Bato Institute of Science and Technology
Dolho, Bato, Leyte
Business Finance
ABM 4
Student’s Name:______________________________________ Year & Section: ________________
Module 6 (Week 7)
Financial Planning Tools and
Concepts
Introduction
Every business unit whether it is an industrial
establishment, a trading concern or a construction company
needs funds for carrying on its activities successfully. It
requires funds to acquire fixed assets like machines,
equipment, furniture etc. and to purchase raw materials or
finished goods, to pay its creditors, to meet its day-to-day
expenses, and so on. In fact, availability of adequate finance
is one of the most important factors for success in any
business. However, the requirement of finance, now-a-days,
is so large that no individual is in a position to provide the
whole amount from his personal sources. So, the businessman
has to depend on other sources and use various ways to raise
the necessary amount of funds.
Every businessman has to be very careful not only in
assessing the firm’s requirement of finance but also in
deciding on the forms in which funds are raised and utilized.
Learning Outcomes
At the end of this module, you should be able to:
1. Identified the steps in the financial planning process;
2. Illustrated the formula and format for the preparation
of budgets and projected financial statement; and
3. Explained tools in managing cash, receivables, and
inventory.
Core Content
Lesson 11 – Financial Planning Process
Financial Planning is the process of evaluating and
managing the utilization of financial resources optimally for
achieving an organization’s goals and objectives. Financial
planning helps insulate businesses from myopic policies and
practices and aids in mapping out their financial future.
Financial planning is one of the sought-after financial
courses for working professionals owing to the rapidly
growing need for trustworthy and knowledgeable personnel.
Whether it is an organization or a person, financial
planning is critical to ensure that all expenses are taken care
of, and the future is secure. For a company, this is of utmost
importance as many people depend on it for their livelihoods.
It cannot afford to find itself unable to continue operations.
Having a clear idea about how a firm will spend money is
crucial for reaching its goals.
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). Financial planning starts with long
term plans which would then translate to short term plans.
• 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.
Financial Planning Process
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
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 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
For the activity done, the resources the
learners 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.
For the activity done, there were different
responsibilities formed as follows:
• Event Chairperson • Budgeting Team
• Production Team • Marketing Team
• Creatives Team
• Administrative Team
Also, there must be a timeline for the
activities, especially since they were allotted a
specific time to do the activity.
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 criterion. 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).
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.
Lesson 12 – Preparation of Budgets and
Projected Financial Statements
1. Sales Budget
The most important account in the financial
statement in making a forecast is sales since most of
the expenses are correlated with sales. 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 and Internal Factors Influencing Sale
✓ 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
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 of one loaf of bread a day. The population of your 3. Budgeting Cash
community is 500 people. If you are the only person Operations budget refers to the variable and
selling bread in your town, then your sales forecast is fixed costs needed to run the operations of the
500 units of bread. However, you also have to take company but are not directly attributable to the
account your competition. What if there are 4 other generation of sales.
sellers of bread? You will need to have to divide the Examples of this are the following:
sales between the 5 of you. Does this mean your new • Rent payments
forecast should be 100 units of bread? Not necessary. • Wages and Salaries of selling and administrative
You should also know the preference of your personnel
consumers. If more of them would prefer to buy more • Administrative Costs
bread from you, then you should increase your sales • Tax Payments
forecast. • Travel and representation expenses
✓ Production Capacity and man power (internal) • Professional fees
Suppose that you have already evaluated the • Interest Payments
macroeconomic factors and identified that there is a 4. Cash Budget
very strong market for your product and consumers Recall from the start of the term the exercise
are very likely to buy from you. You forecasted that you did where the learners were asked how much
you will be able to sell 1,000 units of your product. allowance they were given and how much expenses
However, you only have 20 employees who are able they would incur in a day. Recall that at the end of the
to produce 20 units each. Your capacity cannot cover activity, they were able to identify whether they had
your expected demand hence, you are limited by it. excess cash or they had a deficit.
To be able to increase capacity, you should be able to Relate that this is what the cash budget aims
expand your operations. to do.
✓ For a business enterprise, having the right
2. Production Budget amount of cash is important since cash is used
A production budget provides information to make payments for purchases, for
regarding the number of units that should be produced operational expenses, to creditors, and for
over a given accounting period based on expected other transactions.
sales and targeted level of ending inventories. It is ✓ The cash budget forecasts the timing of these
computed as follows: cash outflows and matches them with cash
Required production in units = Expected Sales + Target inflows from sales and other receipts. The
Ending Inventories - Beginning Inventories cash budget is also a control tool to monitor
the way the company handles cash.
Note: Ending inventory of current period is
beginning inventory of next period. The cash budget, or cash forecast, is a
Provide the following example: statement of the firm’s planned inflows and outflows
✓ [A] Company forecasts sales in units for January to of cash. It is used by the firm to estimate its short-term
May as follows: cash requirements, with particular attention being
Jan Feb Mar April May paid to planning for surplus cash and for cash
Units 2,000 2,200 2,500 2,800 3,000 shortages.
✓ Moreover, [A] Company would like to maintain 100 CASH BUDGET
units in its ending inventory at the end of each month. Jan Feb … Nov Dec Total
✓ Beginning inventory at the start of January amounts Cash Receipts xxx xxx … xxx xxx xxx
to 50 units. Less: Cash xxx xxx … xxx xxx xxx
✓ How many units should [A] Company produce in Disbursements
order to fulfill the expected sales of the company? Net Cash xxx xxx … xxx xxx xxx
Answer: Flow
MONTH Add: xxx xxx … xxx xxx xxx
Jan Feb Mar April May Total Beginning
Projected 2,000 2,200 2,500 2,800 3,000 12,50 Cash
Sales 0 Ending Cash xxx xxx … xxx xxx xxx
Target level 100 100 100 100 100 100 Required xxx xxx … xxx xxx xxx
of Ending Ending Cash
inventories Balance
Total 2,100 2,300 2,600 2,900 3,100 12,600 Required (xxx) … (xxx)
Less: 50 100 100 100 100 50 Total
Beginning Financing
inventories Excess Cash xxx … xxx xxx
Required 2,050 2,200 2,500 2,800 3,000 12,500 Balance
Production

