BUSINESS FINANCE

WEEK LESSON #: 4

MS. JANE M. CARANGUIAN

REVIEW / RECALL
 WEEK LESSON #: 4
SOURCES AND USES OF
FUNDS
Creating a FINANCIAL PLAN helps you see the
big picture and set long and shot-term business
goals, a crucial step in mapping out your
financial future
 ILLUSTRATIVE FINANCIAL PLANNING
PROCESS

FINANCIAL PLAN IS EASY TO CREATE FOLLOWING

THE ILLUSTRATIVE PROCESS
STEP 1: CALCULATE SET-UP COST
Comparing your set-up costs or your start-up equity
investment.
Set-up costs for another operating period will include:
• Accounting fees
• Registrations and licenses or renewal
• Equipment and fit out
• Initial working capital
STEP 2: PROFIT AND LOSS FORECAST
TO PRODUCE IT:
• Compare potential sales revenue to cost of
goods sold and fixed costs of doing business.
• Calculate likely margins and put your pricing
model to the test.
STEP 3: CASH-FLOW FORECAST
YOU NEED TO BE AWARE THAT:
• New business and another operating period
often need cash to build the capacity
necessary to service customers.
• Customers maybe slow to pay
• The resulting cash-flow gap could leave you
vulnerable if you’re not prepared
STEP 4: BALANCE SHEET FORCAST
YOU SHOULD BASE IT ON:

• The purchase you anticipated in your set up

costs
• The results of your profit and loss forecast
STEP 5: BREAK-EVEN ANALYSIS
Commonly used approaches to predict what those
sales will be included:
• For a Service Business – set benchmark based on
the average numbers of hours worked per week.
• For Other Business – score the size of your market
• Prepare several forecast based on the best-case
and average scenarios.
• Document your assumptions and the reasons
behind them.
BUDGET AND BUDGET PREPARATION

BUDGET – the process of

creating a plan to spend
your name
WHT BUDGETING IS IMPORTANT?
It ensures that you will always have
enough money for the things you need
and the things that are important to
you.
TYPES OF BUDGETS FOR BUSINESS
• MASTER BUDGET – is an aggregate of a
company’s individual budgets designed to
present a complete picture of its financial
activity and health.
• OERATING BUDGET – is a forecast and analysis
and projected income and expenses over the
course of a specified time period.
Continuation:

• CASH FLOW- is a means of projecting how and

when cash comes in and flows out od a
business within a specified time period.
• SALES OF EXPECTED CASH COLLECTIONS –
from the customers shows the budgeted cash
collections on sales during a period.
• SALES BUDGET – is the first and basic
component of master budget and it shows the
expected number of sales units of a period
and the expected price per unit.
continuation

• PRODUCTION BUDGET – is a schedule

showing planned production in units which
must be made by a manufacturer during a
specific period to meet the expected demand
for sales and planned finished goods
inventory.
 Budgeted Income Statement Definition

Budgeted Income Statement – contains the line

items found in the normal income statement,
except that it is a projection of what is the
income statement will look like during future
budget periods.
Projected Balance Sheet – communicates
expected changes in future asset investments ,
outstanding liabilities, and equity financing.
-- referred to as PRO FORMA BALANCE SHEET,
lists specified account balances on a business’
assets , liabilities and equity for a specified
future time.
 WORKING CAPITAL (CONCEPT/TOOLS AND
MANAGEMENT)

WHAT IS WORKING CAPITAL?

Is a measure of both a company’s efficiency and
its short-term financial health.
It can be calculated as:
Working Capital = Current Assets- Current Liabilities

Ration between 1.2 and 2.0 is SUFFICIENT.(NETWORKING CAPITAL)

INTERPRETING WORKING CAPITAL
If the company is not operating in the most efficient
manner(slow collection); it will show up as an increase
in the working capital.
Things to remember about working capital ratios:
• If the ratio is less than one then they have negative
working capital
• A high Working Capital ratio isn’t always a good
thing, it could indicate that they have too much
inventory or they are not investing their excess cash.
WORKING CAPITAL MANAGEMENT
Refers to a company’s managerial accounting
strategy designed to monitor and utilize the two
components of working capital, current assets,
current liabilities to ensure the most financially
efficient operation of the company.
CONCEPTS of WORKING CAPITAL MANAGEMENT
INVOLVES:
• Monitoring cash flow
• Monitoring Assets
• Monitoring Liabilities
Through Ratio Analysis
of the key elements of Operating Expenses, including
the working capital Ratio, Collection Ratio, Inventory
Turn Over Ratio
ELEMENTS of WORKING CAPITAL MANAGEMENT
• WORKING CAPITAL RATIO – it considered a key
indicator of a company’s fundamental financial health
since it indicates the company’s ability to successfully
meet all its short term financial obligations.
• COLLECTION RATIO – is a principal measure of how
efficiently a company manages its accounts receivables.
• INVENTORY MANAGEMENT – to operate with
maximum efficiency and maintain a comfortably high level
of working capital, a company has to carefully balance
sufficient inventory on hand to meet customer’s needs
while avoiding unnecessary inventory that ties up working
capital for a long period of time before it is converted into
cash.
The working capital formula is:
Working capital = Current Assets – Current Liabilities
Below is an example balance sheet used to calculate working capital.
 
The formula looks like this: COLLECTION RATIO
***Days x Average Accounts Receivable / Net Credit Sales = Average Collection
Period Ratio
Example: Suppose Company A’s leadership wants to determine the average
collection period ratio for the last fiscal year. Their period is 365 days.
• They opened last year with $43,000 in accounts receivable. They closed the
year with $61,000. The total for the period is $104,000. The average is
$52,000, as the total is divided by two.
• Net credit sales were $500,000. Now Company A has all of the information
it needs to calculate the ratio.
• They’ll multiple 365 days by $52,000, to get $18,980,000. Next, they’ll
divide this number over $500,000, the net credit sales. This gives them
37.96, meaning it takes them, on average, almost 38 days to collect
accounts.
FEEDBACK
AND
QUESTION?
ACTIVITY :
• MAKE A SUMMARY OF THE
TODAY’S LESSON.

• MAKE A REFLECTION OF THE

TODAY’S LESSON.
• ANSWER IN A CLEAN PAPER
• SUBMISSION IS ON APRIL 11,
2021(5PM)
• SUBMIT OR SEND AT THE
COMMENT SECTION OF YOUR
FB PAGE TO WHERE THE
TOPIC POSTED.
 THANK YOU
AND
GOD BLESS EVERYONE!!!