Business Finance

Governor Pack Road, Baguio City, Philippines 2600

Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade 12- ABM
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph

MODULE 4 – FINANCE Subject Teacher:

FINANCIAL PLANNING
Learning objectives:
At the end of this module, students must be able to:
1. explain the nature and significance of financial planning;
2. be familiar with the basic financial forecasting model;
3. apply the projected financial approach in forecasting;
4. prepare sales budget, production budget, and cash budget.

CONTENTS:
Financial Plan – a statement of what to be done in the future as far as financial goals are concerned.
Financial Planning – the projection of financial information such as sales, income, and assets based
on available alternatives (i.e. production and marketing strategies) as well as the determination of
resources needed to achieve these projections.

Financial Planning Tools and Concepts:

1. Financial Planning Process – Planning that begins with long-term, or strategic, financial plans that in
turn guide the formulation of short-term, or operating, plans and budgets.
a. Long-term (strategic) financial plans – Plans that lay out a company’s planned financial
actions and the anticipated impact of those actions over periods ranging from 2 to 10 years.
Note: all planning activities of an entity always start with the Mission, Vision, and Objectives (VMO).

b. Short-term (operating) financial plans – Specify short-term financial actions and the
anticipated impact of those actions.

Financial Planning Process illustration:

Steps in Financial Forecasting

• Forecast sales
• Production plan (project the assets needed to support sales)
• Estimate marketing and administrative expenses
• Project outside (additional) funds needed
• Decide how to raise funds
• Prepare projected Financial Statements (Pro Forma SFP and Pro Forma SCI)
• Review and Evaluate (see effects of plan on ratios and stock price)

Business Finance Page 1 of 6

 Business Finance
Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade 12- ABM
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph

MODULE 4 – FINANCE Subject Teacher:

Common Financial Forecasting Tools:

• Account Analysis (detailed)
• Probability (t-distribution, chi-square, Bernoulli, etc.)
• Simulation technique
• Sensitivity analysis (please see managerial accounting)
• Linear Programming (Graphic, Algebraic, Simplex)
• PERT-CPM
• Regression Analysis (least-squares regression)

2. Budget preparation
Budgeting – is the process or act of preparing financial budget.
Budget – refers to a plan which is expressed in a quantitative monetary value.
Purposes:
a) Facilitate planning
b) Establishing financial coordination
c) Proper allocation of resources
d) Improve employee morale
e) Enhancing control mechanism
Period covered:
a) Short-term – anchored on one year budgetary requirements
b) Medium-term – sets the budgetary requirements of an entity for the next three or five years.
c) Long-term – also called strategic budget which is anchored on the VMO.

Types of budget:
a) Fixed budget – based only on one level of production capacity.
b) Flexible budget – shows the projected cost at different levels of production capacity.
c) Continuous or rolling budget – continuously prepared every month by adding another
month once the current month has passed.
d) Cash budget – reflects the expected cash receipts from cash sales, collections, proceeds
from sale of other assets and borrowings, expected disbursements on payments of OPEX,
interest, taxes and loans.
e) Sales budget – reflects expected number of units to be sold based on forecast made from
performance of previous years and other marketing variables.
f) Production budget – shows the costs of producing the product which includes the direct
materials, direct labor, and factory overhead.
g) Operating budget – reflects the sales and production budgets.
h) Financial budget – usually includes the cash budget and budgeted balance sheet.
i) Capital budget – a long range budget that incorporates the major expenditures for plant
and machineries.
j) Master budget – the overall budget of the business entity.
*Note: Since budgeting is a very broad topic, we will focus only on three major types of budget, the
Sales Budget, Production Budget, and Cash Budget. Other budgets shall be discussed in higher
accounting subjects in college.

