BUSINESS FINANCE

FINAL

MODULE 3
Ms. CHRYSANTHEMUM B. DURO

Self-Learning Module Business Finance

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 Module

3
FINANCIAL PLANNING,
SALES FORECAST

I. Curriculum Standards:
Content Standards The learners the financial planning process, including budget
preparation, cash management, and working capital management.
Performance The learners are able to
Standards 1. illustrate the financial planning process
2. prepare budgets such as projected collection, sales budget,
production budget, income projected statement of
comprehensive income, projected of financial position, and
projected cash flow statement
3. describe concepts and tools in working capital management
Learning The learner:
Competencies 1. define the measurement levels, namely, liquidity, solvency,
stability, and profitability: ABM_BF12-IIIb-7;
2. perform vertical and horizontal analyses of financial
statements of a single proprietorship: ABM_BF12-IIIb-8;
3. compute, analyze, and interpret financial ratios such as
current ratio, working capital, gross profit ratio, net profit
ratio, receivable turnover, inventory turnover, debtto- equity
ratio, and the like: ABM_BF12-IIIb-9

Damean’s Beat and Competent Professionals, Critical Thinking Skills and Career and
Related Values Learning Self-Reliance

Time Frame 4 days

II. Learning Objectives:

At the end of the lesson, you should be able to:

1. describe the concept of financial planning;

2. discuss the relationship of vision/mission to financial planning;
3. explain the financial planning process;
4. compute the sales forecast; and
5. determine the importance of evaluating and reviewing the financial plan.

III. Resources:
a. Materials:
Module, Answer Sheet, Laptop, Powerpoint, Laptop
b. References:

Aduana, N. L. (2017) Business Finance in the Philippine Setting .C&E Publishing.

Quezon City., Pp. 54 – 75

Medina, R. G. (2007) Business Finance. Rex Book Store, Inc., Sampaloc,

Manila., Pp. 113 – 120

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 IV. Lesson Proper:

INTRODUCTION

One of the most important concepts in the various areas of finance is financial planning.
Financial planning is applied in both public finance and business finance. All entities - whether a
business for profit or a non-profit organization - undertake financial planning as an inherent activity
for their existence and survival

Financial planning, however, does not exist and operate as an independent activity in the
organization. It is the offshoot of interrelated planning activities happening in various sections and
levels of the organization. It is one of the important elements comprising the general plan of the
business organization.
In almost all instances, the plans of the different functional areas of the business are
ultimately expressed in peso. This mechanism of financial planning indicates that the finance office,
which is mainly responsible in the process of putting together the financial plans of the various units
and drafting and finalizing the general financial plan, cannot simply prepare the document alone,
or without considering the long-term and short-term directions of the business.
The financial plan must be firmly anchored on the thrust of the business. Hence, financial
planners do not simply isolate or coop themselves up in a room and make all the necessary financial
projections sometimes out of nowhere. Rather, financial planners maintain strong coordination with
the corporate level regarding the general plan and with the different functional areas on the specific
plans and express these plans in monetary values.

BUSINESS VISION AND MISSION

All strategic plans of the different functional areas,

departments, divisions, and units should be anchored on the
vision and mission of the business. Plans that have been
prepared and implemented—including a financial plan-but are
not grounded on the vision and mission of the company may
become the root cause of future misunderstandings and
troubles. The financial plan must be congruent with the
corporate vision and mission.

The vision conveys the ultimate goal of the

organization. It outlines the final map of what the business will
be and where the business is going. The vision is the guiding
star for all the plans, policies, and strategies of the business.
Hence, all business activities to be undertaken at present or in
the future should be based on the vision.

Since the corporate vision is long-term in character, the business, through the finance
office in coordination with the different departments, prepares and adopts a long-term financial
plan, Though there is no specific amount of time prescribed, "long term" commonly denotes five
years or more. Three years is even considered by other business entities as long-term.

Therefore, the basic principle in the preparation of a financial plan is to align it with the vision
of the business. For example, the vision statement of a rural bank is as follows:

"To be a premier rural bank in Mindanao"

This vision defines what kind of rural bank it will be in its geographic area of operation in
the future. The long-term financial plan should thus consider the capital expenditures on bank
buildings and facilities in various parts of Mindanao. There must be amounts allocated for business
site acquisition, building construction, and equipment acquisition in the long-term financial plan of
the bank. In the absence of capital expenditures in the long-term financial plan, the rural bank will
never attain its goal of becoming a premier rural bank in the whole of Mindanao.

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 The mission of the business, on the
other hand, sets the current business activities
and outlines what the business is for. It defines
as well the nature of the business. More
importantly, it lists relevant undertakings and
carries out or implements various projects for
the realization of the vision.

The monetary implications of the mission

statement, particularly the strategies and
various operating activities, should be
expressed in the short-term and medium-term
financial plans of the business. Both financial
plans serve as precursor to the long-term financial plan. With the vision statement of the rural
bank mentioned earlier, its mission statement can be phrased as follows:

"A rural bank providing complete and low cost agricultural banking services to farmers across
Mindanao.”
This mission statement defines the banking services currently provided by the rural bank.
As outlined, it is a rural bank and not a universal or commercial bank. The services provided are
agricultural banking facilities particularly agricultural loans. The mission of the business is
likewise expressed in financial terms. It should be included in the financial plans of the business
over the short and long hauls. The financial plan must not only be aligned with the company's
vision-mission but must also be in consonance with the organizational goals and objectives.

The goal states where all the

activities and operation of the business are
directed. It is the refined version of the
company's vision. If the vision presents the
desired end-state of the business in its
broadest term, the goal sets in a more
specific medium the general end of
business.

