Ateneo de Davao University

Senior High School

Km. 7, MacArthur Highway Bangkal, Talomo, Davao City
A.Y: 2022-2023

Subject: BUSINESS FINANCE

Grade Level: Grade 12
Semester: 1st Semester

LEARNING CONTENT 9: MASTER BUDGET AND FORECASTING

THE FINANCIAL PLANNING PROCESS

Planning is the process of establishing goals and identifying courses of action(strategies)

to meet the goals. In finance, the goal of management is often stated as the maximization
of the value of the firm. Financial planning is a process of anticipating future needs and
establishing courses of action today to meet financial objectives in the future. Financial
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. Two key
aspects of the financial planning process are cash planning and profit planning. Cash
planning involves the preparation of the firm’s cash budget. Profit planning involves the
preparation of pro forma statements. Both the cash budget and the pro forma statements
are useful for internal financial planning. They also are routinely required by existing and
prospective lenders.

The financial planning process begins with long-term or strategic financial plans. These,
in turn, guide the formulation of short-term or operating plans and budgets. Generally, the
short-term plans and budgets implement the firm’s long-term strategic objectives.

LONG-TERM (STRATEGIC) FINANCIAL PLANS

Long-term (strategic) financial plans lay out a company’s planned financial actions and
the anticipated impact of those actions over periods ranging from 2 to 10 years. Five-year
strategic plans, which are revised as significant new information becomes available, are
common. Generally, firms that are subject to high degrees of operating uncertainty,
relatively short production cycles, or both, tend to use shorter planning horizons.

Long-term financial plans are part of an integrated strategy that, along with production
and marketing plans, guides the firm toward strategic goals. Those long-term plans
consider the following:
✔ Proposed outlays for fixed assets
✔ Research and development activities
✔ Marketing and product development actions
✔ Capital structure
✔ 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.
Such plans tend to be supported by a series of annual budgets.

SHORT-TERM (OPERATING) FINANCIAL PLANS

Short-term (operating) financial plans specify short-term financial actions and the
anticipated impact of those actions. These plans most often cover a 1--year period. Key
inputs include the sales forecast and various forms of operating and financial data. Key

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outputs include a number of operating budgets, the cash budget, and pro forma financial
statements.

Short-term financial planning begins with the sales forecast. From it, companies develop
production plans that take into account lead (preparation) times and include estimates of
the required raw materials. Using the production plans, the firm can estimate direct labor
requirements, factory overhead outlays, and operating expenses. Once these estimates
have been made, the firm can prepare a pro forma income statement and cash budget.
With these basic inputs, the firm can finally develop a pro forma balance sheet.

THE SALES FORECAST

The key input to the short-term financial planning process is the firm’s sales forecast. This
prediction of the firm’s sales over a given period is ordinarily prepared by the marketing
department. On the basis of the sales forecast, the financial manager estimates the
monthly cash flows that will result from projected sales and from outlays related to
production, inventory, and sales. The manager also determines the level of fixed assets
required and the amount of financing, if any, needed to support the forecast level of sales
and production. In practice, obtaining good data is the most difficult aspect of forecasting.
The sales forecast may be based on an analysis of external data, internal data, or a
combination of the two.

An external forecast is based on the relationships observed between the firm’s sales and
certain key external economic indicators such as the gross domestic product (GDP), new
housing starts, consumer confidence, and disposable personal income. Forecasts
containing these indicators are readily available.

Internal forecasts are based on a consensus of sales forecasts through the firm’s own sales
channels. Typically, the firm’s salespeople in the field are asked to estimate how many
units of each type of product they expect to sell in the coming year. The sales manager
collects and totals these forecasts, who may adjust the figures using knowledge of specific
markets or the salesperson’s forecasting ability. Finally, adjustments may be made for
additional internal factors, such as production capabilities.

Firms generally use a combination of external and internal forecast data to make the final
sales forecast. The internal data provide insight into sales expectations, and the external
data provide a means of adjusting these expectations to take into account general
economic factors. The nature of the firm’s product also often affects the mix and types of
forecasting methods used.

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SALES BUDGET
A sales budget is simply the amount of revenue you expect to bring in over the next year
or next period. While costs are an important part of your master budget, they are not
included in the sales budget.

