FORECASTING SHORT-TERM

FINANCIAL REQUIREMENTS

EXPECTED LEARNING OUTCOMES

After studying this module, you should be able to:

 Understand the relationship between financial planning and control.

 Know the nature, purposes and limitations of the budget.

 Enumerate the types of budget.

 Understand and apply the steps in developing a master budget.

FINANCIAL PLANNING AND CONTROL PROCESS

Business is becoming increasingly competitive and corporate
profitability is increasingly dependent upon operating efficiency. This
situation is desirable from a social standpoint for consumers are
getting higher quality goods at lower prices but intense competition
does make life tough on corporatemanagers.
Financial planning involves making projections of sales,
income, and assets based on alternative production and marketing
strategies and then deciding how to meet the forecasted financial
requirements. In the financial planning process, managers should
also evaluate plans and identify changes in operations that would
improve results.
Financial control moves on to the implementation phase
dealing with the feedback and adjustment process that is required
to ensure that plans are followed and to modify existing plans in
response to changes in the operating environment. The process
begins with the specification of the corporate goals, after which
management lays out a series of forecasts and budgets for every
significant area of the firm's activities, as shown in Figure 1.
In a global competitive world where the key factors are definitely
price turnover, profits, costs, financial planning and control permit each and
every person to have a sound knowledge associated with financial
implication concerning finance plan, actions and control can be used to any
kind and any size of business. As tool concerning management, it increases
the effectiveness associated with the company and all the departments that
are involved.
Financial planning and control defines as a combination of strategies
that supports the entire financial management process for an organization.
The process begins at financial planning, many times in the form of cash
flow and forecasting balance sheet.
 Figure 1. Financial Planning and Control Process

Financial forecasting analysis begins with projections of sales

revenues and production costs. In standard business terminology, a
budget is a plan which sets forth the projected expenditures for a
certain activity and explains where the required funds will come from.
Thus, the production budget presents a detailed analysis of the
required investments in materials, labor, and plant necessary to
support the forecasted sales level. Each of the major elements of the
production budget is likely to have a sub-budget of its own; thus, there
will be a materials budget, a personnel budget and a facilities budget.
The marketing staff will also develop selling and advertising budgets.
Typically, these budgets will be set up on a monthly basis, and as
time goes by, actual figures will be compared with projected figures
for the remainder of the year will be adjusted if it appears that the
original projections were unrealistic.
 During the planning process, the projected levels of each of the
different operating budgets will be combined, and from this set of data
the firm's cash flow will be set forth in its cash budget. If a projected
increase in sales leads to a projected cash shortage, management
can make arrangements to obtain the required funds in the least-
cost manner.
After all the cost and revenue elements have been
forecasted the firm's projected statements can be developed.
These projected statements are later compared with the actual
statements such as comparisons can help the firm pinpoint reasons
for deviations, correct operating problems, and adjust projections for
the remainder of the budget period to reflect actual operating
conditions. Through its financial planning and control processes,
management seeks to avoid c ash squeezes and to improve the
profitabilityof the individual divisions and thus the entire company.

FINANCIAL PLANNING AND CONTROL (TRANSPARENCY,

FEASIBILITY & STEERING)
Effective management of business technology requires proactive and
analytical financial steering to justify operational performance, investment
feasibility and allocation of costs. Management, along with decision making,
is dependent on transparency with clear structures and processes
surrounding financial management.

