Micro Asia College of Science and Technology

Poblacion South, Sta.Cruz, Zambales

Sta. Cruz Campus

Name: Date:
Grade & Section:

LEARNING MODULE
Business Finance

Grade 12 - ABM

Module 2:
Week 3 to 4

Financial Planning Tools and Concepts

pt.1

Learning Competency
The learners shall be able to identify the steps in the financial planning process. (ABM_BF12-IIIc-d-10)

Specific Learning Outcomes

 The learners will be able to:
• Explain the importance of planning.
• Differentiate between strategic planning and tactical planning.
• Enumerate and apply the steps in planning.

 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).
 Management planning is about setting the goals of the organization and identifying ways on how to achieve them
(Borja& Cayanan, 2015).

• There are two phases of financial planning. Financial planning starts with long term plans which would then
translate to short term plans.
• Strategic vs. Tactical Planning
- Discuss the difference between Strategic and Tactical planning.
 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.

Long-Term Planning Short Term Planning

Persons More participation from top Top management is still involved but there is more
Involved management participation from lower level managers (production,
marketing, personnel, finance and plant facilities) because
their inputs are crucial at this stage since they are the ones
who implements these plans
Time Period 2 to 10 years 1 year or less

Level of Less More

Detail
Focus Direction of the company Everyday functioning of the company

Table 1: Comparison of Short-Term Planning (Gitman & Zutter, 2012)

Continue discussing the planning process as follows:

1) Set goals or objectives.
• For the activity done, the objective was to increase awareness of (chosen issue).
• For corporations, long term and short term objectives are usually identified. These can be seen in the 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.
• Examples of a company’s Vision-Mission statements are as follows:

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.

McDonalds Philippines
Vision: First to respond to the fast changing needs of the Filipino family; First choice when it comes to
food and dining experience; First mention as the ideal employer and socially responsible company; First
to respond to the changing lifestyle of the Filipino family
Mission: To serve the Filipino community by providing great-tasting food and the most relevant
customer delight experience.

2) Identify Resources
The resources have are the following:
• PHP 300,000
• Man power
Resources include production capacity, human resources who will man the operations and financial resources
(Borja & Cayanan, 2015).

3) Identify goal-related tasks

• For the activity done, the goal-related task is to prepare an event to increase awareness of (whatever issue you
want).

4) Establish responsibility centers for accountability and timeline.

There were different responsibilities formed as follows:
• Event Chairperson
• Budgeting Team
• Production Team
• Marketing Team
• Creatives Team
• Administrative Team

5) Establish the evaluation system for monitoring and controlling

 • For the activity done, the learners were given an expectation of their output and the teacher will grade them
based on a predetermined criteria. Other evaluation for awareness events may be number of attendees, feedback,
etc.
• For corporations, the management must establish a mechanism which will allow plans to be monitored. This can
be 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 should be investigated.

6) Determine contingency plans

• In planning, contingencies must be considered as well.
• Budgets and projected financial statements are anchored on assumptions. If these assumptions do not become
realities, management must have alternative plans to minimize the adverse effects on the company (Borja &
Cayanan, 2015).

Appendix

Annex 1: Event Planning Evaluation Rubrics

Position Description Expected
Output Evaluation Criteria

4 - Outstanding 5 - Competent 2 - Emerging 1 – Needs 0 – Objectives

Improvement not met

On the whole The event was The event was There were The event was There were a
carried out carried out minor carried out but lot
smoothly and the smoothly but challenges the members of of disorder in
whole class was there are during the the class were the
participative. members of the presentations only focusing presentations
class that did but the class on and the
not made the effort their own members of the
participate. to give a good functions which class have not
presentation. did not translate been working
to the whole. together.

Event Oversees the •Event title Leads Leads the Did not Occasionally Watches and
Chairperson functions of and discussions and discussions but consistently intervenes in lets everyone
the other slogan made timely was reluctant at engage in the else do their
committees. • Mission and decisions. making discussions but activity only own job.
Must be able to vision of the decisions. still had a final when problems
set the campaign say on what to arises.
overall direction do.
of the
group.
Administrative Responsible for Present in Present in May Stopped No
Team other
coordinating coordinating occasionally working initiative to
functions that the
Event the the lose focus after direct
Chairperson different different on expected shown.
deems functions and functions the direction output
necessary. This
may include
motivating the but of has been
stage direction, members of allows other the formulated.
event the members of functions.
conceptualization class to work the
, crowd
control, backstage
on class to
organizer, etc. their functions. slack off.

Position Description Expected output Evaluation Criteria

 4- 5- 2 - Emerging 1 – Needs 0 – Objectives
Outstanding Competent Improvement not met

Budgeting Responsible for • Record of Was on time Had a few Wanted to Prepared No
Team the goods on delays cater budgets but documentation
allocation of the and services creating the on delivering to ALL needs did was presented.
given purchased budget and the of not show
budget to • Documentation organized in budget but ALL teams initiative to
purchase the of timeline of the was which incorporate
necessary activities done documentation able to give compromised what
materials to during the of the timeline what deadlines. other teams
make the event planning and of the other needed.
possible. execution stage events. teams
They will also needed.
negotiate
with the
facilitator
regarding prices
of the
required
materials.
Production Responsible for • Song/dance Was confident Provided a Provided a Presented Unable to
Team organizing number and good good with a present
the performances incorporated in entertaining presentation presentation lot of flaws anything.
to be the campaign and was able to but but some of but
presented during present within time limit the made the
the the time limit. was members did effort
event. This not observed. not to give the
includes role participate. presentation.
playing as the
celebrities
who will perform
in the
campaign event.
Marketing Responsible for Persuasive/ Spoke loud and Spoke well Provided a Presented Unable to
Team the informative audibly to be but good with a present
presentation that speech able to catch did not work presentation lot of flaws anything.
would incorporated in the within the but some of but
persuade the the campaign. attention of time the made the
audience to May be done in listeners. limit. members did effort
join the campaign between song/ not to give the
initiative. dance numbers participate. presentation.
Tip: Emphasize • Not all need to
on the present. Some
importance of the may just
campaign, how formulate the
the scrip
audience can be
involved
and what would
they get
from supporting
the
campaign.
Creatives Responsible for • Whole Materials were Materials Both Only the No campaign
Team the cartolina appealing and were materials poster materials were
production of the campaign poster complete in all appealing but were made or the made.
campaign • Whole bond requirements . incomplete. but pamphlet
paraphernalia. paper campaign it wasn’t very was made.
The posters and pamphlet appealing.
brochures
should be able to
catch the
attention of the
target
audience.