If you sell only one product or service, calculating your sales budget may be quite easy.
Simply take the number of units you expect to sell and multiply them by the sales price.
If you sell multiple items or services, you will need to calculate the sales price for each
and then add them together.

Your sales budget should include both the number of units being sold and the total
revenue for each type of unit. The number of units will determine what you will need to
produce over the year and will determine your budget for producing them. The same
principle applies to services as well as products, as knowing how many hours of time will
be sold will help you determine how many employees you will need to do that work.

Example of the Sales Budget

UWMA Company plans to produce an array of plastic pails during the upcoming budget
year, all of which fall into a single product category. Its sales forecast is outlined as
follows:

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. The
sales budget is usually presented in either a monthly or quarterly format; presenting only
annual sales information is too aggregated, and so provides little actionable information.

PRODUCTION BUDGET

A production budget provides information regarding the number of units that should be
produced over a given accounting period based on expected sales and targeted level of
ending inventories. It is computed as follows:

UWMA Company would like to maintain 1,000 units in its ending inventory at the end of
each quarter. Beginning inventory at the start of the year amounts to 500 units. How many
units should UWMA Company produce in order to fulfill the expected sales of the
company?

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*The required production in the first month is 200,500 units.
*Note that the ending inventory level of the present month will be the beginning inventory
level of the next month.

From the number of units that is expected to be produced, the cost of production can be
estimated especially if the company has developed standard production cost per unit. This
information can also be used then in preparing projected financial statements and cash
budgets.

OPERATIONS BUDGET
Operations budget refers to the variable and fixed costs needed to run the operations of
the company but are not directly attributable to the generation of sales. Examples of this
are the following:
✔ Rent payments
✔ Wages and Salaries of selling and administrative personnel
✔ Administrative Costs
✔ Travel and representation expenses
✔ Professional fees
✔ Interest Payments
✔ Tax Payments

CASH BUDGET
For a business enterprise, having the right amount of cash is important since cash is used
to make payments for purchases, for operational expenses, to creditors, and for other
transactions. The cash budget forecasts the timing of these cash outflows and matches
them with cash inflows from sales and other receipts. The cash budget is also a control
tool to monitor the way the company handles cash.

The following are the steps in formulating a cash budget:

A. Form the sales forecast, identify how much would be collected in the cash
budget period. Sales may be made in cash or for credit. Cash sales are translated to

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 cash at the point of sale while credit sales are collected depending on the credit
period. Credit periods may range from 10 days to more than a month depending on
the strategy of the company.
Assume selling price is PHP 20/unit. Sales for each month are expected to be
collected as follows:
⮚ Month of sales : 20%
⮚ A month after sales: 50%
⮚ 2 months after sales: 30% - How much is total receipts from sales?

B. Identify other receipts.

Examples:
✔ interest received
✔ return on principal investments
✔ proceeds from sale of non-operating assets
✔ issuance of capital stock
✔ proceeds from borrowings

Add these receipts to the collections from sales to get to total receipts.

C. From the Production Budget, identify how much of the purchases made will be
paid by the company on the cash budget period. Like sales, purchases may be
made in cash or on credit depending on the supplier’s credit terms.

Continuing from previous example:

⮚ Assume that cost per unit is Php 12.
⮚ All purchases this month are paid the following month. How much is total
cash disbursements for purchases?

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 D. From the operations budget, identify which expenses will be paid in cash during
the cash budget period.
The following expense items will be paid based on the following periods:
⮚ Rent payments: Rent of PHP10,000 will be paid each month.
⮚ Wages and salaries:
✔ Fixed salaries for the year are Php 96,000, or Php 8,000 per month.
✔ Wages are estimated as 10% of monthly sales.
⮚ Tax payments: Taxes of PHP250,000 must be paid in April.

E. Identify all other cash payments to be made.

Examples:
✔ Fixed-asset purchases in cash
✔ Cash dividend payments
✔ Principal Payments
✔ Repurchase of common stock
✔ Purchase of stock/bond investments - It is important to recognize that depreciation
and other noncash charges are NOT included in the cash budget.

The following items will be paid based on the following periods:

⮚ Fixed-asset outlays: New machinery costing PHP130,000 will be purchased and paid for
in April.
⮚ Interest payments: An interest payment of PHP10,000 is due in May.
⮚ Cash dividend payments: Cash dividends of PHP20,000 will be paid in January.
⮚ Principal payments (loans): A PHP15,000 principal payment is due in February.

