Financial Planning

&
Tools in Managing
Cash, Receivables,
and Inventories
Objectives:

The learners will be able to:

1. Identify the steps in the financial planning process, illustrate the
formula and format for the preparation of budgets and projected
financial statement. 
2. Explain tools in managing cash, receivables, and inventory.    
What is • Planning is an important aspect of the
Planning? 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).
 • These are a set of goals that lay
out the overall direction of the
Long- company.
• A long-term financial plan is an
Term integrated strategy that considers
various departments such as
Financial sales, production, marketing, and
operations for the purpose of
Plan guiding these departments
towards strategic goals. (Gitman
& Zutter, 2012).
 • Specify short-term financial
actions and the anticipated impact
Short- of those actions. Part of short-
term financial plans include setting
term the sales forecast and other forms
of operating and financial data.
Financial This would then translate into
operating budgets, the cash
Plan budget, and pro forma financial
statements (Gitman & Zutter,
2012).
Steps in Financial
Planning Process
1. Set goals or objectives.

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 be while the mission statement states the
plans on how to achieve the vision.
Examples of a Company’s Vision-Mission
Statement
2. Identify Resources

Resources include production capacity, human

resources who will man the operations and financial
resources (Borja & Cayanan, 2015).
3. Identify goal-related tasks

For instance, your objective is to increase awareness

about smoking among youths. And so, your goal-
related task is to prepare an event to increase
awareness about smoking among youths or the Anti-
smoking campaign.
4. Establish responsibility centers for
accountability and timeline.

Division of people into different teams with specialization of tasks.

• Event Chairperson
• Budgeting Team
• Production Team
• Marketing Team
• Creatives Team
• Administrative Team
5. Establish the evaluation system for
monitoring and controlling

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.
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).
A plan is useless if it is not quantified. A quantified plan is
represented through budgets and projected or pro-forma
financial statements.

Measuring actual performance vis a vis the plans even at the

early start of the year allows the management to assess the
company’s performance and come up with remedial actions if
warranted (Cayanan, 2015).
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.
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.
External and internal factors influencing sale:

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.
External and internal factors influencing sale:

Competition (external)
If the competitor has a reputable brand
controlling a significant market share, its
presence may negatively affect the sales of the
rival's products.
External and internal factors influencing sale:

• Production Capacity and manpower (internal)

Having manpower with the right skills in the right
number for the various jobs in the organization.
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:
Required production in units = Expected Sales + Target Ending
Inventories - Beginning Inventories
Budgeting Cash

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.
Projected Financial Statements

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
Recall the steps in planning as follows:

• Set goals or objectives.

• Identify Resources.
• Identify goal-related tasks.
• Establish responsibility centers for accountability and timeline.
• Establish the evaluation system for monitoring and controlling.
• Determine contingency plans.
 Tools in Managing
Cash, Receivables, and
Inventories
Cash

Being the most liquid asset, cash is an important account in the balance
sheet that will affect the liquidity, and solvency of a company. It is also
the most vulnerable when it comes to theft.
• Good internal control must be properly implemented to safeguard this
asset:
• A basic internal control system entails the assignment of custodial function and
recording function to separate individuals, unless you are the owner.
Cash

• Cash collections should be supported by official receipts

which are summarized in a daily collection report.
• A good internal control over cash is by depositing all
collections intact. The daily collection reports are now
compared with the deposit slips to find out if all collections
are indeed deposited.
Cash

• If all collections need to be deposited, then payments must be made

through a check voucher system.
• For small payments like the fare given to a messenger, a petty cash
fund is used.
• The 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.
Motives for Holding Cash

• Primary Reasons
a. Transactional
b. Compensating balance
• Secondary Reasons
a. Precautionary
b. Speculative
Budgeting Cash

• The cash budget provides information regarding the

company’s expected cash receipts and disbursements over a
given period.
• It is useful for identifying future funding requirements or
excess cash within a given period.
Net Cash Flow, Ending Cash,
Financing, and 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.
Accounts Receivable

a. Accounts receivables spring out of the need to sell merchandise.

b. An excellent business proposition is to generate sales without
offering a credit facility to customers.
c. Credit management strategically defines the quality of account
receivables collection.
d. 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.
Accounts Receivable

• Credit policies are an integral part of the credit evaluation and there
are 5C’s used in credit evaluation. These are:
a. Character –the willingness of the borrower to repay the loan
b. Capacity – a customer’s ability to generate cash flows
c. Collateral – security pledged for payment of the loan
d. Capital – a customer’s financial resources
e. Condition – current economic or business conditions
Accounts Receivable

e. 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.
f. Aging of receivables is also a control measure to determine the amount of
receivables that are still outstanding and past due. lead to the sending of
statements
of account to customers on time.
g. 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.
Inventory Management

a. 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.
b. Proper inventory management involves the determination of
reasonable levels of inventories considering the size and nature of
business.
Inventory in A Manufacturing
Company

• In a manufacturing company, there are three types of inventory:

• - 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.
The ABC Analysis

• One way to control inventory is to classify inventory into a

classification system called ABC Analysis.
a. Inventories classified as “A” are high valued items which should
be safeguarded the most.
b. “B” items, on the other hand, are average-cost items that should
be safeguarded more than C items but not as much as A items.
c. While “C” items have low cost and is the least safeguarded.