Annex 2: Sweet Beginnings Co. Case Study

Sweet Beginnings Co. is currently the most talked about clothing shop in town. Not only was the shop filled with
customers every day, but they have been a major supplier of clothing to other shops. Ms. Muff, the owner of the shop has
remained confident that the operations will go smoothly until one early morning when there had been problems with the
delivery that was supposed to leave the shop. The clothes which were scheduled to be delivered were already packed and
waiting on the loading bay. It was past 30 minutes of the scheduled delivery and no delivery truck was in sight. Ms. Muff
decided to call the delivery contractor to find out what was taking the trucks so long.
“You’ve been one month late from your scheduled payment for our delivery service,” the frustrated delivery contractor
said. “We’ve been sending you notices every day for the past week and your company doesn’t seem to be responding.
Unless you will be able to pay the amount due by this morning, we will not send any truck to deliver your goods.
Ms. Muff was astounded to hear of the unpaid fee. To clear up the mishap, Ms. Muff hurriedly approached the company’s
accountant, Mr. Phil in hopes of drawing cash from the company. Mr. Phil regrettably reported that the company does not
have cash to pay the delivery contractor. In fact, the company has been consistently borrowing short term funds for three
months from the start of the year. The company has yet to pay any of these borrowings and Mr. Phil informed Ms. Muff
that the short term lenders have been reluctant to lend money at this point.
As a result, the shipments will not be delivered to the customers until the company figures out how to pay their
delinquency with the delivery contractors. The outside customers have been understanding enough to acknowledge that
there will be a delay on the deliveries for this day. However, too much delay may frustrate these customers and may cause
bad reputation to the company. Ms. Muff is looking into taking a loan from Fresh Rural Bank to pay for the delinquent
fees. The bank manager of Fresh Rural Bank has requested a meeting with Ms. Muff to discuss the financial condition of
Sweet Beginnings Co. and plans for restoring its liquidity.
Outraged, Ms. Muff told Mr. Phil, “Why don’t we have any balance in our cash account? Our company has been very
profitable but we seem to be depending on loans to finance our operations. We need to figure out what is going wrong.
Otherwise, we may lose our customers.”
Company Background
Sweet Beginnings Co. was founded in 20X0 as a manufacturer of summer clothes. The first shop was located near a calm
beach with sky blue waters and powdery sands. Families and tourist would usually flock to the beach on summer
weekends which gave the clothing shop foot traffic and gained the market’s attention. Due to its high quality products, the
clothing store became a popular stop shop for vacation goers. In 20X1, a known blogger fancied the clothing line
displayed in Sweet Beginnings and published an article promoting the shop. This earned the company nationwide
publicity which led to other clothing stores offering shelf space for Sweet Beginning’s brand. In 20X3 it expanded its
garment productions due to the increasing demand of their products. To this day, the company maintained its position as a
summer clothing store since this line has brought its brand equity.
Clothing Market
The demand for clothing was characterized by a stable year-to-year growth. Unit demand increased with both population
and individual income. However, the seasonal character of the company’s product has resulted to cyclical sales.
Competition among other clothing shops in the town is unlikely to clash with the company’s sales growth. The company
believes it will maintain its average growth rate for sales for the succeeding years.
Sales Forecast
Sweet Beginnings Co. had been consistently profitable. Moreover, sales had grown at an annual rate of 18 percent in
20X5. Gross sales were projected to grow at 20% of the sales of the same months on the first quarter, 30% of sales of the
same months on the second quarter and 25% of sales of the same months on the third and 4th quarter. This growth rate is
expected to be constant until 20X8.

Financial Information
To prepare a forecast on a business-as-usual basis, Ms. Muff and Mr. Phil agreed on various parameters. Cost of goods
sold would run at 73.7% of gross sales—a figure that was up from recent years because of increasing price competition.
Operating expenses would be about 6% of sales —also up from recent years to include the addition of a quality-control
department and two new sales agents. Depreciation is at 10% of cost of property, plant and equipment (PPE). Additions
during 20X6 is expected to amount to PHP1,200,000 which will be paid on January 20X7. The Company’s policy is to
expense full year’s depreciation on the date of purchase. The Company expects inventory level for 20X6 to be the same as
20X5.
The company’s income tax rate was 30% paid for each quarter in May, August, November, and April of the following
year, respectively. The company opts to use optional standard deduction of 40% from the company’s gross profit to arrive
at the taxable income for the quarter.
The delivery contractor’s fee (at 3% of sales) was collected at the loading gate as trucks left to make deliveries to
customers. Ms. Muff proposed to pay dividends of PHP450,000 per quarter. For years Sweet Beginnings had paid high
dividends.
Mr. Phil observed that sales collections in any given month had been running steadily at the rate of 40% of the last
month’s sales plus 60% of the sales from the month before last. The value of raw materials paid in any month represented
on average 55% of the value of sales expected to be made two months later. Wages and other expenses in a given month
were equivalent to about 34% of purchases in the previous month. As a matter of policy, Ms. Muff wanted to see a cash
balance of no less than PHP640,000.
Sweet Beginnings Co. had a line of credit from Fresh Rural Bank, where it also maintained its cash balances. Fresh Rural
Bank’s short-term interest rate was currently 16%. Return on investment for short term investments is at 12%.

Historical Information
Sweet Beginnings Co. Sweet Beginnings Co. Sweet Beginnings Co.
Monthly Sales Historical Income Statements Balance Sheet
2015 December 31, 20X5

Financial Planning Tools and Concepts

pt. 2
Learning Competency
The learners shall be able to illustrate the formula and format for the preparation of budgets and projected
financial statements. (ABM_BF12-IIIc-d-11)

Specific Learning Outcomes

The learners will:
• Know and apply the tools used in planning and forecasting.
• Know and apply the tools used in budgeting.

 Review the Financial Planning Process.

• Financial planning process involves setting up long term and short term goals.

- Long term goals set the direction of the company.

- Short term goals are the specific steps or actions that will ultimately reach the company’s long term goals.

 Steps in planning as follows:

A. Set goals or objectives.
B. Identify Resources.
C. Identify goal-related tasks.
D. Establish responsibility centers for accountability and timeline.
E. Establish the evaluation system for monitoring and controlling.
F. Determine contingency plans.

