BUSINESS FINANCE

1ST QUARTER
Lesson 3: Financial Planning Process

I. INTRODUCTION

When was the last time you bought something from the mall? After choosing the item you wanted to
purchase, you went to the cashier to pay and then got receipt. Sounds about right? To you as a consumer,
that was a simple transaction. To the cashier who assisted you, that was just part of his or her job. But to the
commercial organization where you purchased the item, that “simple transaction” was part of a process.
Sales from the different departments are all collected at the end of the day and then deposited in a bank. All
of those deposits after a certain number of days become part of one big report. Then organization decides if
they have enough money or if they should borrow to support plans and programs.
At the end of this module, the learners are expected to define financial planning and Identify the
steps in the financial planning process.

“A good Financial Plan is a road map that shows us exactly how the choices we make today will affect our
future”
- Alexa Von Tobel
-
We will be proceeding with our lesson proper with the use of the following e-learning platforms:
1. Edmodo;
2. Zoom;
3. Google meet; and
4. Messenger/messenger chat room.

IV. ABSTRACTION

Financial Planning is the process of estimating the capital required and determining its competition.
It is the process of framing financial policies in relation to procurement, investment and administration of
funds of an enterprise.

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).

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 plans - 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.

Objectives of Financial Planning

Financial Planning has got many objectives to look forward to:

a. Determining capital requirements- This will depend upon factors like cost of current and fixed assets,
promotional expenses and long- range planning. Capital requirements have to be looked with both
aspects: short- term and long- term requirements.

b. Determining capital structure- The capital structure is the composition of capital, i.e., the relative kind
and proportion of capital required in the business. This includes decisions of debt- equity ratio- both
short-term and long- term.

c. Framing financial policies with regards to cash control, lending, borrowings, etc.

d. A finance manager ensures that the scarce financial resources are maximally utilized in the best
possible manner at least cost in order to get maximum returns on investment.

To further continue with our discussion, kindly look for the following articles and videos:

1. Financial Statements Explained in One Minute: Balance Sheet, Income Statement, Cash Flow Statement

https://www.youtube.com/watch?v=6GVVTfj7ndc

2. 4 Types of Financial Statements

https://www.youtube.com/watch?v=Fw14qE_9B-A

3. Importance of Financial Planning

https://www.franklintempletonindia.com/investor/investor-education/video/importance-of- financial-
plannng-io04og31

4. Financial Statements Explained in One Minute: Balance Sheet, Income Statement, Cash Flow
Statement

https://www.youtube.com/watch?v=6GVVTfj7ndc

5. Spotlight on the Difference between Budgeting and Forecasting

https://www.youtube.com/watch?v=FL2NcGYQ_Vc

Importance of Financial Planning

Financial Planning is process of framing objectives, policies, procedures, programs and budgets
regarding the financial activities of a concern. This ensures effective and adequate financial and investment
policies. The importance can be outlined as-

1. Adequate funds have to be ensured.

2. Financial Planning helps in ensuring a reasonable balance between outflow and inflow of funds so
that stability is maintained.

3. Financial Planning ensures that the suppliers of funds are easily investing in companies which
exercise financial planning.

4. Financial Planning helps in making growth and expansion programs which helps in long-run survival
of the company.

5. Financial Planning reduces uncertainties with regards to changing market trends which can be faced
easily through enough funds.

6. Financial Planning helps in reducing the uncertainties which can be a hindrance to growth of the
company. This helps in ensuring stability and profitability in concern.

Financial Planning Process

Step 1: Calculate set-up cost

By comparing your set-up or operating costs to your start-up equity investment, you can work out
how much money, if any, you’ll need to borrow to start your business or proceed with another operating year.
Set-up costs or start up for another operating period will include accounting fees, registrations and licenses/
or renewal, equipment and fit out and initial working capital.

Step 2: Profit and loss forecast (Income Statement)

A forecast of sales and expenses, usually for the next or another 12 months of operations. To
produce it:

a. Compare potential sales revenue to cost of goods sold and fixed costs of doing business.

b. Calculate likely margins and put your pricing model to the test.

Step 3: Cash-flow forecast

 A vital component of any financial plan. You need to be aware that:

a. New business or another operating period often need cash to build the capacity necessary to
customer.

b. Customers may be slow to pay.

c. The resulting cash-flow gap could leave you vulnerable if you’re not prepared.