In the given example, the vision

statement of the rural bank is to become a
premier rural bank in Mindanao. The term "premier rural bank" is very broad. Hence, the vision
must be expressed in a more concrete manner by adopting a business goal for the next five or
10 years. For example, the bank may adopt the following goals in order to become a premier
rural bank in Mindanao

"To expand the rural banking activities in the various

parts of Mindanao.”

"To increase the quality of loan portfolio extended to

farmer borrowers."

Comparatively, the goals of expanding the rural banking activities and increasing the loan
portfolio are less broad than the vision of becoming a premier rural bank in Mindanao. The
financial plan of the business must also be congruent to the goals. The long-term financial plan
must include provisions for infrastructure in view of the goal to expand banking activities.

The objective, on the other hand, is specific

and short-term. Usually, business entities express
their objectives in quantifiable terms to highlight the
specific aspects or details, The objectives present in
very clear terms the actions that must be taken by
the business in order to meet its goals. The objective
is the refined version of the mission statement. For
example, the rural bank may have the following
objectives

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 "To open two branches every year"
"To increase loan portfolio of 25% every year"
The objective of opening two branches every year is more specific compared to the general
goal of expanding the rural banking activities. In the preparation of the financial plan, the
estimated cost of establishing and operating one branch must be reflected in both the short term
and medium-term financial plans.

The financial plan should always jibe with the vision-mission statement of corporate goals
and objectives. Sadly, however, there are still corporate bigwigs who conduct financial planning
without considering the vision-mission or goals and objectives of the organization.

THE FINANCIAL PROCESS

Business organizations conduct financial planning as underscored by the concept of goal
setting in monetary terms. Financial planning answers this question:

Where will the business be in terms of financial performance five or ten years from today?

The following steps are adopted in preparing a financial plan as illustrated in Figure 1:

1. The business makes explicit assumptions of the future levels of the sales, cost, operating
expenses, capital expenditures and borrowings and interest.
2. Projected financial statements (e.g., statement of comprehensive income, statement of
financial position, and statement of cash flows) are prepared.
3. The projected financial statements are commonly analyzed and interpreted using the
financial mix ratios.
4. The general financial plan is evaluated and reviewed by the top-level management for
improvement taking into account present trends and developments in the external
environment.

Figure 1. Financial Planning Process

A closer look at the financial planning process reveals that the whole process is
basically preparation of projections. It covers the determination of projected sales and
computation of projected cost and expenses, projected capital outlays, and projected
financial statements. All of these things boil down to the projected financial plan.

Financial planning, thus, is usually equated with projection or forecast.

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THE FORECAST
The first step in financial planning is forecast setting or the making of assumptions
and projections. In making a forecast or projection, the sale projection is estimated and
prepared.

The Sales Forecast

The preparation of the sales forecast is the initial step in making the projection. In other
words, one must always start with the sales forecast when making a financial projection.

Thus, the business has to make projected sales for the next two to five years. In the
preparation of the projected sales, the sales performance of the last five preceding years is
considered to determine if the sales trend is increasing, decreasing, or maintaining a steady
level. Generally, it is the marketing department that is primarily responsible for preparing the
sales forecast. Different forecasting tools are used to predict future sales.

For example, JENNY Trading presents the following sales figures in terms of units

2014 22,800
2015 24, 500
2016 28, 750
2017 32,900
2018 36,350

Assuming that the business applies the arithmetic geometric curve to determine the
projected sales in 2019, the percentage of increase every year and the average change
percentage are determined as follows:

Percentage of Increase

2014 -
2015 (24,500 – 22, 800) / 22, 800 7.46%
2016 (28,750 – 24, 500) / 24, 500 17.35%
2017 (32,900 – 28,750) / 28, 750 14.43%
2018 (36,350 – 32,900) / 32, 900 10.49%
Total Divide by 49.73%
Average change percentage _4
12.43%

Based on the average change percentage of 12.43%, the projected sales of JENNY
Trading for 2019 will be 40, 868 units.
(36, 350 x 12.43%) + 36, 350 = 40, 868 units

Once the projection based on the past years’ sales performance of the business has been
made, the estimated sales forecast is adjusted. The factors that highly influence the result of the
projection include other marketing information such as:

a. environmental analysis
b. consumer buying behaviour
c. competitor’s possible marketing move
d. government programs and priorities
e. possible new entrants and threats of suppliers and buyers
f. marketing mix strategies (price, promotion, product, place)

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 Activity 1: Let`s Check Your Understanding

True or False. Write TRUE if the statement is correct and write FALSE if wrong.
1. Financial planning applies only to the area of business finance.
2. Financial planning is solely undertaken by the finance unit of an organization.
3. Financial planning is making as forecast on the financial operation of the business.
4. The vision and mission of the business are given importance in the formulation of the
strategic financial plan.
5. The long-term financial plan need not to be congruent to the vision of the business.
6. The first step in preparing a financial plan is to determine the expected cost and expenses.
7. The vision of the business defines short-term financial direction.
8. The mission statement outlines the current financial activities that the business undertakes.
9. The financial plan must be carefully reviewed by the higher level of management before
implementation.
10. The financial plan should always jibe with the vision-mission statement or corporate goals
and objectives.

Activity 2: Identification

Computation: Compute for the average change in percentage using the following data to
project 2019. How much is the result of sales figure forecasted for 2019? 15
points.

Year Sales Figure

2014 40,000
2015 22,150
2016 45,060
2017 49,000
2018 36,780

Activity 3: ESSAY…

Essay. Answer the question in not less than 5 sentences. 10 points.

This is the criteria:

Content(Relevant, focused and thorough explanation): 6 pts
Organization (Logical sequencing, effective transition): 2 pts
Conventions (Spelling and Grammar): 2 pt
10 pts

Why is it important for the top-level management to review and evaluate the financial plan?

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