F. Match the receipts and disbursements on the periods they become collectible and
payable, respectively.

G. Set a minimum required cash balance. This balance is maintained in case

contingencies arise. Recall from the steps in planning that we should also plan for
contingencies.

H. If the net cash flow is above the minimum cash balance, the company is in excess
cash and may consider putting it in short term investments. If it is below, the
company should make a short-term borrowing during that period.

Moreover, UWMA Company has a beginning cash balance of PHP40,000 and would like
to maintain an ending cash balance of PHP120,000 per month. Prepare UWMA
Company’s Cash Budget for January to May. Prepare a cash budget.

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 Evaluating the Cash Budget:
✔ If the ending cash balance after payment of all required disbursements is less than
the required ending balance, the company needs to borrow additional cash from
short-term borrowings to meet its required ending balance. Should the ending
cash balance exceed the company’s minimum cash requirement in the next period,
the company may be able to repay the loan plus accrued interest.
✔ Should the Company have excess cash above its required maintaining cash
balance, the company may invest this cash in short-term investments so that it will
have an opportunity to earn additional profits. If the company’s cash balance
would then falls below its minimum cash requirement, the company may
withdraw the investment to be able to meet the required cash balance.

PROJECTED FINANCIAL STATEMENT (FS FORECASTING)

Projected financial statements is a tool of the company to set an overall goal of what the
company’s performance and position will be for and as of the end of the year. It sets
targets to control and monitor the activities of the company. The following reports may be
forecasted:
✔ Projected Income Statement
✔ Projected Statement of Financial Position
✔ Projected Statement of Cash Flows

TWM Company
Income Statement
For the year ended December

2019 2018 2017 2016 2015

Net Sales ₱ 5,250,000 ₱ 4,770,000 ₱ 4,310,000 ₱ 3,910,000 ₱ 3,547,000
Cost of Sales ₱ 4,305,000 ₱ 3,959,100 ₱ 3,663,500 ₱ 3,128,000 ₱ 2,979,480
Gross Profit ₱ 945,000 ₱ 810,900 ₱ 646,500 ₱ 782,000 ₱ 567,520
Operating
Expenses ₱ 314,750 ₱ 297,890 ₱ 246,240 ₱ 221,500 ₱ 217,540
Operating Income ₱ 630,250 ₱ 513,010 ₱ 400,260 ₱ 560,500 ₱ 349,980
Interest Expense ₱ 250,000 ₱ 250,000 ₱ 250,000 ₱ 450,000 ₱ 300,000
Income Before
Taxes ₱ 380,250 ₱ 263,010 ₱ 150,260 ₱ 110,500 ₱ 49,980
Taxes ₱ 114,075 ₱ 78,903 ₱ 45,078 ₱ 33,150 ₱ 14,994
Net Income ₱ 266,175 ₱ 184,107 ₱ 105,182 ₱ 77,350 ₱ 34,986

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 TWM Company
Balance Sheet
As of December

2019 2018 2017 2016 2015

Assets
Current Assets
₱
Cash ₱ 1,060,000 990,000 ₱ 770,000 ₱ 760,000 ₱ 880,000
Receivables ₱ 2,300,500 ₱ 1,921,000 ₱ 1,722,000 ₱ 1,454,000 ₱ 1,396,000
Inventories ₱ 4,850,000 ₱ 4,500,000 ₱ 3,797,000 ₱ 3,290,000 ₱ 3,350,000
₱
Other Current Assets ₱ 1,050,000 980,000 ₱ 984,000 ₱ 735,000 ₱ 998,000
Total Current Assets ₱ 9,260,500 ₱ 8,391,000 ₱ 7,273,000 ₱ 6,239,000 ₱ 6,624,000
Noncurrent Assets
Property, Plant and Equipment ₱ 2,440,000 ₱ 2,260,000 ₱ 1,810,000 ₱ 1,870,000 ₱ 1,900,000
₱
Other Noncurrent Assets ₱ 835,689 925,681 ₱ 896,842 ₱ 876,235 ₱ 827,490
Total Noncurrent Assets ₱ 3,275,689 ₱ 3,185,681 ₱ 2,706,842 ₱ 2,746,235 ₱ 2,727,490
Total Assets ₱ 12,536,189 ₱ 11,576,681 ₱ 9,979,842 ₱ 8,985,235 ₱ 9,351,490