Financial Transparency
Financial transparency shows how accumulated costs are transferred
to service consuming fees and how actuals correlate to plans. Financial
planning ensures:
 Reserving future cash flow to business technology elements
(budgeting)
 Measuring the actual spend by business technology elements and
comparing actuals to planned costs to identify deviations and
suggest corrective actions (controlling)
 Allocation of business technology costs to business units and
capabilities as service fees (invoicing)

Financial Feasibility
Financial feasibility provides feasibility analysis about proposed, on-
going and completed development initiatives and feasibility of on-going
services throughout their lifecycle by assessing:
 Financial feasibility of proposed development initiatives with the
demand and development portfolio steering. Analysis is based on a
business case with payback and/or net present value calculation
(Pre-feasibility)
 Financial feasibility of an on-going development initiative with the
project steering. Analysis will help to make go/no-go decisions to
identify initiatives that should not be continued even with high sunk
costs
 Financial feasibility of completed initiative by measuring the realised
 costs and business benefits and comparing them to the previously
approved business case. The analysis is important for lessons
learned purposes (Post-feasibility)

Financial Steering
Financial steering contributes to strategic planning and service
portfolio steering by providing insights about optimal allocation of financial
resources. It provides insights on:
 Cost levels by making benchmarking total cost levels and more
specific service cost levels with similar organizations. Benchmarking
justifies cost saving initiatives or additional investments
(Benchmarking)
 Right balance between build and run as well as between
investments (capex) and operational costs (opex). These ratios are
highly dependent on current business status, but usually
organizations aim at saving operational costs and investing more on
development (Build/run ratio)
 Right allocation of money to different value streams. The value
stream ranking high in created or expected business value should
get more money and vice versa. Value streams and their investment
profile is a key topic in strategic planning. Money allocation creates
demand while cost allocation is result of supply (Demand-supply
balance)
 Business value of the on-going services to justify further
investment or service retirement. Traditional business case
calculation is not adequate as it is targeted for investment calculation,
while the on-going business value calculation is based on current
asset value of the business technology.

FINANCIAL PLANNING AND CONTROL PROCESS FLOW CHART

Here we have presented an ideal financial planning and control process
flow chart which a financial manager should undergo with. Typically, financial
planning and control process flow goes through following steps:
1. Listening: Focusing towards goals, desires and dreams of a company.
2. Analysis Information: To perform data analysis for prepare a plan.
3. Planning: Create a plan which will best suit for your client requirements.
4. Implementation: Design strategies, methods and implementation of
investment plan for acompany.
5. Control & Monitoring: Keep periodically checks whether the designed
techniques worked wellfor an organization or need further improvements.
IMPORTANCE OF FINANCIAL PLANNING AND CONTROL
One field that requires increased attention and understanding is precautionary
financial planning and controlling processes. Many entrust their administrative
as well as sinking fund money towards financial managers along with little or
no investigation into the way regarding how financial supervisor handles
financial planning and controlling internally. Here are listed out some of the
key importance of financial planning and control within a management of an
organization. They are:
1. Short Term Vision
With adequate financial planning, businesses can have a clearer
vision of their resources and funds. Financial reports give insight
information about the working of a business. The business proprietors
and management department consider these financial reports as a guide
to forecast business goals. Such insight detailed report has importance of
financial planning in business to take appropriate decision for their vision.
2. Segregation of Tasks and Duties
When dividing responsibilities anywhere between people increases
the risk of protection against errors, fraud, oversights, etc. For example, if
someone reports cash received as well as then you check bank
statements, it becomes smoother towards detect dishonesty. Segregation
of tasks and duties is among the importance of financial planning and
control for robust environment.
3. Cash Management
Businesses have month to month or regular incomes, which leads
into months when there is excess cash surplus and times when there is a
 cash deficit happens. In building the financial plan, the proprietor
considers these cycles to keep a tight rein on expenses when forecasting
low income months. Having a financial plan that is organized so cash flow
is managed and business proprietor sleeps better around the nights. For
example, the opportunity to buy stock / raw material from a supplier or
market at discounted cost during times only if cash management is
structured for a business.
4. Estimating Profit and Loss
Finance team frequently publishes financial reports to assess the
profit and loss of a company. Moreover, it helps an organization to figure
out how to accomplish goals. There is no point of income until you can
make profits that are advantageous for your business. For all the
entrepreneurs, we ask you to understand importance of financial planning
in business to keep your business in great strength.
5. Measure Assets and Liabilities Ratio
Financial department frequently monitor the liabilities and asset
ratio of a business. There is an importance of financial planning for
business to evaluate and improve the valuation of a company. Decisions
are made on how to expand your assets and reduce your liabilities. This
gives an outline to the management and financial department to prioritize
the investment requirements for the business.