• For the rest of the sessions, you will learn how to establish the evaluation system of monitoring and controlling.

Characteristics of an Effective Plan.

• In planning, the goal of maximizing shareholders’ wealth must always be put in mind.
• The following criteria may be used for effective planning:

- Specific – target a specific area for improvement.

- Measurable – quantify or at least suggest an indicator of progress.
- Assignable – specify who will do it.
- Realistic – state what results can realistically be achieved, given available resources.
- Time-related – specify when the result(s) can be achieved. (Doran, G. T. (1981). "There's a S.M.A.R.T.
way to write management's goals and objectives". Management Review (AMA FORUM) 70 (11): 35–36.)

INSTRUCTION/PRACTICE
 1. Sales Budget
How a sales budget is formulated?

- The most important account in the financial statement in making a forecast is sales since most of the expenses
are correlated with sales. - Recall from Lesson 2: Financial Statement analysis that cost of sales ratio, gross profit
ratio, and variable operating expenses ratio are based on the sales figure.

- Given the importance of the sales forecast, the financial manager must be able to support this figure with
reasonable assumptions. The following external and internal factors should be considered in forecasting sales:

External Internal
• Gross Domestic Product • production capacity
(GDP) growth rate • man power requirements
• Inflation • management style of
• Interest Rate managers
• Foreign Exchange Rate • reputation and network of
• Income Tax Rates the controlling stockholders
• Developments in the • financial resources of the
industry company
• Competition
• Economic Crisis
• Regulatory Environment
• Political Crisis
Table 1: Factors that Influence Sales

• External and internal factors influencing sale, among others:

- 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.
  The implications if sales budget is not correct. If understated, there can be lost opportunities in the form of
forgone sales. If it is too optimistic, the management may decide to unnecessarily increase capacity or hire more
employees and end up with more inventories.

2. Production Budget

• What a production budget is and how it is formulated?

- A 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.

- It is computed as follows

Required production in units = Expected Sales + Target Ending Inventories - Beginning Inventories
Note: Ending inventory of current period is beginning inventory of next period.
- Sample
- [A] Company forecasts sales in units for January to May as follows:
Jan Feb Mar Apr May
Units 2,000 2,200 2,500 2,800 3,000

- Moreover, [A] Company would like to maintain 100 units in its ending inventory at the end of each month.
- Beginning inventory at the start of January amounts to 50 units.
- How many units should [A] Company produce in order to fulfill the expected sales of the company?
Answer:

Month
Jan Feb Mar Apr May Total
Projected Sales 2,000 2,200 2,500 2,800 3,000 12,500
Target level of ending 100 100 100 100 100 100
inventories
Total 2100 2,300 2,600 2,900 3,100 12,600
Less: beginning inventories 50 100 100 100 100 50
Required production 2,050 2,200 2,500 2,800 3,000 12,550

3. Budgeting Cash
• What an Operation Budget is and how it is formulated.

- Operations 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 of this 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

4. Cash Budget
• The importance of a Cash Budget and how it is formulated.
• Recall from the start of the term the exercise you did where the learners were asked how much allowance they
were given and how much expenses they would incur in a day. Recall that at the end of the activity, they were
able to identify whether they had excess cash or they had a deficit.
• Relate that this is what the cash budget aims to do.

- For a business enterprise, having the right amount of cash is important since cash is used to make
payments for purchases, for operational expenses, to creditors, and for other transactions.

- The cash budget forecasts the timing of these 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.
• Below is the general form of the Cash Budget:

CASH BUDGET
Jan Feb …. Nov Dec Total
Cash Receipts xxx xxx … xxx xxx xxx
Less: Cash xxx xxx … xxx xxx xxx
Disbursement
Net Cash Flow xxx xxx … xxx xxx xxx
Add: Beginning Cash xxx xxx … xxx xxx xxx
Ending Cash xxx xxx … xxx xxx xxx
Required Ending Cash xxx xxx … xxx xxx xxx
Balance
Required total financing (xxx) … (xxx)
Excess cash balance xxx … xxx xxx

• 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?

Jan Feb Mar Apr May Total
Units 2,000 2,200 2,500 2,800 3,000 12,500
Sales in Pesos 200,000 220,000 250,000 280,000 300,000 1,250,000
Collection from current 40,000 44,000 50,000 56,000 60,000 250,000
months sales
Collection from Previous 100,000 110,000 125,000 140,000 150,000
months sales
Collection from two 60,000 66,000 75,000 84,000
months prior sales
Total Collections from 40,000 144,000 220,000 247,000 275,000 926,000
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

- Add these receipts to the collections from sales to get to total receipts.
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?
Jan Feb Mar Apr May Total
Required production 2,050 2,200 2,500 2,800 3,000 12,550
Cost in Peso 102,500 110,000 125,000 140,000 150,000 627,500
Payment from current 102,500 110,000 125,000 140,000 477,500
month sale
Payment from previous 150,000
month sales
Payment from two
months prior sales
Total Payments for 0 102,500 110,000 125,000 140,000 477,500
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.
 Jan Feb Mar Apr May Total
Total Payments for - 102,500 125,000 140,000 477,500
Purchases 110,000
Rent Payments 5,000 5,000 5,000 25,000
5,000 5,000
Wages 20,000 22,000 28,000 30,000 125,000
25,000
Salaries 8,000 8,000 8,000 8,000 40,000
8,000
Tax Payment 25,000 25,000
Fixed Asset Outlay 130,000 130,000
Interest Payment 10,000 10,000
Cash Divident 20,000 20,000
Principal Payment 20,000 20,000
Total Cash Disbursement 53,000 157,500 148,000 321,000 193,000 872,500

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.
- Moreover, [A] Company has a beginning cash balance of PHP80,000 and would like to maintain an ending cash balance
of PHP100,000
per month. Prepare [A] Company’s Cash Budget for January to May. Prepare a cash budget.
Jan Feb Mar Apr May Total
Cash Receipts 40,000 144,000 220,000 247,000 275,000 926,000
Less: Cash Disbursement (53,000) (157,500) (148,000) (321,000) (193,000) (872,500)

Net Cash Flow (13,000) (13,500) 72,000 (74,000) 82,000 53,500

Add: Beginning Cash 80,000 67,000 53,500 125,500 51,500 80,000

Ending Cash Balance 67,000 53,500 125,500 51,500 133,500 133,500

Less: Minimum Cash (100,000) (100,000) (100,000) (100,000) (100,000) (100,000)
Balance

Cumulative excess cash (33,000) (46,500) 25,500 (48,500) 33,500 33,500

balance (Cumulative
required financing

- 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.
5. Projected Financial Statements
• Discuss the purpose of 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 for and as of the end of the year. It sets targets to control and monitor the
activities of the company. The following reports may be forecasted:

‣ Projected Income Statement

‣ Projected Statement of Financial Position
‣ Projected Statement of Cash Flows
• Provide the learners a historical financial statement that they would use to make their forecast. You may use
your own set of financial statements or the one found below.