Liabilities and Equity

Current Liabilities
Trade Payables ₱ 5,050,000 ₱ 4,756,000 ₱ 4,130,000 ₱ 3,300,000 ₱ 2,870,000
₱ ₱ ₱
Income Taxes Payable ₱ 28,520 19,725 ₱ 11,270 8,290 3,750
Current Portion of LTD ₱ 2,250,000 ₱ 2,500,000 ₱ 1,000,000 ₱ 2,000,000 ₱ 2,000,000
₱
Other Current Liabilities ₱ 85,600 28,700 ₱ 40,990 ₱ 30,688 ₱ 37,890
Total Current Liabilities ₱ 7,414,120 ₱ 7,304,425 ₱ 5,182,260 ₱ 5,338,978 ₱ 4,911,640
Noncurrent Liabilities
Long-term Debt ₱ 2,000,000 ₱ 1,250,000 ₱ 1,000,000 ₱ 3,000,000
Total Liabilities ₱ 9,414,120 ₱ 8,554,425 ₱ 5,182,260 ₱ 6,338,978 ₱ 7,911,640
Stockholders' Equity
Capital Stock ₱ 1,000,000 ₱ 1,000,000 ₱ 1,000,000 ₱ 1,000,000 ₱ 1,000,000
Retained Earnings ₱ 2,122,069 ₱ 2,022,256 ₱ 3,797,582 ₱ 1,646,257 ₱ 439,850
Total Stockholders' Equity ₱ 3,122,069 ₱ 3,022,256 ₱ 4,797,582 ₱ 2,646,257 ₱ 1,439,850
Total Liabilities and Equity ₱ 12,536,189 ₱ 11,576,681 ₱ 9,979,842 ₱ 8,985,235 ₱ 9,351,490

STEPS ON FINANCIAL STATEMENT PROJECTION

A. Forecast Sales. In making financial projections, always start with the income
statement and the most important account to forecast first is sales.

A simple method for developing a pro forma income statement is the percent-of-sales
method. It forecasts sales and then expresses the various income statement items as
percentages of projected sales. The percentages used are likely to be the percentages of
sales for those items in the previous year

Illustration:
Sales are expected to increase by 10% in 2020 from the 2019 sales level.

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 TWM Company
Projected Income Statement
For the year ending December 31, 2020

2020
Net Sales ₱ 5,775,000
Cost of Sales
Gross Profit

B. Forecast Cost of Sales and Operating Expenses

✔ In determining the cost of sales and operating expenses, variable and fixed costs
should be identified.
✔ Cost of sales are direct costs associated in the generation of sales. One way of
projecting cost of sales is using the cost of sales ratio. Companies would generally
have a consistent historical cost of sales ratio. The company may use this as a
starting point.
✔ Suppose that the company has an average of 60% cost of sales ratio. In doing
projections, the financial manager may use the same average ratio or, if the
company is pushing for efficiency, the financial manager may reduce this ratio to
say 57% depending on his judgment.
✔ Operation costs are a mix of variable and fixed costs. Variable costs usually vary
with sales. To project these costs, the percentage of sales method may be used.
On the other hand, fixed costs remain the same no matter how the volume of sales
has changed.

Illustration:
⮚ The company wants to maintain the same gross profit per year in 2019.
⮚ Variable expense is 5% of sales
⮚ Depreciation expense is 5% of the gross beginning balance of property, plant and
equipment. As of December 31, 2019, the gross balance of PPE is Php 5,200,000.
For January 2020, Php 1,000,000 new PPE will be acquired. It is the policy of the
company that PPE acquired in the first half of the year will be depreciated for one
full year.