WHAT IS A BUDGET?
In essence, a budget is a plan. It takes into account how much money
you make each month and helps you plan how much of it to spend and on
what. Your budget also reflects how much money you will need to put
towards things like bills, living expenses and other costs.
One of the primary reasons budgeting is important is to ensure that
you always have enough money to meet your financial needs and pursue
your financial goals.
A budget is a forecast of revenue and expenses over a specified
future period. Budgets are utilized by corporations, governments, and
households and are an integral part of running a business (or household)
efficiently. Budgeting for companies serves as a plan of action for managers
as well as a point of comparison at a period's end.

NATURE OF THE BUDGET

The nature of a budget is to arrange how cash is to be spent. It is to
live inside your methods and to distribute assets accurately. A budget also
known as a financial plan predicts costs and earnings for a precise
timeframe so they are given a financial plan and are relied upon to remain
inside it.

Top 5 Features of a Budget

1. It is goal oriented. It is aimed at achieving the objectives of an
enterprise.
2. It is future oriented. It is prepared and approved prior to a defined
period of time.
 3. It is an expression of policies and plans in monetary and physical
terms.
4. It helps in estimating income and expenditure for the budget period.
5. It also estimates the capital to be employed for achieving the
predetermined goals.

5 Main Characteristics of Budget

1. It is a plan expressed in monetary terms or quantity or both.
2. It is related to a definite future period.
3. It is prepared prior to a defined period.
4. It is approved by the management for implementation.
5. It indicates the business policy which has to be followed so as to
achieve a given objective.

PURPOSES OF THE BUDGET

A budget is a description in quantitative - usually monetary -
terms of desired future result. The process of preparing the budget
requires management at all levels to focus on the future of the
business entity. The benefits that may be realized from a budgeting
program are:
1. Defining broad objectives and goals and formulating
strategies to achievesuch objectives;
2. Coordinating the activities of the organization by integrating
the plans of the various parts thereby pulling everyone in the
same direction;
3. Allocating resources to those parts of the organization where
they can beused most effectively
4. Communicating management's approved plans
throughout the organization;
5. Uncovering and preparing for potential bottleneck in the
operations beforethey occur;
6. Motivating managers to achieve the desired results; and
7. Setting a standard or benchmark for evaluating actual
performance.

LIMITATIONS OF A BUDGET
The limitations of budgeting are:
1. Budgets tend to oversimplify the real situation and fail to allow
for variations in external factors. They do not reflect qualitative
variables.
2. It is difficult to prepare a detailed budget for an organization that
has never existed or for a new division, product, or department
of an existing firm.
3. There may be lack of higher and lower management
commitment becauseof lack of understanding of the fundamentals
of budget preparation andutilization.
 4. The budget is only a representation of future plans or a means
to the goal of profitable activity and not an end in itself. It may
interfere with the supervisor's style of leadership and can
therefore stifle initiative.
5. Budget reports usually emphasize results, not reasons.

TYPES OF BUDGET
The types of budgets or the major composition of the master
budget are:
 The Operating Budget
 The Financial Budget
 The Capital Investment Budget

The following is a simplified subclassification of the above-

mentioned types of budget for a manufacturing firm:

