Business Finance

Weeks 3-4
Prayer
Attendance
Activity- What Will I Do?
1. If you won the lottery amounting to P20M, what would you do with the money?
2. Give 3 decisions that you will make after claiming the money
3. Use a decision making process sheet
Planning
 The guide by which
1. the organization obtains and commits the resources required to reach its objectives
2. Members of the organization carry on activities consistent with the chosen objectives and
procedures
3. Progress towards the objectives is monitored and measured so that corrective action can be
taken if progress is unsatisfactory
Planning con’t

May be broken
setting the goals of the
down into long-
organization and identifying
term plans and
ways to achieve them
short-term plans
Long-term Plan
 Reflected in a company’s business strategy
 In the process of planning, resources have to be identified
 These sources include: manpower resources, production capacity and financial resources
 Once a plan is set, it has to be quantified
 A plan that is not quantified is useless because
there will be no basis for monitoring
performance, no way of gauging success
Quantified Plans

 In the form of budgets and projected financial

statements
 These budgets and projected financial statements
are then compared with the actual performance
Controlling

• Controlling function comes into play when

budgets and projected financial statements are
compared with the actual performances
• It doesn’t mean that if the actual performance
falls short of the budgets or of the projections,the
management is not doing its function
 Reasons have to be identified for the shortfalls so that corrective measures can be made.
 The analysis will show whether the reasons for not meeting the projections are due to
management incompetence or factors outside its control
 Controlling goes beyond comparing plans with actual performance, but it takes off from
PLANNING
To be effective, controlling must include a reward system for those who deliver and a penalty for
those who do not deliver, whose reasons for failing to meet objectives are within their control
Question??
How do we plan?
How do you prepare for something that you want to achieve?
Steps in Planning
1. Set goals or objectives
2. Identify resources
3. Identify-goal related tasks
4. Establish responsibility centers for accountability and timeline
5. Establish an evaluation system for monitoring and controlling
6. Determine contingency plan
Budget Preparation
1. Sales Budget
2. Production Budget
3. Operating budget
4. Cash budget
Sales Budget
 The most important financial statement account in forecasting is SALES because almost all
other accounts in the financial statements are affected by sales
 If you analyze the statement of profit or loss, the account such as cost of sales, gross profit
and variable operating expense are based on the sales figure
 To a large extend, depreciation expense and income tax expense are also based in sales
 The decision of management to expand production capacity is based on projected increase in
sales
 With the expansion in capacity comes higher depreciation expense
 Higher income tax expense is expected with higher sales, assuming that most of the operating
expenses and cost of sales will remain unchanged as a percentage of sales
 Looking at the accounts in the statement of financial position, almost all of them are also
correlated with sales
 The amount of cash that the company maintains: A/R and Inventories, PPE, and trade
payables are affected by sales
 Given the importance of sales forecast, attention must be given to it and must be supported
reasonable assumptions
 To have a set of reasonable assumptions on sales, there must be a good understanding of the
industry where the company operates, enough historical financial data to establish trend and
knowledge about corporate plans such as expansion of product offerings or expansion into
other geographical areas
 In preparing sales budget, external and internal factors have to be considered:
External factors factors:
 GDP growth rate -competition
 Interest rate -economic crisis
 Foreign exchange rate -regulatory environment
 Income tax rate -political crisis
 Inflation

Ex. A depreciating local currency is not welcomed by a company which relies heavily on
imported materials for its production
Internal factors
 Pricing -reputation and network
 Promotion activities
 distribution,
 area/outlet coverage
 Production capacity
 Human resources
 Management styles
Production Budget
Production budget is the schedule which 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
Required Production in Units= Expected Sales
+ Target Ending Inventories
-Beginning Inventories
Projected Financial Statements
1. Forecast Sales-always start with the statement of profit and loss and the most important
account to forecast first is SALES
2. Forecast of cost of sales and operating expenses- For the cost of sales, the average cost of
sales over the historical data analyzed. If there are plans to improve cost efficiency, then
such improved cost efficiency can also be considered
For example, if the average cost of sales for the past five years is 60% but the management feels
that given their plans to improve production efficiency, cost of sales can be reduced to 58%. In
the projection, this 58% cost of sales percentage can be used
Question??
Why is sales the most important financial statement account in forecasting?
Activity
1. Prepare a sales forecast (sales Budget)