CHAPTER 3:

Planning
and
Working Capital Management
 Is the process of making plans for something.
P
L
A MANAGEMENT PLANNING
N
N is the process of assessing an
I organization's goals and creating a
N realistic, detailed plan of action for
meeting those goals
G

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Steps in Planning:
The following steps can be followed in
planning.
1.) Set goals or objectives.
 Short Term Goals: For a year
 Medium Term Goals: Can be between one to three
years
 Long Term Goals: Can be five or 10 years or
even longer
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2.) Identify
Resources.
Resources include
production
capacity, human
resources who will
man the operations
and financial
resources.
 “
3.) Identify goal-
related tasks.
In this step,
management must
figure out how to 5
 already
4.)
identified to
Establish
responsibi achieve goals.
lity The next
centers important step to
for do is identify
accountabi which department
lity and
should be held
timeline.
accountable for 6
 5.) Establish an evaluation system for
monitoring and controlling.
◦ The management must establish
a mechanism which will allow
plans to be monitored.
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 ◦ In planning
6.)
Determine contingencies must
contingen to be considered
cy plans. as well.

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 ◦ A critical
aspect of
intervention
Budget planning
Preparat is preparing a
ion
budget of
income and
expenses. 9
 The most important
financial statement
account in
Sales forecasting is
Budget sales because all
other accounts in
the financial
statements are
affected by sales. 10
 External factors:
Gross domestic product (GDP) growth rate
Interest rate
Foreign exchange rate
Income tax rate
Inflation
Competition
Economic crisis
Regulatory environment
Political crisis
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 Internal factors
Pricing
Promotion activities
Distribution area/outlet coverage
Production capacity
Human resource
Management style of managers
Reputation
Network of the controlling stockholders
Financial resources of the company
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 A production budget is
a schedule which
Production provides information
Budget regarding the number
of units that should
be produced over a
given accounting
period based on
expected sales and 13
 DCD Company
Production Budget (In Units)
For the Year Ending December 31, 2015
Quarter
1 2 3 4 Year
Projected sales 20 000 22 000 25 000 30 000 97 000

Target level of ending inventories 3 000 3 500 5 000 3 500 3 500

Total 23 000 25 500 30 000 33 500 100 500

Less: beginning 2 500 3 000 3 500 5 000 2 500

inventories

Required production 20 500 22 500 26 500 28 500 98 000

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 ◦ An operating budget is the
Operati annual budget of an activity
stated in terms of Budget
ng Classification Code,
Budget functional/subfunctional
categories and cost accounts
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 A cash budget is an estimation
of the cash inflows and
Cash outflows for a business over a
specific period of time. This
Budget budget is used to assess
whether the entity has
sufficient cash to operate.
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STEPS IN PROJECTING
FINANCIAL STATEMENT

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 ◦ In making financial
statements, always start
with the statement of profit
1. FORECAST
SALES or loss and the most
important account to
forecast is sales.

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 ◦ For cost of sales, the
average cost of sales over
2. Forecast the historical data analyzed
cost of sales
can be used. If there are
and
operating plans to improve cost
expense efficiency, the such improve
cost efficiency can also be
considered.
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 ◦ To forecast net income, there
should be information on
3. Forecast income taxes and how much
net income financing cost a company will
and retained have. Financing costs will be
earnings
based on the amount of loans
the company has and the
payment terms for these loans.
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 4. Determine
balance sheet ◦ Balance sheet items that may
items that will
vary with sales
vary with sales or will be highly
or whose correlated with sales are cash
balances will be
accounts, accounts receivable,
highly
correlated with Inventories, accounts payable
sales
and accrued expenses payable.
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 ◦ Payment schedule for loans can
5. Determine be based on the disclosures
payment
provided in the notes to
schedules for
loans financial statements or the
plans of management on how
to pay the loans.
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 ◦ After assumptions are made to project
different balance sheet accounts, the
projected statements of financial
6. Determine position has to balance. The formula
external
for EFN is,
funds needed
(EFN)
EFN= Change in total assets – (change
in total liabilities + total change in
stockholder’s equity)
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7. Determine ◦ The management will
how decide how to finance it. It
external
funds needed can all be through debt or
will be equity or combination of
financed
both.

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 Working Capital Management
◦ Working capital management refers to a company's managerial
accounting strategy designed to monitor and utilize the two
components of working capital, current assets and current liabilities,
to ensure the most financially efficient operation of the company.
The primary purpose of working capital management is to make sure
the company always maintains sufficient cash flow to meet its short-
term operating costs and short-term debt obligations.
◦ Working Capital helps investors judge companies financial health and
future prospect

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 WORKING CAPITAL FINANCING POLICIES
3 Types of Working Capital Financing Policies Management

1.Maturity-matching working capital financing policy

2.Aggressive working capital financing policy
3.Conservative working capital financing policy

Working capital requirements change with the volume of

business operations. As the sales increase, working
capital requirements also increase.
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 Maturity-Matching Working Capital Financing
Policy
Based on maturity-matching working capital financing
policy, permanent working capital requirements should be
financed by short-term sources of financing. Long-term
sources of financing include long-term debt and equity such
as common stocks and preferred stocks. Short-term
sources include short-term loans from a bank. These short-
term loans from banks are called working capital loans
which perfectly described the reasons why these loans are
incurred.
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 Aggressive Working Capital Financing
Policy

Under aggressive working capital financing

policy, some of the permanent working capital
requirements are financed by short-term
sources of financing.

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 Conservative Working Capital
Financing Policy
Based on the conservative working capital financing
policy, some of the temporary working capital
requirements are financed by long-term sources of
financing.

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 ◦ Cash is the most liquid of
assets and is susceptible to
Managing of loss if not properly
Working controlled. Therefore, it is
Capital
extremely important all
Accounts
departments handling cash
implement and adhere to
strong internal controls.

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 Separating cashiering function from the recording
1
or accounting function.

Internal Separate cash handling

duties among different
controls people. With proper
over cash separation of duties, no
single person has control
over the entire cash process.

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 Issuing official receipts for collections and
2
summarizing collections in a daily collection report

Cash accountability ensures

Internal that cash is accounted for,
controls properly documented and
over cash secured, and traceable to
specific cash handlers.

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 3 Depositing collections

Internal Departments receiving cash

every day should make daily
controls deposits.
over cash

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 4 Adopting the check voucher system for payments.

Internal Vouchers not only create an

efficient system for making
controls cash payments but also
over cash provide for critical aspects
of internal control.

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 ◦ Petty cash voucher controls
Petty Cash ensure no payments exceeding
Payment a predetermined amount can be
made from the petty cash fund.

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THANK
YOU