FINANCIAL PROJECTIONS AND BUDGET
Forecasting is making of assumptions and
Strategic Plan - A strategic plan is the grand plan of
any organization wherein the overall objectives are
set and specific programs are created in support of
the objectives.
Elements of a Strategic Plan
1. Vision Statement - is a description of what
the organization aspires to be in the long
term.
2. Mission Statement - is the statement of the
organization’s core purpose.
3. Corporate Objectives - These are
statements which outline the specific goals,
in line with the mission, that an
organization would like to achieve.
4. Corporate Strategies - are the concrete
programs for specific business units,
departments, and / or cross-functional
areas
5. Departmental Plans and Programs - are
specific in terms of activities, the people
responsible for carrying out those activities,
the time lines, the targets, and the budget
per activity.
6. Financial Forecasts and Budgets - The
financial forecasts and budgets tie
everything together.
SWOT
Strength - is a source that is owned or controlled by
or is available to a firm. An advantage over its
competitors.
Weaknesses - is a limitation which affects a firm’s
position relative to its competitors.
Opportunities – is a situation in the external
environment which the firm can take advantage of.
Threats - is an unfavorable situation in a firm’s
external environment which may adversely affect
the way a firm does business.
Planning
The 5 P’s
 Proper
 Planning
 Prevents
 Poor
 Performance
Planning means looking ahead and chalking out
future courses of action to be followed.
Examples:
- Preparation for competitive exams
- Planning a vacation
Financial Planning is the process of meeting your life
goals through the proper management of your
finances.
Examples of goals:
- Buying a house
- Higher Educatio
projections.
Sale Forecast is the initial step in making the
projections.
Different forecasting tools are used to predict
future sales.
• Simple moving average
• Weighted moving average
• Arithmetic geometric line
• High-low point method
• Method of least square
Other factors that highly influence the result of the
projection
• Environmental analysis
• Consumer buying behavior
• Competitor’s possible marketing move
• Government programs and priorities
• Possible new entrants and threats of
suppliers and buyers
• Marketing mix-Strategies (4P’s)
Production Schedule is highly dependent on the sale
forecast.
The production schedule simply shows that cost
of making or producing a product. It reflects the
following information:
• Number of units and the cost of raw
materials
• Direct labor cost
• Manufacturing overhead cost
• Desired inventory level
Budgeting is the process or act of preparing a
financial budget
Budget refers to a plan which is expressed in a
quantitative monetary value.
Two Types of Budget
Operating Budget
 a detailed projection of all income and
expenses for a given period of time, which is
usually one year.
 Sales budget, Production budget, Direct
materials budget, Direct labor budget,
Factory overhead budget, Selling and
Administrative budget, Income Statement
Financial Budget
 shows the impact of the planned operations
and capital investments on a firm’s asset,
liabilities, and owner’s equity.
 Cash budget, Statement of Financial
Position
Types of Budget
Sales budget - A budget that reflects the expected
number of units to be sold based on forecast made
from the performance of previous years and other
marketing variables.
Production Budget - A budget that shows the cost of
producing the product.
Direct Materials Budget - a summary of the quantity
of direct materials required in order to meet
production requirements.
Direct Labor Budget - The estimate or projection on
how much to produce will be used in order to come
up with the estimate for the labor requirements and
how much to budget or the direct labor cost.
Factory Overhead Budget -refers to manufacturing
expenses other than direct materials and direct
labor.
Selling and Administrative Expense Budget - are
operating costs that are not associated with
production.
Cash budget - A budget that reflects the expected
cash receipts from cash sales, collections of accounts
and notes receivable, sale of other assets proceeds
of borrowings, and the expected cash disbarment on
payments of operating expenses, interest, taxes, and
loans.
Capital budget - A long-range budget that
incorporates the major expenditures for plant and
machineries
Master budget - The overall budget of the business
Procedures in Budgeting
1. Prepare the sales budget
2. Prepare the production budget
3. Prepare the projected operating expenses
and financing charges
4. Prepare the financial budget and capital
budget
5. Prepare the projected statement of
comprehensive income and projected
balance sheet
Working Capital Policy
Working capital, the capital of a business which is
used in its day-to-day trading operations
FINANCIAL STATEMENT ANALYSIS
A person cannot manage what he or she cannot
measure and even if that person knows the
numbers, it is still important for him or her to know
what they mean; otherwise, those numbers are of
no value.
“Sales per store are improving”
“It is quite costly”
“Last year was better than this year”
Business Survival
There are two key factors for business survival:
• Profitability - Is important if the business is
to generate revenue in excess of the
expenses incurred in operating that
business.
• Solvency - Is also important because it looks
at the ability of the business in meeting its
financial obligations.
Financial statement Analysis
• Is the process of evaluating risks,
performance, financial health, and future
prospects of a business using computational
and analytical techniques with the
objectives of making economic decisions.
Financial Analysis:
It is a process of :
• Analyzing and interpreting financial
statements.
• Analyzing means simplifying the data and
interpreting means explaining the meaning
and significance of data so simplified.
• Critically examining the accounting
information given to financial statements.
• Evaluating relationship between the
component parts of financial statements to
obtain a better understanding of firm’s
position and performance.
Tools and Techniques
• Horizontal Analysis
• Vertical Analysis
• Financial Ratios
- Profitability Ratio
- Operating Efficiency Ratio
- Financial Health Ratio
Horizontal Analysis / Trend Analysis
It is a technique that involves the
comparison of a line item (account) over a number
of periods.
The objective of the analysis is to answer the
following question:
 What is the behavior of the
account over time? It is increasing,
decreasing or not moving?
 What is the relative or the
percentage change in the balances
of the account over time?
Peso Change
Percentage
change = Balance of Prior Year
Vertical Analysis
• Common size Analysis
• It is a technique that expresses each
financial statement line item as a
percentage of a base amount.
• SFP base amount used is total assets
• SCI base amount used is Sales or Net sales
Balance Sheet Item
Statement of Financial Position Income Statement
X100
= Statement of Comprehensive Item
Total Assets x100
Income =
Total Sales
Liquidity Ratios - An asset’s liquidity describes the
ease with which it can be converted to cash.
Liquidity ratios evaluate a firm’s ability
to generate sufficient cash to
meet its short-term obligations.
Current Ratio - This ratio measures the company’s
ability to meet its current liabilities with current
assets.
Quick Ratio - This ratio is a stringent test of liquidity
that compares highly liquid current
assets to current liabilities.
Asset Management and Inventory Ratios
Receivables turnover - It measures how quickly a
company collects its accounts receivable.
Inventory turnover - This ratio indicates the number
of times total merchandise inventory is purchased
(or finished goods inventory is produced) and sold o Reliance on a single supplier.
during a period. o The goal of the company.