Sales budget Pro-forma schedule:

Units to be sold xx
x unit selling price ₱xx
Sales revenue ₱xx

Production budget Pro-forma schedule:

Units to be sold xx
Add: desired ending inventory xx
Total requirements xx
Less: Beginning inventory xx
Units to be produced xx

Business Finance Page 2 of 6

 Business Finance
Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade 12- ABM
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph

MODULE 4 – FINANCE Subject Teacher:

Cost of Sales Pro-forma schedule:

Beginning inventory ₱xx
Add: Budgeted purchases xx
Total Goods available for sales ₱xx
Less: Desired Ending inventory xx
Budgeted Cost of Sales ₱xx

Income Statement Pro-forma schedule:

Sales ₱xx
Less: Cost of Sales xx
Gross profit ₱xx
Less: Selling & Admin Expenses xx
Operating income ₱xx
Less: Interest Expense xx
Income before taxes ₱xx
Less: Income tax xx
Net Income ₱xx

Cash budget Pro-forma schedule:

Beginning balance ₱xx
Add: Collections:
Cash sales xx
Credit sales xx
Total cash available ₱xx
Less: Disbursements:
Raw materials xx
Labor xx
Overhead xx
Selling & Admin xx
Income taxes xx
Equipment xx
Total disbursements ₱xx
Ending balance before financing ₱xx
Financing:
Borrowings xx
Repayments (xx)
Interests (xx)
Total financing xx
Ending balance ₱xx

Cash budget Pro-forma schedule (alternative):

Collections ₱xx
Disbursements (xx)
Net cash flow ₱xx
Cash beginning balance xx
Cash ending balance ₱xx
Required cash balance xx
Surplus/(Deficit) xx
Financing required ₱xx

*Other format for cash budget may be used provided same concepts are applied.

Illustrative Problem no. 1:

Chovid-19 Company desires an ending inventory of ₱640,000. The company has forecasted sales to
be ₱1,800,000 and has a beginning inventory of ₱630,000. Cost of sales is 65% of sales. How much is
budgeted purchases?

Business Finance Page 3 of 6

 Business Finance
Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade 12- ABM
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph

MODULE 4 – FINANCE Subject Teacher:

Solution:
Budgeted sales ₱1,800,000
Cost of sales (35% of Sales) 630,000

Beginning inventory ₱ 640,000

Add: Budgeted purchases 620,000 squeeze
Total Goods available for sales ₱1,260,000
Less: Desired Ending inventory 630,000
Budgeted Cost of Sales ₱ 630,000

Illustrative Problem no. 2:

If the required direct materials purchases are 8,000 units and the direct materials required for
production is three times the direct materials purchases, and the beginning direct materials are three
and a half times the direct materials purchases, what are the desired ending direct material in units?

Solution:
Units required for production 24,000
Add: desired ending inventory 12,000 squeeze
Total requirements 36,000
Less: Beginning inventory 28,000
Units to be purchased 8,000

Illustrative Problem no. 3:

Chovid-20 Company has a collection schedule of 60% during the month of sales, 15% the following
month, and 15% subsequently. The total credit sales in the current month of September were ₱80,000
and total collections in September were ₱57,000. What were the credit sales in July?

Solution:
Collections:
Cash sales (₱80,000 x 60%) ₱48,000
Credit sales 9,000
Total cash collections ₱57,000

Credit sales in July: ₱9,000 ÷ 2 ÷ 15% = ₱30,000

Illustrative Problem no. 4:

Vaxinne Company has ₱299,000 in accounts receivable on January 1, 2019. Budgeted sales for
January are ₱860,000. The company expects to sell 20% of its merchandise for cash. Of the remaining
sales, 75% are expected to be collected in the month of sale and the remainder the following month.
How much is the January cash collections from sales?

Solution:
Collections:
January sales (₱860,000 x 0.8 x 0.75) ₱516,000
December sales (January 1 Accounts) 299,000
Collection of Credit sales ₱ 815,000
Cash sales (₱860,000 x 0.2) ₱ 172,000
Total January cash collections ₱ 987,000

*A comprehensive problem will be included in the PowerPoint presentation.

