Steps in the Financial Planning Process

The reporters were Raesel Pagtalunan, Precious Mendoza, and Noreen Miranda. We were
introduced to a new topic which is challenging as it requires us to deal with various calculations
and analyzation. It is something that we have to practice until we adapt the process of preparing a
financial and budget plan. Given that there were several terms and foreign formulas instigated to
us, students, this lesson was discussed for two consecutive days. Analyzing is difficult as it
requires deep understanding of the data and information. Therefore, it is understandable that we
would not simply comprehend it with just one discussion by the reporters. Afterall, learning is a
process that we are currently accomplishing with this topic. Generally, I appreciated their efforts
in explaining a tough lesson of finance.

•Financial Planning - forecasting of a business' future financing requirements

•Short-term Financial Plan - also known as operating financial plan; forecasting the financing
requirements within a year or less

•Long-term Financial Plan - also known as strategic financial plan; forecasting the financing
requirements 3-5 years down the road

Steps in Developing Long-term Plan:

a. Forecast your sales - understanding of the industry your business belongs to, knowing your
target market segment, and forecasting your market share in terms of sales.
*May increase based on the target increase in market share, or due to the increase of the market
itself.
*Increase sales = acquire more assets
● Capital Intensity Ratio - total assets
—————
total sales

b. Compute the dividend payout ratio and the plowback ratio

*Cash dividend amount should be divided by net income to get the dividend payout ratio
*If the business does not pay any dividend, it is equal to zero. The plowback ratio or retention
ratio is 100%
● Plowback Ratio - proportion of net income that does not get paid out in cash dividends

c. Identify your spontaneously-generated funds

*Spontaneous means "done naturally"; funds that come about as a result of normal business
operations.
*Increase sales → increase inventory → increase accounts payable → increase accrued wages →
increase accrued taxes

d. Use the percent of sales approach to prepare the pro forma financial statements
*This approach calls for dividing expenses, assets, and liabilities by the sales figure.
*Pro forma is a Latin word which means "as a matter of form" and is used to emphasize
projected figures.

e. Calculate your External Financing Need (EFN)

*EFN, also known as Additional Funds Needed (AFN) and Discretionary Financing Needs
(DFN), is the required additional financing, through the additional issuance of interest-bearing
debt and common stock, to acquire the needed assets.
→ To complete the process, add total liabilities to total owner's equity. This is also called
External Financing Needed (EFN)

The Budget Preparation:

•Cash Budget - also known as cash forecast; the primary tool in short-term financial planning; it
plots the business' projected cash inflow and outflow typically done monthly
It is divided into three parts:
1. Cash receipts
2. Cash disbursements
3. Excess cash balance/required total financing
Steps in Preparing the Cash Budget:
1. Forecast the business' monthly sales
2. Forecast the cash sales and the credit sales from the projected monthly sales
3. Take into account other cash receipts
4. Sum up the total cash receipts
5. Forecast the business' monthly purchases
6. Forecast the cash purchases and the credit sales from the projected monthly sales
7. Take into account the other cash disbursements
8. Sum up the total cash disbursements
9. Net cash flow = total cash - total cash disbursements
10. Ending cash balance = beginning cash balance + net cash flow
11. Ending cash balance - minimum cash balance
*Minimum cash balance (target cash balance) - minimum cash balance the business needs to
have on hand to conduct its day to day operations