A. Operating Budget
1. Budgeted Income Statement
a. Sales Budget
The sales budget contains an itemization of a company's
sales expectations for the budget period, in both units and
dollars. If a company has a large number of products, it usually
aggregates its expected sales into a smaller number of product
categories or geographic regions; otherwise, it becomes too
difficult to generate sales estimates for this budget.
b. Production budget
• Materials cost budget
The materials cost budget calculates the materials that
must be purchased, by time period, in order to fulfill the
requirements of the production budget. It is typically
presented in either a monthly or quarterly format in the
annual budget. In a business that sells products, this
budget may contain a majority of all costs incurred by the
company, and so should be compiled with considerable
care. Otherwise, the result may erroneously indicate
excessively high or low cash requirements to fund
materials purchases.
• Direct labor cost budget
The direct labor cost budget is used to calculate the
number of labor hours that will be needed to produce the
units itemized in the production budget. A more complex
direct labor budget will calculate not only the total number
of hours needed, but will also break down this information
by labor category. The direct labor budget is useful for
anticipating the number of employees who will be needed
to staff the manufacturing area throughout the budget
 period. This allows management to anticipate hiring
needs, as well as when to schedule overtime, and when
layoffs are likely. The budget provides information at an
aggregate level, and so is not typically used for specific
hiring and layoff requirements.
• Factory overhead budget
The factory overhead budget contains all
manufacturing costs other than direct materials and direct
labor. The information in this budget becomes part of the
cost of goods sold line item in the master budget. The
total of all costs in this budget are converted into a per-
unit overhead allocation, which is used to derive the cost
of ending finished goods inventory, and which in turn is
listed on the budgeted balance sheet. The information in
this budget is among the most important of the various
departmental budget models, since it may contain a large
proportion of the total amount of a company's
expenditures.
• Inventory levels
The inventory levels calculate the cost of the finished
goods inventory at the end of each budget period. It also
includes the unit quantity of finished goods at the end of
each budget period, but the real source of that
information is the production budget. It contains an
itemization of the three main costs that are required to be
included in the inventory asset under both generally
accepted accounting principles and international financial
reporting standards. These costs and their derivation are
direct materials, direct labor and overhead allocation.
2. Cost of Sales budget
Cost sales budget or also called cost of goods sold (COGS) budget
is essentially part of your operating budget. COGS is the direct
expense or cost of the production for the goods sold by a business.
These expenses include the costs of raw material and labor but do not
include indirect costs such as that of employing a salesperson.
3. Selling and Administrative expenses budget
The selling and administrative expense budget lists the operating
expenses involved in selling the products and in managing the
business. Just as in the case of the factory overhead budget, this
budget can be developed using the cost-volume (flexible budget)
formula in the form of (y = a + bx).
4. Financial expense budget
A financial budget in budgeting means predicting the income and
expenses of the business on a long-term and short-term basis.
Accurate projections of cash flow help the business achieve its targets
in the right way.
B. Financial Budget
1. Budgeted Statement of Financial Position
Budgeted financial statements may comprise the complete set of
financial statements, which are: These statements are compiled from
the annual budgeting model of a business. They are useful for
estimating the financial results, financial position, and cash flows of a
business as of various dates in the future.
2. Cash budget
A cash budget represents the expected future cash flow of an
organization over a defined period of time. It is an estimate of the cash
receipts expected in the future over the budget period, the expenditure
to be incurred in cash, and finally, the cash balance with the company
at the end of the period.
3. Budgeted Statement of Sources and Uses of Funds
The statement of sources and uses of funds is a statement that
condenses the financial statements and financial plan in one
statement. It displays the sources from which an organization or a
company manages to generate cash and all the areas where the
obtained cash is used during an accounting period.

C. Capital Investment Budget

Capital investment budget is the process of making investment decisions
in long term assets. It is the process of deciding whether or not to invest in a
particular project as all the investment possibilities may not be rewarding.
Thus, the manager has to choose a project that gives a rate of return more
than the cost financing such a project.

WHAT IS A MASTER BUDGET?

The master budget is the aggregation of all lower-level budgets produced
by a company's various functional areas and also includes budgeted financial
statements, cash forecast, and a financing plan. The master budget is
typically presented in either a monthly or quarterly format, or usually covers a
company's entire fiscal year.