Step 4: Balance sheet forecast

A snapshot of the business after 12 months of operations. You should base it on:

a. The purchases you anticipated in your set-up costs

b. The results of your profit and loss forecast

Step 5; Break-even analysis

Once you’ve forecast your fixed costs, you can calculate how much revenue you need to break even.
If you’ve decided on your pricing, it’s easy to calculate how much revenue based on sales.

Budget and Budget Preparation

Budgeting is the process of creating plan to spend your money. This spending plan is called a budget.
Creating this spending plan allows you to determine in advance whether you will have enough money to do
things you need to do. Following a budget or spending plan will also keep you out of debt or help you work
your way out of deb. If you don’t have enough money to do everything you would like to do, then you can use
this planning process to prioritize your spending and focus your money on the things that are most essential.

Type of Budgets for Business

1. Master Budget. Is an aggregate of a company’s individual budget designed to present a complete a

financial activity and health. The master budget combines factors like sales, operating expenses, assets, and
income streams to allow companies to establish goals and evaluate their overall performance, as well as that
individual cost centers within the organization. Master budgets are often used in larger companies to keep a
individual managers aligned.

2. Operating Budget. Is a forecast and analysis of projected income and expenses over the course specified
time period. To create an accurate picture, operating budgets must account for factors such as sales
production, labor costs, material costs, overhead, manufacturing costs, and administrative expenses.
Operating budget are generally created on a weekly, monthly, or yearly basis. A manager might compare
these reports monthly to see if a company is overspending.

3. Cash Flow Budget. Is a means of projecting how and when cash comes in and out of the business? It can
be useful in helping a company determine whether if management of cash is efficient. Cash flow budget
consider factors such as accounts payable and receivable to assess whether a company has ample cash on
hand to continue operation, the extent to which it is using its cash productively, and its likelihood of generating
cash in the future.

4. Schedule of Expected Cash Collections. Shows the budgeted cash collections on sales during a period. It
is a component of a master budget and it is prepared after the preparation of sales budget and before cash
budget. The calculation of expected cash collections is based on the total sales figure obtained from sales
budget. The management estimates the proportion in which sales are expected to be collected in the current
and following years. This is used to determine how much sales are expected to be collected during the period.

5. Sales Budget. Is the first and basic component of master budget and it shows the budgeted and actual
number of sales units and price per unit of a period. Sales budget influences many of the other components
of master budget either directly or indirectly due to the reason that the total sales figure provided by it is used
as a base figure. Due to the fact that many components of master budget rely on sales budget, the estimated
sales volume and price must be forecasted with sufficient care and only reliable forecast techniques should
be employed. Otherwise, the master budget will be rendered ineffective for planning and control.

6. Production Budget. Is a schedule showing planned production in units which must be made by a
manufacturer during a specific period to meet the expected demand of sales and planned finished goods.
Production budget is prepared after sales budget since it needs the expected sales unit’s figure which is
provided by the sales budget.

7. Budgeted Income Statement. Contains all of the line items found in a normal income statement, except
that it is a projection of what the income statement will look like during future budget periods. It is compiled
from a number of other budgets, the accuracy of which may vary based on the realism of the inputs to the
budget model. The budgeted income statement is extremely useful for testing whether the projected financial
results of a company appear to be reasonable.

8. Projected Balance Sheet. Communicates expected changes in future asset investments, outstanding
liabilities and equity financing. Business may consider the creation of a projected balance sheet as a way to
facilitate long-term planning. A business long term plans often concern future asset growth and how it may
be supported by increased financing through debt and equity. A projected balance sheet provides the most
relevant financial information needed in the business planning process. A projected balance sheet, also
referred to as pro forma balance sheet is useful tool for business planning in general and benefit those
individuals responsible for arranging and bringing additional financing. Using a projected balance sheet,
financial personnel can present lenders and investors with detailed financial information about planned future
expansion, making it easier to persuade capital providers to supply the required financing.
VI. REFERENCES

-https://www.managementstudyguide.com/fiancial-planning.htm
-Business Finance by Albert N. Gamatero and Arcadio B. Acol published by DIWA LEARNING SYSTEMS
INC
-Business Finance by Prof. Rafael F. Dimaala published by Our Lady of Fatima University