Financial planning is making projections of sales or revenue, expenditures based on alternative  The key difference between a budget and

tween a budget and a forecast is that a budget lays out the plan for
production and marketing strategies, as well as asset acquisitions necessary to achieve those
strategies and deciding how to meet the forecasted financial requirements.
Financial planning is important part of financial management. It is the process of determining the
objectives; policies, procedures, programs and budgets to deal with financial activities of an
enterprise.
Financial planning reflects the needs of the business and is integrated with overall business
planning. Proper financial planning is necessary to enable the business enterprise to have right
amount of capital to continue its operations efficiently.
It is the preparation of Budget; such plans must be stated in quantitative terms
Budget
- are plans expressed in monetary terms
-  is an estimation of the revenue or expenses over a specified future period of time
- Once established they serve as goals and guidelines to be adhered to and to be
respected.
- Basically a financial plan for a definite period, normally a year or monthly that is known to
greatly enhance the success of any financial undertaking.
- Financial plan of the resources needed to carry out the tasks and meet the financial
goals of the company. It is a quantitative expression of the goals of the organization and
the cost of attaining these goals.
Difference between planning and Control
Planning involves developing objectives and preparing the budget to achieve those objectives.
Control involves steps taken by the management to ensure that the objectives set down at the
planning stage are attained and to ensure that all parts of the organization function in a
manner consistent with organizational policies. (Ex. Whether favorable or
unfavorable)
what a business wants to achieve, while a forecast states its actual expectations for
results, usually in a much more summarized format.
 In essence, a budget is a quantified expectation for what a business wants to achieve. Its
characteristics are:
 The budget is a detailed representation of the future results, financial position, and cash
flows that management wants the business to achieve during a certain period of time.
 The budget may only be updated once a year, depending on how frequently senior
management wants to revise information.
 The budget is compared to actual results to determine variances from expected
performance.
 Management takes remedial steps to bring actual results back into line with the budget.
 The budget to actual comparison can trigger changes in performance-based
compensation paid to employees.
BUDGETING: is the process of stating in quantitative terms their operations usually in units and
pesos and planned their organizational activities for a given period of time.
Primary purposes:
1. Standard setting- standard are established as basis of actions. Must be met by the company
2. Planning- concrete plans and targets are developed
3. Communication and coordination- goals and processes should be effectively communicated to
encourage participation
4. Monitoring of activities- actions are checked to assess conformity with plans
5. Evaluation of results- e.g., feedback and variance analysis Budgeting does not guarantee any
success of business operations.
Budgeting does not guarantee any success of business organization.

Functions of Budgeting
Budget Committee
Budget makes decision making process more effective by helping managers meet
uncertainties. The objective of budgeting is to substitute deliberate will conceive business Also called as management committee or executive committee, is primarily responsible in
judgment for accident success in enterprise management. developing and institutionalizing budgetary systems and processes. They do not make the budget.
Responsible to overall policy matters related to budgeting processes.
Purposes of Budget
Budget Manual is the handbook where a rules, procedures and policies are outlined.
1. Planning Function
2. Coordination and Allocating Resources function for Goal Congruence Contents of Budget Manual = Objectives and Policies of Company; definition of line of authority
3. Communication function and responsibility; Functions and responsibilities of budget committee and budget officer; time
4. Motivation function schedule for budget preparations; instructions and forms to be used; programs for preparation of
5. Control function budgets; procedures for budgetary control an account codes in use.
Flexibility
Focus on controllable costs
Non-punitive approach
6. Standards in evaluating performance Master Budget

A master budget is an expensive business strategy that documents expected future sales,
Budget production levels, purchases, future expenses incurred, capital investments, and even loads to be
acquired and repaid. In other words, the master budget includes all other financial budgets as well
as a budgeted income statement and balance sheet.
The master budget is basically management's strategic plan for the future of the company. Every Operating budget - refers to the plans for the conduct of business for the planning period; it
aspect of the company operations is charted and documented for future predictions. includes the budgeted income statement and all its supporting budgets.

Master budget composes: Responsibility budget - budget for a responsibility center

I. Operating budgets: is the detailed schedule for each item in the operation of the Rolling (continuous, progressive) budget - budget which is prepared throughout the year, that is, as
business. one month elapses, a budget is prepared for one more month in the future.

