CHAPTER III

FINANCIAL PLANNING: TOOLS & TECHNIQUES Financial Planning

refers to the process of determining the best uses of the financial resources of an organization to attain its predetermined objectives & the procurement of the required funds at the least cost. Corporate Planning a formal and systematic managerial process, organized by responsibility, time & information, to ensure that operational planning, project planning & strategic planning are carried out regularly to enable top management to direct & control the future of the enterprise. Strategic Planning the process of making decisions which will tend to optimize the organization s future position despite changes in future environment. Project Planning or Capital Expenditure Planning refers to working out the detailed execution of an action outside the scope of current operations such as acquisition of another company, a new plant, a new market or adoption of a new system. Budgeting is the process of translating a plan in quantitative terms, usually monetary. Objectives of Budgeting: 1. Planning 2. Coordination 3. Control Budgetary Control refers to the use of budgets and budgetary reports to coordinate, evaluate & control day-today operations to attain the goals specified by the budget. Master Budget the consolidation of all the budgets of the different sub-units (departments, branches, & sections) in an enterprise. It consists of the ff: I. Operating budgets or profit plan. II. Financial resources budgets III. Capital expenditures budget Time Periods in Cash Planning & Control 1. Operational 2. Short-term 3. Long-term Cash Budget shows the effect of management s plans on cash inflows & outflows. Sources of Capital: Equity Capital refers to the financial resources provided by owners of the business. (COH) cash on hand. Borrowed Capital capital acquired that gives rise to a liability (or debtor-creditor relationship). Ways of Borrowed Capital  Purchasing goods, property & equipment on account or charge basis  Obtaining loans from financial companies  Receiving advances from officers & affiliate companies.  Issuing commercial papers. (Promissory notes)  Discounting notes receivable.  Floating bonds Financial Leverage financial advantage derived from having additional funds considering the cost involved. Cost of Borrowed Capital: Cost of borrowed capital = Interest x (1 tax rate) Examples: ANSDOR Corp. obtained a 20%, 200,000, one-year loan from ABC Financing Company. Income tax rate is 35%. The cost of capital from this source is computed as follows: Cost of borrowed capital = 20% x (1 35%) = 13% Proof: Interest of 20% on 200,000 Tax benefit (35% of 40,000) Interest expense net of tax benefit Percentage ( 26,000/ 200,000) 40,000 14,000 26,000 13%