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Lesson 13 – Tools in Managing Cash, voucher signed by the recipient of the petty
cash. When the petty cash fund is almost
Receivables, and Inventory depleted, the petty cash fund custodian will
get reimbursements. This reimbursement will
Working capital is the company’s investment in
go through the check voucher system where
current assets such as cash, accounts receivable, and
the custodian gets a check with the petty cash
inventories. Net Working capital is the difference between
vouchers as supporting documents. - The
current assets and current liabilities.
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
1. Cash
held to meet bank requirements such as the
Being the most liquid asset, cash is an
minimum cash balance you maintain for
important account in the balance sheet that will affect
checking accounts and if you have existing
the liquidity, and solvency of a company. It is also the
loans, banks may also require a minimum
most vulnerable when it comes to theft. A good
amount of deposit with them.
internal control must be properly implemented to
✓ Secondary Reasons
safeguard this asset:
a. Precautionary. This is the cash
✓ A basic internal control system entails the
maintained for emergencies such as the
assignment of custodial function and
additional cash you keep during political and
recording function to separate individuals,
economic uncertainties. For example, if your
unless you are the owner. Why is this so?
business requires a substantial amount of
Imagine a cashier of a company who is also
importation, a relatively higher amount of
the chief accountant. If tempted, this person
cash has to be maintained when the exchange
can steal cash from the company and can
rate becomes highly volatile due to political
manipulate the records so that nobody can
instability such as what happened during
discover that he is stealing. If you are the
EDSA II.
owner, you probably will not steal from
b. Speculative. This refers to the cash held by
yourself and adjust the records?
the company to take advantage of
✓ Cash collections should be supported by
opportunities (e.g., buying stocks during
official receipts which are summarized in a
major corrections such as what happened at
daily collection report. The daily collection
the height of the global financial crisis in
report is going to useful for the next control
2008 and 2009 where stock valuations went
measure for cash – depositing collections.
down by as much as 80% for some
✓ A good internal control over cash is by
companies).
depositing all collections intact. The daily
3. Budgeting Cash
collection reports are now compared with the
The Cash Budget
deposit slips to find out if all collections are
The cash budget provides information
indeed deposited.
regarding the company’s expected cash receipts and
✓ If all collections need to be deposited, then
disbursements over a given period. It is useful for
payments must be made through a check
identifying future funding requirements or excess
voucher system. There must also be two
cash within a given period. This allows managers to
signatories in the check to provide a check
find possible sources of financing if the cash budget
and balance. If the business is small then the
shows cash shortage or identify appropriate tenors for
entrepreneur’s signature may suffice. For
money market placements for excess cash. Normally,
small payments like the fare given to a
a cash budget is prepared for a one-year period broken
messenger, a petty cash fund is used. A petty
down into smaller intervals like months. This allows
cash fund which should be minimal in
managers to see the seasonality of the business which
amount, will be issued to a petty cash fund
affects the cash flows.
custodian, say the office administrator. The
Basically, cash budget has the following
petty cash fund may be PHP10,000 or
parts:
PHP20,000. Disbursements from this petty
✓ Cash Receipts include all of a firm’s inflows
cash funds must be supported by a petty cash
of cash in a given financial period. The most

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 common components of cash receipts are
cash sales, collections of accounts receivable,
and other cash 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.
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.
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.
▪ 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 inventories:
✓ 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
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 One way to control inventory is to classify
inventory into a classification system called ABC
References
Analysis. Inventories classified as “A” are high Timbang, Ferdinand L.; “Financial Management, Part
valued items which should be safeguarded the most. 1”;2015; C & E Publishing, Inc...
B items, on the other hand, are average-cost items that
should be safeguarded more than C items but not as Brigham, Eugene F. and Ehrhardt, Michael C.;
much as A items. While C items have low cost and is
“Financial Management: Theory and Practice”; 12th
the least safeguarded.
INVENTORY CLASS
Edition
A B C
Money value High Medium Low https://talentedge.com/articles/six-steps-financial-
Quality of control Very Strict No too Strict planning-process/
Strict https://www.scribd.com/presentation/438932089/Finan
Inventory Slow Relatively Fast cial-Planning-Tools-and-Concepts-pptx
movement (flows) fast

In-text Activity 1
? What are the steps in financial planning process?
ARGENE B. ABELLANOSA
Choose one of the steps of financial planning process
Instructor
and explain it.
? Does financial planning help business in utilizing
their financial resources? How?

Summary & Key Takeaways

❖ The finance manager not only has to plan, procure,
and utilize the funds but he/she also has to exercise
control over those finances. If you want to get more
insight into the scope of financial management
activities, you can consider applying for financial
management online certification to dig deeper into
this domain. An advanced financial management
course can help you learn the latest concepts and
modeling techniques used in finance to determine
how to gain control over the finances of an
organization like ratio analysis, financial forecasting,
cost and profit control, etc.

Self-Assessment Questions
GL Industries, a defense contractor, is developing a
cash budget for October, November, and December. Jhayne’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.