3. Working Capital (WC) management

A. Cash management
Cash management tools:
a) Cash budget preparation
b) Cash break-even computation
c) Cash management model
Business Finance Page 4 of 6
 Business Finance
Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade 12- ABM
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph

MODULE 4 – FINANCE Subject Teacher:

c.1 Collection of receivables

c.2 Payment payables
c.3 Maintaining optimum cash balance
𝟐 𝒙𝑻𝒙𝑫
c.3.1 Baumol Model 𝑬𝑪𝑸 = √
𝒊
Where: (inventor: William J. Baumol)
𝑇 = Transaction cost or Cost of obtaining a loan
𝐷 = Annual demand for cash
𝑖 = Opportunity cost in percentage (%)
𝐸𝐶𝑄 = Economic Conversion Quantity
𝟑 𝟑 𝒙 𝑻 𝒙 𝑺𝟐
c.3.2 Miller-Orr Model 𝑹𝒆𝒕𝒖𝒓𝒏 𝑷𝒐𝒊𝒏𝒕 = √
𝟒𝒙𝒊
Where: (inventor: M.H. Miller and Daniel Orr)
𝑇 = Transaction cost or Cost of obtaining a loan
𝑆 2 = Variance of daily net cash flows
𝑖 = Daily opportunity cost in percentage (%)
Note: Upper limit is 3 times the Return Point

d) Cash Conversion Cycle 𝑪𝑪𝑪 = 𝑨𝑨𝑰 + 𝑨𝑪𝑷 − 𝑷𝑫𝑷

Where:
𝑨𝑨𝑰 = Average Age of Inventory
𝑨𝑪𝑷 = Average Collection Period
𝑷𝑫𝑷 = Payables Deferral Period (Average Payment Period)

B. Account Receivable management:

𝟑𝟔𝟓
A/R conversion period 𝑨𝑪𝑷 = 𝑵𝒆𝒕 𝑪𝒓𝒆𝒅𝒊𝒕 𝑺𝒂𝒍𝒆𝒔
( )
𝑨𝒗𝒆𝒈 . 𝑨𝑹
The 5 C’s of Credit:
1. Character
2. Capacity
3. Conditions
4. Capital
5. Collateral

C. Inventory management
𝟐 𝒙 𝑨 𝒙 𝑶𝑪/𝒐𝒓𝒅𝒆𝒓
Economic Order Quantity 𝑬𝑶𝑸 = √
𝑪𝑪/𝒖𝒏𝒊𝒕
Where:
𝐴 = Annual usage
𝑂𝐶 = Ordering cost
𝐶𝐶 = Carrying cost

Re-order point (without safety stock) 𝑹𝑶𝑷 = 𝑳𝑻 𝒙 𝑫

Where:
𝐿𝑇 = Normal lead time
𝐷 = Daily usage

Re-order point (with safety stock) 𝑹𝑶𝑷 = 𝑳𝑻 𝒙 𝑫 + 𝑺𝑺

Where:
𝐿𝑇 = Normal lead time
𝐷 = Daily usage
𝑆𝑆 = Safety stock

* Illustrative problems for Working Capital management will be included in a separate PowerPoint
presentation.

Business Finance Page 5 of 6

 Business Finance
Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade 12- ABM
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph

MODULE 4 – FINANCE Subject Teacher:

References:
✓ BAL 658.15 C1128, 2017. Cabrera, Ma. Elenita Balatbat and Cabrera, Gilbert Anthony B.,
Business Finance for Senior High School, GIC Enterprises
✓ BAL 658.15 G4476, 2017. Gitman, Lawrence J., et. al. Business Finance. JO-ES Publishing House,
Inc.
✓ BAL 332.4 L161, 2015. Laman, Rose Marie B. et. al. Financial System, Market & Management.
GIC Enterprises
✓ BAL 658.15 An15, 2010. Anastacio, Ma. Flordeliza, Dacanay, Roberto C. Fundamentals of
Financial Management, Rex Book Store

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