(A) Company
Income Statements
For the years ended December 32
2014 2013 2012 2011 2010
Net Sales 5,250,000 4,770,000 4,310,000 3,910,000 3,547,000
Cost of sales 4,305,000 3,959,100 3,663,500 3,128,000 2,979,480
Gross Profit 945,000 810,900 646,500 782,000 567,520
Operating 314,750 297,890 246,231 221,500 217,538
expenses
Operating 630,250 513,010 400,259 560,500 349,982
income
Interest 250,000 250,000 250,000 450,000 300,000
Expense
Income before 380,250 263,010 150,259 110,500 49,982
taxes
Taxes 114,075 78,903 45,078 33,150 14,995
Net Income 266,175 184,107 105,181 77,350 34,987

(A) Company
Statement of Financial Position
As of December 31
2014 2013 2012 2011 2010
Assets
Current Assets
Cash 770,000.00 760,000.00 880,000.00
1,060,000.00 990,000.00
Receivables 1,722,000.00 1,454,000.00 1,396,000.00
2,300,500.00 1,921,000.00
Inventories 3,797,000.00 3,290,000.00 3,350,000.00
4,850,000.00 4,500,000.00
Other current assets 984,000.00 735,000.00 998,000.00
1,050,000.00 980,000.00
Total Current 7,273,000.00 6,239,000.00 6,624,000.00
Assets 9,260,500.00 8,391,000.00
Non-current Assets
Property, plant, and 1,810,000.00 1,870,000.00 1,900,000.00
equipment, net 2,440,000.00 2,260,000.00
Other noncurrent 896,842.00 876,235.00 827,490.00
assets 835,689.00 925,681.00

2014 2013 2012 2011 2010

Total non-current 2,706,842.00 2,746,235.00 2,727,490.00
assets 3,275,689.00 3,185,681.00
Total assets 266,175.00 105,181.00 77,350.00 34,987.00
184,107.00
Liabilities and
Equity
Current Liabilities
Notes payable
(external funds
needed)
Trade payables 4,130,000.00 3,300,000.00 2,870,000.00
5,050,000.00 4,756,000.00
Income taxes 11,270.00 8,290.00 3,750.00
payable 28,520.00 19,725.00
Current portion of 1,000,000.00 2,000,000.00 2,000,000.00
long-term debt 2,250,000.00 2,500,000.00
Other current 40,990.00 30,688.00 37,890.00
liabilities 85,600.00 28,700.00
5,182,260.00 5,338,978.00 4,911,640.00
7,414,120.00 7,304,425.00
Non-current
Liabilities
Long-term debt, - 1,000,000.00 3,000,000.00
net of current 2,000,000.00 1,250,000.00
portion
Total liabilities 5,182,260.00 6,338,978.00 7,911,640.00
9,414,120.00 8,554,425.00
Stockholders’
equity
Capital stock 1,000,000.00 1,000,000.00 1,000,000.00
1,000,000.00 1,000,000.00
Retained 3,797,582.00 1,646,257.00 439,850.00
earnings 2,122,069.00 2,022,256.00
Total 4,797,582.00 2,646,257.00 1,439,850.00
Stockholders’ 3,122,069.00 3,022,256.00
equity
Total liabilities 12,536,189.0 11,575,681.0 9,979,842.00 8,985,235.00 9,351,490.00
and stockholders’ 0 0
equity
 100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%
Sales Gross Profit Operating Profit Earnings Before Tax Net Income
Finance Cost Income Tax Expense Earnings

Financial Planning Tools and Concepts

pt.3

Learning Competency
The learner shall be able to describe the concepts and tools in working capital management. (ABM_BF12-IIIc-d-12)

Specific Learning Outcomes

At the end of this lesson, the learners will be able to:
• Understand working capital management, net working capital, and the related trade-off between profitability and risk.
• Appreciate working capital financing policies and their effects on the profitability and risk of the company.
• Compute and analyze the effects of an operating cycle and cash conversion cycle on the working capital requirements of
the company

1. The different Working Capital Assets and their important in the operations of the company.
• Working capital is the company’s investment in current assets such as cash, accounts receivable, and
inventories.
• Net Working capital is the difference between current assets and current liabilities.
2) The flow of the operating cycle.

• The operating cycle is the sum of days of inventory and days of receivables.
3) How to compute the Days of Inventory and Days of Receivables.
• Days of Inventory or inventory conversion period or average age of inventories, is the average number of days
to sell its inventory.

- A DSI of 20 days means that on the average it takes 20 days to sell its inventory. The formula is:
- Since the Statement of Financial Position tells the financial condition of a company at the end of the period, we
take Average Inventory for the year in our calculation.

365 (or 360) days

Days of Inventory = Inventory Turnover*

Cost of Goods Sold

*Inventory Turnover = Beginning Inventory + Ending Inventory
2

Or, this formula can be used without computing for inventory turnover:

Average Inventory
Days of Inventory = Average COGS per day

• Days of Sales Outstanding (DSO) is the average time for the company to collect its receivables.

- For example, a DSO of 40 days means that a customer who purchased on the company on account will pay
his/her balance in 40 days.
 - The formula is:

365 (or 360) days

Days of Inventory = Receivable Turnover*

Net Credit Sales

*Inventory Turnover = Beginning Accounts Receivable + Ending Accounts Receivable
2

- Revenue is from the Statement of Comprehensive Income and Accounts Receivables is from the Statement of Financial
Position.

- We use the Average Receivables for the year in our calculation. For revenue we generally use the credit sales so we may
have to exclude cash sales from the total sales figure.

4) Discuss how to compute Cash Conversion Cycle (CCC).