Includes: Sales budget - budget that shows the quantity of each product expected to be sold.
o Sales budget
o Merchandise purchases budget Traditional budgeting - a system of budgeting which concentrates on the incremental change from
o Cost of Sales Budget the previous year assuming that the previous year's activities are essential and must be continued.
o Production budget
o Manufacturing budget Zero-based budgeting - a system of establishing financial plans beginning with an assumption of
o Direct labor budget /Overhead budget no activity and justifying each program or activity level.
o Selling budget
o General and Administrative expense budget Income statement
T or F
I. Budgeting is essentially a controlling devices rather than planning devices.
II. Financial Budgets: is composed of budgeted balance sheet, cash budget and some 2. Sales budget is same with sales forecast
cases includes capital acquisition budget 3. The starting point of master budget is preparation of production budget or determining the
production of company.
Includes: 4. Operating budgets are generally long time horizon and may extends more than 12 months.
o Balance sheet budget 5. Budget committee is in charge in preparation of detailed budgets
o Cash flow statement 6. Budgetary slack can be best described as overestimation of expenses and underestimation
o Statement of changes in owner's equity of revenues
o Schedule of receivables, payables and accruals, others 7. Capital Budget is considered as Operating Budgets
8. Cash budget will be prepared first before preparing the Cost of sales Budget
9. Developing budget is useful in profit oriented organization but not in non-profit organization
BUDGETING TERMINOLOGIES 10. Depreciation is not part of cash budget

Budgeted Income Statement - refers to projection of revenue, expenses, and results of operations
for a definite period of time

Cash Budget - a period-by-period statement of cash at the start of a budget period, expected cash STEPS IN DEVELOPING A MASTER BUDGET
receipts, expected cash disbursements, classified by function, responsibility, and form; and the
resulting cash budget period. 1. Establish basic goals and long-range plans for the company. These will serve as guidelines in
the preparation of budget estimates.
Financial Budget - refers to the budget of the financial resources as reflected in the budgeted
balance sheet and cash budget/ 2. Prepare a sales forecast for the budget period.

Fixed Budget - projection of cost at a particular or one level of production (usually at normal
capacity) for a definite time period. Ex. Master Budget
Flexible (variable budget) - projection of cost at different levels of production for a definite period of
time.
Participative budget - budget prepared using employees at all levels in the organization.
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 the cash flow forecast.
5. Summarize the estimated data in the form of a projected income statement for the budget period
and the projected balance sheet as of the end of the budget period.

Physical budget - budget that is expressed in units of materials, number of employees, or number
of man-hours or service units rather than in pesos.

Planning budget (static budget) – another term for master budget

Production budget - production plan for resources needed to meet current sales demand and
ensure adequate inventory level

Program budget - budget for the major programs or projects that the company plans to undertake.
 For inventories, production, and sales:

Units in beginning inventory + Required production - Budgeted sales

I. Sales Budget = Units in ending inventory
II. Cost of Sales Budget
Production Budget
Beginning Finished Goods
Add: Cost of Goods manufactured Rearranging for required production:
Available for Sale
Less: Ending FG Inventory Budgeted sales + Units in ending inventory - Units in beginning inventory
= Required production

III. Cost of Goods manufactured

• Santiago Pants' sales budget is 160,000 units, Management estimates that there will be 5,000
Beginning Work In Process units in beginning inventory and 15,000 in ending inventory.
Add: Manufacturing Cost
DM 160,000 units + 15,000 units - 5,000 units = 170,000 units
DL
OH Production Costs = DM + DL + OH
Total Cost Put into Process
Less: Ending WIP
Cost of Goods Manufactured

IV. Raw Materials Used

Beginning Raw Materials

Add: Purchases
Freight in
Available for use
Less: Ending RM
RM Used
Less: Indirect materials
Direct materials used

Sales Forecasting

Estimate sales. Forecasting sales is the most difficult aspect of budgeting. Cash Budget

How do we forecast sales? Estimate cash flows. The cash budget is a statement of cash on hand at the start of the budget
period, expected cash receipts, expected cash disbursements, and the resulting cash balance at
• Sales staff the end of the budget period.
• Market researchers
• Delphi technique I. Cash receipts:
• Trend analysis o Collection of accounts receivable
• Econometric models o Cash sales
o Sales of assets
o Borrowing
Forecasting Production
o Issuing stock
A production budget is a plan of resources needed to meet current sales demand and ensure that o Other
inventory levels are sufficient for future sales.
II. Cash disbursements:
Basic inventory formula: o Materials purchases
o Manufacturing costs
Beginning balance FG + Transfers in (TI) - Transfers out (TO) = Ending balance o Operating activities
 o Debt repayment
o Acquisition of new assets
o Income taxes
o Dividends
o Other activities

Cash Collections Example

Budgeted Balance Sheet