Compute for Cost of Sales, Variable Operating Expense, and Depreciation Expense.
Cost of sales percentage in 2019 = (4,305,000 ÷ 5,250,000) x 100%
Cost of sales percentage in 2019 = 82%
Projected cost of sales in 2020 = 82% x 5,775,000
Projected cost of sales in 2020 = 4,735,500
TWM Company
Projected Income Statement
For the year ending December 31, 2020

2020
Net Sales ₱ 5,775,000
Cost of Sales (82% of Net
Sales) ₱ 4,735,500
Gross Profit ₱ 1,039,500

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Variable (5% x Sales of 5,775,000) = 288,750
Fixed (depreciation expense)
(5,200,000 + 1,000,000) x 5% = 310,000
Total operating expenses 598,750

TWM Company
Projected Income Statement
For the year ending December 31, 2020

2020
Net Sales ₱ 5,775,000
Cost of Sales (82% of Net
Sales) ₱ 4,735,500
Gross Profit ₱ 1,039,500
Operating Expenses ₱ 598,750
Operating Income ₱ 440,750

Compute for net PPE.

PPE net, beginning 2,440,000
Additions 1,000,000
Less: Depreciation (310,000)
PPE net, end 3,130,000

C. Forecast Net Income and Retained Earnings.

To forecast net income, interest expense and income tax expense should also be
considered using the relevant interest and tax rates. Retained earnings is arrived at by
adding projected net income to beginning retained earnings then deducting dividends to
be declared during the year.

Illustration:
Income tax rate is 30% of the income before taxes. 75% of the income tax expense will be
paid in 2020, while the balance will be paid in 2021.

TWM Company
Projected Income Statement
For the year ending December 31, 2020

2020
Net Sales ₱ 5,775,000
Cost of Sales (82% of Net
Sales) ₱ 4,735,500
Gross Profit ₱ 1,039,500
Operating Expenses ₱ 598,750
Operating Income ₱ 440,750
Interest Expense ?
Income Before Taxes
Taxes (30%)
Net Income

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D. Determine balance sheet items that will vary with sales or whose balances will be
highly correlated to sales.

Balance sheet items that may vary with sales or will be highly correlated with sales are
cash, accounts receivable, inventories, accounts payable, and accrued expenses payable.

Illustration:
Compute as follows:
The following financial statement accounts are expected to vary with sales based on the
2019 financial statements:
1. Cash
2. Trade Accounts Receivable
3. Inventories
4. Other Current Assets
5. Trade Accounts Payable

Cash
Cash as a percentage of sales in 2019 = ( 1,060,000 ÷ 5,200,000) x 100%
Cash as a percentage of sales in 2019 = 20.19%
Projected cash in 2020 = 20.19 % x 5,775,000
Projected cash in 2020 = 1,165,973

Accounts receivable
Accounts receivable as a % of sales in 2019 = (2,300,500 ÷ 5,200,000) x 100%
Accounts receivable as a % of sales in 2019 = 43.82%
Projected accounts receivable in 2020 = 43.82% x 5,775,000
Projected accounts receivable in 2020 = 2,530,605

Inventories
Inventories as a % of sales in 2019
Inventories as a % of sales in 2019
Projected inventories in 2020
Projected inventories in 2020
= ( 4,850,000 ÷ 5,200,000) x 100%
= 92.38%
= 92.38% x 5,775,000
= 5,334,945

Other current assets

Other current assets as a % of sales in 2019 = (1,050,000 ÷ 5,200,000) x 100%
Other current assets as a % of sales in 2019 = 20%
Projected other current assets in 2020 = 20% x 5,775,000
Projected other current assets in 2020 = 1,155,000

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 TWM Company
Projected Balance Sheet
As of December 31, 2020

2020
Assets
Current Assets
Cash ₱ 1,165,973
Receivables ₱ 2,530,605
Inventories ₱ 5,334,945
Other Current Assets ₱ 1,155,000
Total Current Assets ₱ 10,186,523
Noncurrent Assets
Property, Plant and Equipment ₱ 3,130,000
Other Noncurrent Assets
Total Noncurrent Assets
Total Assets

Accounts payable
Accounts payable as a % of sales in 2019 = (5,050,000.00 ÷ 5,200,000) x 100%
Accounts payable as a % of sales in 2019 = 96.19%
Projected accounts payable in 2020 = 96.19% x 5,775,000
Projected accounts payable in 2020 = 5,554,973

Liabilities and
Equity
Current Liabilities
Trade Payables ₱ 5,554,973
Income Taxes
Payable
Current Portion of
LTD
Other Current Liabilities
Total Current
Liabilities
Noncurrent
Liabilities
Long-term Debt
Total Liabilities

E. Determine payment schedule for loans.

Illustration:
Compute for interest expense:
⮚ As of December 31, 2019, there are two long-term loans. Both have an annual
interest of 8%.
⮚ The first loan will mature on June 30, 2020 and the remaining principal balance to
be paid on June 30, 2020 is Php 1,250,000.
⮚ The second loan which was incurred on December 31, 2019 is paid at the rate of
Php 500,000 principal balance every June 30 and December 31.