• Cash Conversion Cycle, also called the net operating cycle, is computed as the operating cycle less days of payable.
- In formula form:

Cash Conversion Cycle = Operating Cycle - Days of Payables

Cash Conversion Cycle = (Days of Inventory + Days of Receivables) - Days of Payables

-The Cash Conversion Cycle is the length of time it takes for the initial cash outflows for goods and services purchased
(materials, labor, etc.) to be realized as cash inflows from sales (cash sales and in the collection of receivables).

• Days of Payables Outstanding (DPO) is the average number of days for the company to pay its creditors. A DPO of 30
days means that the company waits for 30 days before paying its creditors.

- The formula for DPO is:

365 (or 360) days

Days of Inventory = Receivable Turnover*

Net Credit Sales

*Payables Turnover = Beginning Accounts Payables + Ending Accounts Payables
2

- Purchases are taken from the Statement of Comprehensive Income and Accounts Payables are taken from the Statement
of Financial Position.
- Since the Statement of Financial Position tells the financial condition of a company at the end of the period, we take
Average payables for the year in our calculation.
- For purchases we are generally concerned about the credit purchases so the learner may have to exclude cash purchases
from the total sales figure.

FORMULA NUMERATOR DENOMINATOR

Inventory Turnover Cost of Goods Sold Average Inventory
Receivables Turnover Net Credit Sales Average Receivables
Payables Turnover Net Credit Purchases Average Payables

- We can see that the numerators of the turnovers needed for the computation of cash conversion cycle are all Income
Statement Accounts, while the denominators are all Average Balance Sheet Accounts.

- Graphical Representation

Figure 1: Corelation of the Operating Cycle and Number of Days

Also, there must be a timeline for the activities, especially since they were allotted a specific time to do the activity.

• Using the above figures, the CCC will be:

CCC = 20 + 40 – 30 = 30

30 days is the time between the cash outlay and the cash received.
If the CCC is negative, it indicates that the company has excess cash to invest. A CC of -10 indicates that the company has
excess cash to invest for 10 days.

5) Discuss the different working capital policies:

• Working Capital Management is the administration and control of the company’s working capital. The
primary objective is to achieve a balance between profitability and risk. Basically, there are three types of
working capital financing policies the management can choose from:

- Maturity-matching working capital financing policy

- Aggressive working capital financing policy

- Conservative working capital financing policy

• Managing working capital is important because failure to do so may result in the closure of business.
 - It must be noted that working capital requirements increase as the size or volume of the business increases.
- For example, a company needs PHP10 million in working capital to support an annual sales of PHP50 million.
If the sales increase to PHP100 million, will the PHP10 million working capital be enough? Most likely, the
answer is no.
• Why? Because with PHP100 million sales, there will be more cash needed for the operations, more
accounts receivable, and if the company is a trading or a manufacturing company, more inventories.

6) Define Permanent and Temporary Working Capital.

• Permanent Working Capital is the minimum level of current assets required by a firm to carry-on its business
operations given its production capacity or relevant sales range.
• Temporary working capital is the excess of working capital over the permanent working capital given its production
capacity or relevant sales range. (Source: Learn Accounting with Online Accounting Course | Simplestudies.com. (2016).
Simplestudies.com. Retrieved 13 May 2016, from http://simplestudies.com/what-are-the-types-of-working-capital)

• During the year, sales are not the same every month. This is why companies have slack season and peak season. If a
company has annual sales of PHP50 million, chances are these sales are not generated uniformly throughout the year.
Given this situation, the net working capital requirements during the slack season is lower than those during the peak
season. The net working capital needed to support an operation during the slack season represents the permanent working
capital requirements while the additional net working capital needed during the peak season represents the temporary
working capital requirements.

• Illustrative Sample: Bugay is managing the working capital of SR Ice Cream. SR Ice Cream is engaged in the selling of
different ice creams. The following are the sales volume, and the working capital needed based on the recent years:

Quarter Sales Working Capital

1st (January to March) PHP 200,000 PHP 120,000
2nd (April to June) PHP 900,000 PHP 300,000
3rd (July to September PHP 750,000 PHP 250,000
4th (October to December) PHP 350,000 PHP 150,000

- We can see that the working capital never goes below PHP120,000. That is the permanent working capital
requirement.

- The maximum temporary working capital is PHP180,000 (difference between the PHP300,000 working capital and the
permanent working capital of PHP120,000) at the peak season with PHP900,000 sales level. For the 4th Quarter, the
temporary working capital is PHP30,000 (difference between the PHP150,000 working capital and the permanent
working capital of PHP120,000).

7) Explain the Working Capital Financing Policies.

• Financing policies can either be aggressive, conservative or maturity-matching:
- Maturity-matching working capital financing policy
• Based on the maturity-matching working capital financing policy, permanent working capital
requirements should be financed by longterm sources while temporary working capital requirements
should be financed by short-term sources of financing.
 • Long-term sources of financing include long-term debt and equity such as common stock and preferred
stock. Short-term sources include short-term loans from a bank.
• These short-term loans from banks are called working capital loans which perfectly describe the reasons why
these loans are incurred.

Source: Cayanan and Borja. Business Finance.2016.

• In maturity-matching, all permanent working capital must be financed by long-term sources while temporary working
capital requirements should be financed by short-term sources.

- Aggressive Working Capital Financing Policy

• Under the aggressive working capital financing policy, some of the permanent working capital requirements are
financed by short-term sources of financing.
• Why do managers of some companies adopt this policy? It is because long-term sources of funds have higher cost as
compared to short-term sources of financing. By financing some of the permanent working capital requirements with
short-term sources of financing, financing cost is minimized which in turn, improves net income.
• But what is the trade-off? Since it is short-term, the debt has to be paid soon and the company may not yet have enough
cash by the time the debt matures. This refers to liquidity risk and this risk increases with the aggressive working capital
financing policy.
 Source: Cayanan and Borja. Business Finance. 2016.

- Conservative Working Capital Financing Policy

• Based on the conservative working capital financing policy, even some of the temporary working capital requirements
are financed by long-term sources of financing.
• This policy minimizes liquidity risk but it also reduces the company’s profitability because long-term sources of
financing entail higher cost.

Source: Cayanan and Borja. Business Finance. 2016.