STEPS IN DEVELOPING A MASTER BUDGET

The major steps in developing a Master Budget may be outlined
as follows:
1. Establish basic goals and long- range plans for the company.
These will serve as guidelines in the preparation of budget
estimates.
2. Prepare a sales forecast for the budget period.
3. Estimate the cost of goods sold and operating expenses.
4. Determine the effect of budgeted operating results on assets,
liabilities and ownership equity accounts. The cash budget is the
largest part of this step, since changes in many asset and
 liability accounts will depend uponthe cash flow forecast.
5. Summarize the estimated data in the form of a projected
income statement for the budget period and the projected
statement of financial position as of the end of the budget period.

Figure 2 depicts the sequence and types of budgets commonly found.

Figure 2. The Master Budget Interrelationship

Illustrative Case 1. Comprehensive Master Budget Preparation

Gilbert Manufacturing Company manufactures a special line of tools.

As of December 31, 20X4, the Statement of Financial Position of the firm is as
follows:
Additional information:
The treasurer's office also provided the following information and
estimates:
1. All sales are on account and collections from customers are expected
to amount to P5,185,000.
2. Equipment costing P300,000 with accumulated depreciation of
1275,000 will be sold at its net book value, New equipment costing
P320,000 will be purchased during the year.
3. Accounts payable will increase by P15,000 and assumed to be for
materials purchases only.
4. Income taxes will be provided at an average rate of 35% of income
before taxes while P252,000 will be paid during the year.
5. Dividends amounting to P140,000 will be paid during the year
and the current portion of the long-term debt shall also be settled at
the end of the year. Interest rate is 8% per annum.

REQUIRED: Prepare the Master Budget for Gilbert Company for the year
ending December 31, 20XS. Based on the above preliminary data, each of
Gilbert Company's budgets will now be discussed and illustrated.

Sales Budget
The sales budget showing what products will be sold in what quantities
at what prices, is the foundation on which all other short-term budgets are
built. The sales budget triggers a chain reaction that leads to the development
of many other budget figures in an organization. The sales budget provides
the revenue predictions from which cash receipts from customers can be
estimated and supplies the basic data for constructing budgets for production
costs and selling and administrative expenses. In short, the sales forecast is
the keystone of the budget structure. The accuracy and reasonableness of the
sales data will affect the whole budget. The sales forecast is made after
consideration of the following factors:
1. Past sales volume
2. General economic and industry conditions
3. Relationship of sales to economic indicators
4. Relative product profitability
5. Market research studies and competition
6. Pricing, advertising and other promotion policies
7. Production capacity 8. Quality of sales force
8. Quality of Sales Force
9. Seasonal variations
10. Long-term sales trends for various production
For Gilbert Company, the Sales Budget is presented follows:

Production Budget
After the sales budget has been set, a decision can be made on the
level of production that will be needed for the period to support sales and the
production budget can be set as well. The production budget becomes a key
factor in the determination of other budgets, including the direct materials
budget, the direct labor budget and the manufacturing overhead budget.
These budgets in turn are needed to assist in formulating a cash budget.
Using the data from the previously prepared sales budget as well as
the inventory summary information, the following production budget is
developed.

Raw Materials Budget

After determining the number of units to be produced, the Raw
Materials Purchases can now be prepared, as follows:
Direct Labor Budget
The preliminary data show that the budgeted direct labor cost per unit
produced is P146. This must have been arrived at after considering such
factors as skills level of the workers, labor rate per hour, time requirement,
conditions of union contracts, etc.
The direct labor is therefore budgeted as follows:

Overhead Cost Budget

Study of past records will show how the cost reacts to changes in
volume or in relation to other factors. Some overhead items may be projected
on the basis of direct labor hours or on materials costs or on machine hours.
The overhead costs budget for 20X5 is illustrated below using the basic
information from the preliminary data previously established.
Budgeted Cost of Sales
The Budgeted Cost of Sales Statement can now be developed using
the data from the following:
Marketing and Administrative Expense Budget
As with overhead costs, marketing and administrative expenses are
also made up of fixed and marketing variable components. The marketing and
administrative expense budget for 20X5 is shown on the next page.
Previously provided data are used.