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 ⮚ New loans of Php 3,500,000 will be incurred on December 31, 2020 payable at
the rate of Ph 500,000 every June 30 and December 31, 2020. Annual interest rate
is at 8%.

First Loan
Interest from January 1 to June 30, 2020
1,250,000 x 8% x (6 mos ÷ 12 mos) = 50,000
Second Loan
Interest from January 1 to June 30, 2020
(1,000,000 + 2,000,000) x 8% x (6 mos ÷ 12 mos) 120,000
Interest from July 1 to December 31, 2020 = 100,000
(500,000 + 2,000,000) x 8% x (6 mos ÷ 12 mos)
Total interest expense for 2020 270,000

Complete projected income statement as follows:

TWM Company
Projected Income Statement
For the year ended December 31, 2020

2020
Net Sales ₱ 5,775,000
Cost of Sales (82% of Net Sales) ₱ 4,735,500
Gross Profit ₱ 1,039,500
Operating Expenses ₱ 598,750
Operating Income ₱ 440,750
Interest Expense ₱ 270,000
Income Before Taxes ₱ 170,750
Taxes (30%) ₱ 51,225
Net Income ₱ 119,525

Compute for Income Tax Payable.

Projected Income Tax Payable in 2020: 51,225 x (1 – 75%) = 12,806

Liabilities and
Equity
Current Liabilities
₱
Trade Payables 5,554,973
Income Taxes ₱
Payable 12,806
Current Portion of
LTD
Other Current Liabilities
Total Current
Liabilities
Noncurrent
Liabilities

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 Compute for current and non-current portion of long-term debt:
Loans Current Portion Long-Term Portion Total
Loan incurred on Dec. 31, 2019 of Php ₱ ₱
3,000,000 1,000,000 1,000,000 ₱ 2,000,000
Loan of Php 3,500,000 to be incurred on ₱ ₱
Dec. 31, 2020 1,000,000 2,500,000 ₱ 3,500,000
₱ ₱
Total 2,000,000 3,500,000 ₱ 5,500,000

Liabilities and Equity

Current Liabilities
Trade Payables ₱ 5,554,973
Income Taxes Payable ₱ 12,806
Current Portion of LTD ₱ 2,000,000
Other Current Liabilities ₱ ?
Total Current Liabilities ₱
Noncurrent Liabilities
Long-term Debt ₱ 3,500,000
Total Liabilities ₱

F. Check for other information

Illustration:
⮚ Cash dividends of Php 300,000 will be paid in 2020.
⮚ Other non-current assets and other current liabilities will remain unchanged.

Compute for retained earnings

Retained earnings, beginning 2,122,069
Add: Net Income 119,525
Less: Dividends (300,000)
Retained earnings, end 1,941,594

TWM Company
Projected Balance Sheet
As of December 31, 2020

2020
Assets
Current Assets
Cash ₱ 1,165,973
Receivables ₱ 2,530,605
Inventories ₱ 5,334,945
Other Current Assets ₱ 1,155,000
Total Current Assets ₱ 10,186,523
Noncurrent Assets
Property, Plant and Equipment ₱ 3,130,000
Other Noncurrent Assets ₱ 835,689
Total Noncurrent Assets ₱ 3,965,689
Total Assets ₱ 14,152,212

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 Lialibilities and Equity
Current Liabilities
Trade Payables ₱ 5,554,973
Income Taxes Payable ₱ 12,806
Current Portion of LTD ₱ 2,000,000
Other Current Liabilities ₱ 85,600
Total Current Liabilities ₱ 7,653,379
Noncurrent Liabilities
Long-term Debt ₱ 3,500,000
Total Liabilities ₱ 11,153,379
Stockholders' Equity
Capital Stock ₱ 1,000,000
Retained Earnings ₱ 1,941,594
Total Stockholders' Equity ₱ 2,941,594
Total Liabilities and Equity ₱ 14,094,973