• Illustrative Sample: B. Bugay is managing the working capital of SR Ice Cream. SR Ice Cream is engaged in the selling
of different ice creams. The following are the sales volume, and the working capital needed based on the recent years:

Quarter Sales Working Capital

1st (January to March) PHP 200,000 PHP 120,000
2nd (April to June) PHP 900,000 PHP 300,000
3rd (July to September) PHP 750,000 PHP 250,000
4th (October to December) PHP 350,000 PHP 150,000

The following banks offered the following loans:

BANK TERM (OR DURATION) AMOUNT

BPI 3 YEARS PHP40,000 - PHP90,000
BDO 5 MONTHS PHP25,000 - PHP60,000
AUB 4 YEARS PHP90,000 - PHP150,000
PNB 9 MONTHS PHP65,000 - PHP105,000

What banks will be probably chosen by B. Bugay when choosing different policies?

___________________________________________________________________
___________________________________________________________________

POLICY TEMPORARY PERMANENT

Maturity-Matching BDO, PNB AUB, BPI
Aggressive BDO, PNB All banks are considered
Conservative All banks are considered AUB, BPI
8) Strategies for managing the cash conversion cycle.
• The central issue in managing the working capital is the ability to reduce operating cycle days. This is to ensure that
such operating cycle days will be shorter than the payable days. The quickness of completing the operating cycle is
measured by the operating cycle days.
• The following are some of the strategies in efficiently managing the cash conversion cycle:
1. Turn over inventory as quickly as possible without stockouts that result in lost sales.
2. Efficiently manage the accounts receivable consistent with the company’s credit policies. You need to also
consider accelerating the collection of receivables through:
A. Shorter credit terms.
B. Offering special discounts to customers who pay their accounts within a specified period.

C. Speeding up the mailing time of payments from customers to the firm.

D. Minimizing the float or reducing the time during which payments received by the firm remain
uncollected funds. For example, a customer deposited a check in the name of the company on a Friday
and the check will be cleared on Monday. The payment is said to be floating for two days.
3. Manage mail, processing, and clearing time to reduce them when collecting from customers and to increase
them when paying suppliers.
4. Pay accounts payable as slowly as possible without damaging the firm’s credit rating.

 EXERCISES NO. 1

Philippine Products Company is concerned about managing cash efficiently. On the average, inventories have an age of
90 days and accounts receivable are collected in 60 days. Accounts payable are paid approximately 30 days after they
arise. The firm has annual sales of about PHP30 million. Assume there is no difference in the investment per peso of sales
in inventory, receivables, and payables and that there is a 360-day year.
1. Calculate the firm’s operating cycle.
2. Calculate the firm’s cash conversion cycle.
3. Discuss how management might be able to reduce the cash conversion cycle.

1. 90+60=150 days 2. 90+60-30=120 days 3. Reduce days to sell inventory, reduce days to collect accounts receivable and
lengthen payable payment period without negatively affecting relationship with suppliers.
Financial Planning Tools and Concepts
pt.4
Learning Competency
The learners shall be able to explain the tools in managing cash, receivables, and inventory. (ABM_BF12-IIIc-d-12)

Specific Learning Outcomes

At the end of this lesson, the learners will be able to explain how to manage cash, accounts receivables, and inventories.

1. Cash
• Being the most liquid asset, cash is an important account in the balance sheet that will affect the
liquidity, and solvency of a company. It is also the most vulnerable when it comes to theft.
• A good internal control must be properly implemented to safeguard this asset:

- A basic internal control system entails the assignment of custodial function and recording function to separate
individuals, unless you are the owner. Why is this so? Imagine a cashier of a company who is also the chief accountant. If
tempted, this person can steal cash from the company and can manipulate the records so that nobody can discover that he
is stealing. If you are the owner, you probably will not steal from yourself and adjust the records?
- Cash collections should be supported by official receipts which are summarized in a daily collection report. The daily
collection report is going to useful for the next control measure for cash – depositing collections.
- A good internal control over cash is by depositing all collections intact. The daily collection reports are now compared
with the deposit slips to find out if all collections are indeed deposited.
- If all collections need to be deposited, then payments must be made through a check voucher system. There must also be
two signatories in the check to provide a check and balance. If the business is small then the entrepreneur’s signature may
suffice.
- For small payments like the fare given to a messenger, a petty cash fund is used. A petty cash fund which should be
minimal in amount, will be issued to a petty cash fund custodian, say the office administrator. The petty cash fund may be
PHP10,000 or PHP20,000. Disbursements from this petty cash funds must be supported by a petty cash voucher signed by
the recipient of the petty cash. When the petty cash fund is almost depleted, the petty cash fund custodian will get
reimbursements. This reimbursement will go through the check voucher system where the custodian gets a check with the
petty cash vouchers as supporting documents.
- The check must also be cross-checked by drawing two lines on the payee section of the check. This cross-checking
requires depositing of a check. It cannot be encashed. This makes it more difficult for somebody who stole a check to get
the money.

2. Motives For Holding Cash

• The following are the reasons for holding cash:

- Primary Reasons
a. Transactional. This is the cash used for paying expenses such as salaries, utilities, rent and taxes, among others.
b. Compensating balance. This is the cash held to meet bank requirements such as the minimum cash balance you
maintain for checking accounts and if you have existing loans, banks may also require a minimum amount of deposit with
them.

- Secondary Reasons
a. Precautionary. This is the cash maintained for emergencies such as the additional cash you keep during political and
economic uncertainties. For example, if your business requires a substantial amount of importation, a relatively higher
amount of cash has to be maintained when the exchange rate becomes highly volatile due to political instability such as
what happened during EDSA II.
b. Speculative. This refers to the cash held by the company to take advantage of opportunities (e.g. buying stocks during
major corrections such as what happened at the height of the global financial crisis in 2008 and 2009 where stock
valuations went down by as much as 80% for some companies).
3. Budgeting Cash
• The Cash Budget

- The cash budget provides information regarding the company’s expected cash receipts and disbursements over a given
period.

- It is useful for identifying future funding requirements or excess cash within a given period. This allows managers to
find possible sources of financing if the cash budget shows cash shortage or identify appropriate tenors for money market
placements for excess cash.

