FINANCIAL

PLANNING TOOLS
WK04-LAS2-BF-II-12
LEARNING OBJECTIVE(S):

• AT THE END OF THE LESSON, THE STUDENTS SHALL BE

ABLE TO UNDERSTAND THE CONCEPTS OF PREPARATION
OF BUDGETS AND WORKING CAPITAL RATIOS
SALES BUDGET: FACTORS TO BE CONSIDERED
 External factors influencing sales
- Macroeconomic Variables (external)

 Macroeconomic variables such as the GDP rate,

inflation rate, and interest rates, among others play an
important role in forecasting sales because it tells us
how much the consumers are willing to spend. A low
GDP rate coupled by a high inflation rate means that
consumers are spending less on their purchases of
goods and services. This means that we should not
forecast high sales of the periods of low GDP.
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. Consumer trends are
always changing, thus the industry should be
competitive to be able to appeal to more
customers and stay in the market.
 Competition (external)
Suppose you are selling bread and you know that each person in
your community eats an average of one loaf of bread a day. The
population of your community is 500 people. If you 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
competition. What if there are 4 other sellers of bread? You will
need to have to divide the sales between the 5 of you. Does this
mean your new forecast should be 100 units of bread? Not
necessary. You should also know the preference of your
consumers. If more of them would prefer to buy more bread from
you, then you should increase your sales
forecast.
 Production Capacity and man power
(internal)
Suppose that you have already evaluated the
macroeconomic factors and identified that there is a very
strong market for your product
and consumers are very likely to buy from you. You
forecasted that you will be able to sell 1,000 units of your
product. However, you only have 20 employees who are
able to produce 20 units each. Your capacity cannot
cover your expected demand hence, you are limited by
it. To be able to increase capacity, you should be able to
expand your operations.
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

Note: Ending inventory of current period is beginning inventory of

next period.
EXERCISE
SOLUTION….
OPERATION 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 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, OR CASH FORECAST, IS A
STATEMENT OF THE FIRM’S PLANNED INFLOWS AND
OUTFLOWS OF CASH. IT IS USED BY THE FIRM TO
ESTIMATE ITS SHORT-TERM CASH REQUIREMENTS, WITH
PARTICULAR ATTENTION BEING PAID TO PLANNING
FOR SURPLUS CASH AND FOR CASH SHORTAGES
(GITMAN & ZUTTER, 2012).
Below is the general form of the Cash
Budget:
THE FOLLOWING ARE THE 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. RECALL FROM LESSON 2: FINANCIAL STATEMENT ANALYSIS
THE IMPLICATIONS OF THE COMPANY’S CREDIT POLICY.
- Continuing from previous example,
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?
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
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?

D. 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.
E. 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.
‣ 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.
F. Match the receipts and disbursements on
the periods they become collectible and
payable, respectively.

G. 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.
H. 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.
 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

-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
INCOME STATEMENT
STATEMENT OF FINANCIAL POSITION
WORKING CAPITAL
LC 12
LC 12
 LC
12

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 LC 12

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LEARNING
EXPERIENCE
Answer the questions in paragraph form.

1. HOW WILL YOU USED PREPARATION

OF BUDGETS TO MAINTAIN THE HEAL
OF YOUR COMPANY?
2. WHAT IS THE DIFFERENCE BETWEEN
CURRENT RATION AND QUICK
RATIO?