position or standing.
• c. Capital: The applicant’s net worth which can be arrived at by
deducting total liabilities from total assets.
• d. Collateral: The amount of assets the customer has that could serve
as a security in the event that the obligation is not paid.
• e. Condition: This includes current economic and industry conditions
that might affect the customer’s ability to repay its obligations.
• Credit Scoring- Another used in granting credit to customers is
through credit scoring.
• Credit scoring applies statistically derived weights to a credit
applicant’s scores on key financial and credit characteristics to
predict whether he or she will pay the requested credit on time.
ACTIVITY 1:
Direction: Compute the Net Working Capital of ABC Company. See table
below and answer directly.

• 1. How much is the net working capital of ABC Company?

• 2. Is it positive or negative? Explain briefly.
ACTIVITY 2:
Direction: Read and understand the case below and continue to fill in the
sales budget table.
XYZ Merchandising, which is engaged in the reselling of branded bags, is in
the process of preparing its budgets for the calendar year 2016. Last year, XYZ was
able to sell 1,500 bags with a selling price of 2,500 per bag. For the current year,
the basis of both external and internal information. First quarter sales expected to
be 400 bags. The firm also expects that unit sales per quarter would increase by
10%. Selling price is also expected to increase by 5% for 2016.

1. Complete the projected sales budget for each quarter.

2. How much is the total projected sales budget?