- Normally, a cash budget is prepared for a one year period broken down into smaller intervals like months. This allows
managers to see the seasonality of the business which affects the cash flows.
B. BUGAY INDUSTRIES
Cash Budget
For the months of October, November, and December 2015
OCTOBER NOVEMBER DECEMBER
Cash Receipts xxx xxx xxx
Less: Cash Disbursements (xxx) (xxx) (xxx)
Net Cash Flows xxx Xxx xxx
Add: Beginning Cash Balance xxx Xxx xxx
Ending Cash xxx Xxx xxx
Less: Minimum cash balance (xxx) (xxx) (xxx)
Cumulative financing requirement (if xxx Xxx xxx
negative) or
Cumulative excess cash balance (if
positive)

• Basically, cash budget has the following parts:

- Cash Receipts include all of a firm’s inflows of cash in a given financial period. The most common
components of cash receipts are cash sales, collections of accounts receivable, and other cash receipts.

- Illustrative Example:
Source: Gitman, L. (1976). Principles of managerial finance. New York: Harper & Row.
B. Bugay Industries, a defense contractor, is developing a cash budget for October, November, and December. Jungaya’s
sales in August and September were PHP100,000 and PHP200,000 respectively. Sales of PHP400,000, PHP300,000, and
PHP200,000 have been forecast for October, November, and December respectively.
Historically, 20% of the firm’s sales have been for cash, 50% have generated accounts receivable collected after 1 month,
and the remaining 30% have generated accounts receivable collected after 2 months. In December, the firm will receive a
PHP30,000 dividend from stock in a subsidiary.
Required: Prepare the cash receipts section of the cash budget.
Answer Key:
Forecasted sales 100,000 200,000 400,000 300,000 200,000
August September October November December
Cash Sales (20%) P20,000 P40,000 P80,000 P60,000 P40,000
Collection of AR
1st month (50%) P50,000 P100,000 P200,000 P150,000
2nd month (30%) P30,000 P60,000 P120,000
Other cash receipts P30,000
TOTAL CASH P210,000 P320,000 P340,000
RECEIPTS

- Cash Disbursements include all outlays of cash by the firm during a given financial period. The most common cash
disbursements are:
• Cash purchases
• Purchasing fixed assets
• Payments of accounts payable
• Interest payments
• Rent (and lease) payments
• Cash dividend payments
• Wages and salaries
• Principal payments (loans)
• Tax

• It is important to recognize that depreciation and other noncash charges are not included in the cash budget, because they
merely represent a scheduled write-off of an earlier cash outflow.
• Illustrative Example:
Jungaya Industries has gathered the following data needed for the preparation of a cash disbursements schedule for
October, November, and December.

- Purchases - The firm’s purchases represent 70% of sales. Of this amount, 10% is paid in cash, 70% is paid in the month
immediately following the month of purchase, and the remaining 20% is paid 2 months following the month of purchase.

- Rent Payments - Rent of PHP5,000 will be paid each month.

- Wages and Salaries - Fixed salary cost for the year is PHP96,000, or PHP8,000 per month. In addition, wages are
estimated as 10% of monthly sales.

- Tax Payments - Taxes of PHP25,000 must be paid in December.

- Fixed Assets - New machinery costing PHP130,000 will be purchased and paid for in November.
- Interest Payments - An interest payment of PHP10,000 is due in December.
Answer:
Forecasted 70,000 140,000 180,000 210,000 140,000
Purchases 10%
August September October November December
Cash Purchases P7,000 P14,000 P28,000 P21,000 P14,000
(10%)
Payment of AP
1st month (70%) 49,000 98,000 196,000 147,000
2nd month (20%) 14,000 28,000 56,000
Total Cash P7,000 P63,000 140,000 245,000 217,000
Purchases
Rent 5,000 5,000 5,000
Wages and Salaries 48,000 38,000 28,000
Tax 25,000
Machinery purchase 130,000
Interest 10,000
TOTAL CASH 193,000 P418,000 P285,000
DISBURSEMENT
S

4. Net Cash Flow, Ending Cash, Financing, and Excess Cash

• The firm’s net cash flow is found by subtracting the cash disbursements from cash receipts in each period. Then we add
beginning cash to the net cash flow to determine the ending cash for each period. Finally, we subtract the desired
minimum cash balance from ending cash to
find the required total financing or the excess cash balance. If the computed amount is negative, the company needs
financing. Otherwise, the company has excess cash.
• The cash budget is part of planning. It helps managers anticipate future funding requirements in order to obtain proper
financing even before the need arises. This will help them avoid usurious rates. On the other hand, if the company has
excess cash, managers are able identify the investment instruments that will maximize the returns on the excess cash.
• Illustrative Example: Given the two illustrative examples, generate a cash budget showing the net cash flow, ending cash
flow, financing, and excess cash. At the end of September, Jungaya’s cash balance was PHP50,000,and its notes payable
and marketable securities equaled PHP0. The company wishes to maintain as a reserve for unexpected needs, a minimum
cash balance of PHP25,000.

Answer:

B. BUGAY INDUSTRIES
Cash Budget
For the month of October, November and December 2015
October November December
Cash Receipts 210,000 320,000 340,000
Less: Cash Disbursement (193,000) (418,000) (285,000)
Net Cash Flows 17,000 (98,000) 55,000
 Add: Beginning Cash Balance 50,000 67,000 (31,000)
Ending Cash 67,000 (31,000) 24,000
Less: Minimum cash balance (25,000) (25,000) (25,000)
Cumulative excess cash 42,000 (56,000) (1,000)
balance (Cumulative
required financing)

• Comprehensive Illustrative Example:

It was December 2014 and the president of DCD Corporation wants to find out if the company has enough cash to
pay the principal balance of the company’s loan worth PHP3 million by the end of 2015. He asked the chief
accountant to prepare the cash budget for 2015.
The following assumptions which will be used for the preparation of the cash budget for 2015 are as follows:

- Projected quarterly sales for 2015 are as follows:

First quarter - Php 5 million
Second quarter - -Php 7.5 million
Third quarter - Php 8.5 million

Fourth quarter - Php 10 million

Fourth quarter sales in 2014 was Php 8 million.

Sales are collected 90% in the quarter the sales are made. The remaining 10% is collected the following quarter.

- The cost of sales is 75% of sales. Merchandise inventories are purchased in the quarter these are sold. All
merchandise purchased in the quarter are paid in the same quarter.

- Operating expenses for each quarter paid in cash are as follows:

First quarter - PHP500,000

Second quarter - -PHP750,000
Third quarter - PHP850,000
Fourth quarter - PHP1,000,000
On top of these cash operating expenses, depreciation expenses that should be charged to operations is
PHP150,000 per quarter.

- Interest expense paid every quarter is PHP75,000.