Solvency Ratios

- Solvency is a company’s ability to

meet the obligations created by its
long-term debt.
- Solvency ratios are of most interest
to stockholders, long-term creditors,
and company management.
Debt ratio - It measures what proportion of a
company’s assets is financed by debt.

Debt to Equity ratio - The proportion of debt and

equity in the capital structure of the business. When
the debt-to-equity ratio is more than 1 or more than
100%, the company has a riskier capital structure
since debts imply payments of interest. A business
with debt-to-equity ratio higher than 1 may appear
not very attractive to conservative creditors.

Time Interest Earned - Is a tool that measures the

debt paying ability of the business. It reflects the
degree of protection provided by an entity to its
long-term creditors. It is favorable to investors if the
business firm has higher ratio of times interest
earned.

Profitability Ratios - Profitability is the ease with

which a company generates income.
-Profitability ratios measure a firm’s past
performance and help predict its future profitability
level.
Gross Profit Margin - Measures the percentage of
gross profit to sales. It also measures the percentage
of gross profit margin available to cover the
operating expenses for the period.

Operating Profit Margin - Measures the percentage

of profit available after deducting the cost of sales
and operating expense from the sales.

Net Profit Margin - Also known as Return on Sales,

measures overall operating results of an entity. The
measure consider all income recognized and all
expenses incurred during the period.

Return on Assets - Also known as Return on

Investment. This ratio measures how efficiently the
company uses its assets to produce profits.

Return on Equity - It measures the return (net

income) generated by the capital invested by the
owner in the business.

Company Analysis

Step 1: Compare ratios to the industry averages.

Step 2: Look for company trends.
Step 3: Consider the industry environment.
Step 4: Draw conclusions.

Qualitative factors in the analysis of financial

statements

o The presence of one major customer.

o The presence of one major product.
o The competitors in the market.