Cash Budget
Cash Receipts
Normally, the bulk of a firm's cash receipts come from customers. The
possibility of cash from other sources (such as additional investments, sales
of assets, borrowings) should likewise be considered when cash receipts are
being budgeted.
Cash Disbursements
Data converted from individual budgets previously illustrated supply the
basic information for the cash disbursements budget. However, various
adjustments and additions will have to be made when preparing the budget
for prepayments, accruals as well extraneous items (such as the purchase of
new equipment, dividend payment) that do not show up in any of the
individual budgets already prepared. If the financial policy of the company
requires that is a minimum cash.
Budgeted Income Statement
After the cash budget has been completed, Gilbert Company prepares
the budgeted income statement showing the net income that is to be expected
during the budget period. The information needed to prepare the budgeted
income statement comes from the previously provide preliminary data as well
as from the company’s other budgets.
Budgeted Statement of Financial Position
The budgeted statement of financial position is developed by beginning
with the current statement of financial position and adjusting it for the data
contained in the other budgets. Gilbert Company's budgeted statement of
financial position is presented below:

KEY TAKEAWAYS
 Financial planning and control defines as a combination of strategies
that supports the entire financial management process for an
organization.
 In essence, a budget is a plan. It is a forecast of revenue and
expenses over a specified future period.
 The nature of a budget is to arrange how cash is to be spent. It is to
live inside your methods and to distribute assets accurately.
  A budget is a description in quantitative - usually monetary -
terms of desired future result.
 The limitations of budgeting are: it tends to oversimplify the real
situation and fails to allow for variations in external factors; it is
difficult to prepare a detailed budget for an organization that
has never existed; there may be lack of higher and lower
management commitment; it is only a representation of future
plans; and reports usually emphasize results, not reasons.
 The types of budgets or the major composition of the master
budget are: operating budget, financial budget, capital
investment budget.
 The master budget is the aggregation of all lower-level budgets
produced by a company's various functional areas and also includes
budgeted financial statements, cash forecast, and a financing plan.

REVIEW QUESTIONS

Identification
1. It contains an itemization of a company's sales expectations for the
budget period, in both units and dollars.
2. Used to calculate the number of labor hours that will be needed to
produce the units itemized in the production budget
3. It shows how accumulated costs are transferred to service consuming
fees and how actuals correlate.
4. Involves making projections of sales, income, and assets based on
alternative production and marketing strategies and then deciding how to
meet the forecasted financial requirements.
5. It begins with projections of sales revenues and production costs.
6. Keep periodically check whether the designed techniques worked well
for an organization or need further improvements.
7. It is the direct expense or cost of the production for the goods sold by a
business
8. Predicting the income and expenses of the business on a long-term
and short-term basis
9. Typically presented in either a monthly or quarterly format, or usually
covers a company's entire fiscal year.
10. Forecast of revenue and expenses over a specified future period.

Essay
1. "As a practical matter, planning and control mean exactly the same
thing." Do you agree? Explain.
2. How can budgeting assist a company in planning its workforce staffing
levels?
3. Rapid corporate growth in sales and profits can cause financing
problems. Elaborate on this statement.
 FINANCIAL MANAGEMENT

Submitted by:
Group 4 - BSBA-FM 2A
Daniel, Windy Ysabel T.
Datu, Aubrey Jhayne N.
De Leon, Aida Diane D.
Dela Cruz, Niña Grace
Edrad, Trisha Mae E.
Lim, Lance Alfonso D.
Matammu, Rhiza A.
Suico, Julie Ann F.

Submitted to:
Mr. Armando Lorenzo C. Robles