- Income tax rate is 30%. The income taxes to be paid every quarter will be as follows:
First quarter - PHP157,500
Second quarter - - PHP270,000
Third quarter - PHP315,000
Fourth quarter - PHP382,500

- Expected cash balance at the end of 2014 is about PHP350,000. For 2015, target cash balance is raised to
PHP500,000 because of expected increase in sales.

Given the above assumptions, a cash budget can now be prepared for 2015.
 DCD Corporation
Cash Budget
For the Year Ending December 31, 2015
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Collections
Quarter of Sale 4,500,000 6,750,000 7,650,000 9,000,000

A quarter after sale 800,000 500,000 750,000 850,000

5,300,000 7,250,000 8,400,000 9,850,000

Payments
Purchases 3,750,000 5,625,000 6,375,000 7,500,000
Cash operating 500,000 750,000 850,000 1,000,000
expenses
Income taxes 225,000 157,500 270,000 315,000
Loan payment 3,000,000
Interest expense 75,000 75,000 75,000 75,000
Total payments 4,550,000 6,607,500 7,570,000 11,890,000
Net cash flow for the 750,000 642,500 830,000 (2,040,000)
period
Cash balance, 350,000 1,100,000 1,742,500 2,572,500
beginning
Cash balance without 1,100,000 1,742,500 2,572,500 532,500
financing
Target cash balance 500,000 500,000 500,000 500,000
Cumulative excess cash 600,000 1,242,500 2,072,500 32,500
(funding requirements)

5. Accounts Receivable

• Accounts receivables spring out of the need to sell merchandise.

• An excellent business proposition is to generate sales without offering a credit facility to customers. However,
this concept is theoretically sound, but not sustainable.
- Consider a real estate company which sells condominium units at PHP5 million per unit. How many units can the
property developer sell if he sells the units only on cash basis? Do you think he can sell a lot? Probably not as many as
compared to providing instalment payments.
• Credit management strategically defines the quality of account receivables collection.
• The collectability of accounts receivables depends largely on the quality of customers. The quality of customers
depends on the standards or credit policies set up and used by an organization. Credit policies are an integral part
of the credit evaluation and there are 5C’s used in credit evaluation. These are:
- Character –the willingness of the borrower to repay the loan
- Capacity – a customer’s ability to generate cash flows
- Collateral – security pledged for payment of the loan
- Capital – a customer’s financial resources
- Condition – current economic or business conditions
• Proper management of accounts receivable entails having a good billing and collection system.
- A good system should lead to the sending of statements of account to customers on time.
- Follow-ups through phone calls or any form of gentle reminders should be made if customers fail to pay
on time. These follow-ups can also serve as the management’s way of validating if the contact details
given by customers are still valid and if the customers still occupy the same office.
• Aging of receivables is also a control measure to determine the amount of receivables that are still outstanding
and past due.
 Current P 60 million

1-30 day past due 20 million

61-90 day past due 10 million

Over 90 days past due 7 million

Total Php 100 million

• Accounts which have been past due for more than 90 days have higher probability to default. The aging of
receivables is useful in determining the allowance for doubtful accounts.
6. INVENTORY MANAGEMENT
• Inventory management involves the formulation and administration of plans and policies to efficiently and
satisfactorily meet production and merchandising requirements and minimize costs relative to inventories.

- Effective inventory management becomes critical when the nature of the products are either perishable (e.g.
fruits, vegetables), fragile (e.g. glasses), or toxic (e.g. bleaching agent).
• Proper inventory management involves the determination of reasonable levels of inventories considering the size
and nature of business.

- Maintaining too much inventories has costs such as carrying or holding costs, possible obsolescence or spoilage.
- On the other hand, too low inventory can result to stockout, and eventually lost sales.
7. Inventory In A Manufacturing Company
• In a manufacturing company, there are three types of inventory:

- Raw materials – these are purchased materials not yet put into production.
- Work in process – these are goods and labor put into production but not yet finished.
- Finished goods – these are goods put into production and finished. These are ready to be sold.
8. The ABC Analysis
• One way to control inventory is to classify inventory into a classification system called ABC Analysis.
• Inventories classified as “A” are high valued items which should be safeguarded the most.
• B items, on the other hand, are average-cost items that should be safeguarded more than C items but not as much as A
items.
• While C items have low cost and is the least safeguarded.

To summarize:

INVENTORY CLASS
A B C
Money value High Medium Low
Quality of control Very strict Strict Not too strict
Inventory movement (flows) Slow Relatively fast Fast
Sources:
Agamata, F. (2014). Management Services.
Gitman, L. (1976). Principles of managerial finance. New York: Harper & Row.
Gitman, L. & Joehnk, M. (1981). Fundamentals of investing. New York: Harper & Row.
Horngren, C. (1972). Cost accounting; a managerial emphasis. Englewood Cliffs, N.J.: Prentice-Hall.
Roque, R. (1990). Reviewer in Management Advisory Services. Roque Press, Inc.

 Exercises No. 2
Multiple Choice: Encircle the letter of the correct answer.
1. The _____b___ inventory consists of all items currently in the production process.
(a) raw materials
(b) work-in-process
(c) finished goods
(d) capital goods
2. The _____c___ inventory consists of items that have been produced but not yet sold.
(a) raw materials
(b) work-in-process
(c) finished goods mat
(d) capital goods
3. The three basic types of inventory are all of the following EXCEPT _d___
(a) raw materials
(b) work-in-process
(c) finished goods
(d) capital goods
4. The ______a___ inventory contains the basic components of the production process.
(a) raw materials
(b) work-in-process
(c) finished goods
(d) capital goods
5. The credit applicant’s __d_______ is the amount of assets the applicant has available for use in securing the credit.
(a) character
(b) capacity
(c) capital
(d) collateral

Problem Solving:
Gerry Jacobs, a financial analyst for Best Valu Supermarkets, has prepared the following sales and cash disbursement
estimates for the period of August through December of the current year.

Month Sales Cash Disbursement

August $400 $300
September 500 500
October 500 700
November 600 400
December 700 500

90% of sales are for cash, the remaining 10% are collected one month later. All disbursements are on a cash basis. The
firm wishes to maintain a minimum cash balance of $50. The beginning cash balance in September is $25. Prepare a cash
budget for the months of October, November, and December, noting any needed financing or excess cash available.

Prepared by:

Mr. Jayson F. Moralejo

Instructor