G. Determine external funds needed (EFN).

Total Assets ₱ 14,152,212

Total Liabilities & Shareholders' Equity ₱ 14,094,973
External Funds Needed ₱ 57,239

H. Determine how external funds needed may be financed.

External Funds Needed is a plug figure to make projected assets equal projected liabilities
and shareholders’ equity.
EFN = change in total assets – (change in total liabilities + total change in stockholders’
equity)
Or
EFN = Squeeze figure to balance assets to Liabilities and equity

A positive value for EFN, means that the company needs more funds equivalent to the
positive value of EFN. As to how this will be raised depends on the management and the
company’s ability to access funds. This EFN can be raised in the form of short term
borrowing, long term borrowing or equity, or a combination of all sources. The projected
balance sheet which generated this EFN is just the first iteration in preparing a pro-forma
balance sheet.

A negative value for EFN, means that the company has excess cash. As to how this
excess cash will be distributed will be the subject of the next iteration for the pro-forma
balance sheet. This can be disposed by adding it to the projected cash balance or it can be
used to retire some of the debt if pre-termination is allowed.

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 Complete balance sheet as follows:
TWM Company
Projected Balance Sheet
As of December 31, 2020

2020
Assets Liabilities and Equity
Current Assets Current Liabilities
Cash ₱ 1,165,973 Trade Payables ₱ 5,554,973
₱
Receivables ₱ 2,530,605 Notes Payable(EFN) 57,239
₱
Inventories ₱ 5,334,945 Income Taxes Payable 12,806
Other Current Assets ₱ 1,155,000 Current Portion of LTD ₱ 2,000,000
₱
Total Current Assets ₱ 10,186,523 Other Current Liabilities 85,600
Total Current Liabilities ₱ 7,710,618
Noncurrent Assets Noncurrent Liabilities
Property, Plant and Equipment ₱ 3,130,000 Long-term Debt ₱ 3,500,000
Other Noncurrent Assets ₱ 835,689 Total Liabilities ₱ 11,210,618
Total Noncurrent Assets ₱ 3,965,689 Stockholders' Equity
Capital Stock ₱ 1,000,000
Retained Earnings ₱ 1,941,594
Total Stockholders'
Equity ₱ 2,941,594
Total Liabilities and
Total Assets ₱ 14,152,212 Equity ₱ 14,152,212

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 Prepare the projected statement of cash flows.

TWM Company
Projected Statement of Cash Flow
For the year ending December 31, 2020

Operating Activities
Income before taxes ₱ 170,750
Adjustments
Depreciation ₱ 310,000
Changes in the following accounts
Increase in Accounts Receivable -₱ 230,105
Increase in Inventories -₱ 484,945
Increase in Other Assets -₱ 105,000
Increase in Accounts Payable ₱ 504,973
Income Taxes paid -₱ 66,939
Cash inflow from Operating Activities ₱ 98,734

Investing Activities
Acquisition of PPE -₱ 1,000,000
Cash outflow from Investing Activities -₱ 1,000,000

Financing Activities
Payment of Cash Dividends -₱ 300,000
Short-term Notes Payable (EFN) ₱ 57,239
Loans, net of payments ₱ 1,250,000
Cash inflow from Financing Activities ₱ 1,007,239
Net change in cash ₱ 105,973
Add: Beginning Cash Balance ₱ 1,060,000
Ending Cash Balance ₱ 1,165,973

REFERENCES AND RESOURCES:

Gitman, L. J., & Zutter, C. J. (2013). Principles of Managerial Finance. Pearson.
Gitman, L. J., Joehnk, M. D., Billingsley, R. S., Besley, S., & Brigham, E. F. (n.d.). Business Finance (Philippine). JO-ES Publishing House, Inc.
Brigham and Houston. Fundamentals of Financial Management. Cengage
Ballada, W. (2018). Basic Financial Accounting and Reporting. DomeDame Publisher & Made Easy Books.
Valix. Financial Accounting and Reporting.
Cayanan, A. & Borja (forthcoming). Business Finance. Quezon City. Rex Bookstore.

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