Chapter 6: Feasibility

Study
Financial Planning,
Forecasting and
Management
Presented by:
Prof. Rodel C. Mendoza, MBA
The Financial
Planning Process
- Is the process of controlling and managing the use of money to achieve personal
economic satisfaction and independence. Each person has his own unique
individual position and therefore would require financial activity.

The Financial Planning Process:

1. Assess you personal or current financial situation
2. Develop financial goals and objectives
3. Develop alternative courses of action
4. Evaluate possible alternatives
5. Create and follow financial plan
6. Re-evaluate and re-examine the plan
Master Budget
- Is a set of interconnected budget of sales, production cost, purchases, income, etc. and it also
includes proforma financial statements and serves as a plan of future financial transactions.

Components:
1. Sales Budget
2. Production Budget
3. Direct Material Purchases Budget
4. Direct Labor Budget
5. Overhead Budget
6. Selling and Administrative Expenses Budget
7. Cost of Goods Manufactured Budget
 Sales Budget

Year 1 Year 2 Year 3 Year 4

- Is the first and basic component of
Sales Units 1,320 954 1,103 1,766
master budget and it shows the
expected number of sales units of
Price per
unit
P91 P92 P97 P112 a period and the expected price
Total Sales P120,120 P87,768 P106,991 P197,792
per unit.
Company A – Forecasted Sales
Budget
For the year Ending December 30,
2017
 Production Budget
Year 1 Year 2 Year 3 Year 4
- Is a schedule showing planned production in units
Budgeted Sales 1,320 954 1,103 1,766 which must be made by a manufacturer during a
Units specific period to meet the expected demand for sales
and the planned finished goods inventory. The
+Planned 48 55 88 98 required production is determined by subtracting the
Ending Units beginning finished goods inventory from the sum of
expected sales and planned ending inventory of the
-Beginning 0 48 55 88 period.
Units Planned production in units formula
Planned 1,368 961 1136 1766 Expected sales in units + planned ending inventory in
Production in units – beginning inventory in units
Units Company A Forecasted Production Budget For the Year
Ending December 30, 2016
 Direct Material
Budgeted
Year 1

1334
Year 2

912
Year 3

1148
Year 4

1778
Purchase Budget
production in
units
- Shows budgeted beginning and
xDm Required 4.00 4.00 4.00 4.00 ending direct material inventory, the
per unit
quantity of direct material that will
Total DM 5336 3648 4592 7112 be used in production, the amount
Required
Production of direct material inventory, the
quantity of direct material that will
Beginning Direct
Material
-800 -547 --689 -1,068
be used in production, the amount
of direct material that must be
Cost per pound P3.10 P3.20 P3.50 P4.00
purchased and its cost during a
Cost of Materials 15757 12128 17398 28020 specific period.
Planned
Year 1
1334
Year 2
912
Year 3
1148
Year 4
1778
Direct Labor Budget
Production in
units

Direct labor 3.5 3.5 3.5 3.5 - Shows the total direct labor cost and
hours required
per unit
number of direct labor hours needed for
production. It helps the management to
plan its labor force requirements. Direct
Budgeted
Direct Labor
4669 3192 4018 6223 labor budget is a component of master
Hours Required budget. It is prepared after the
preparation of production budget because
the budgeted production in units figure
Cost per unit
Direct Labor
P4 P5 P5 P5
provided by the production budget serves
Hour as starting point in direct labor budget.
Budgeted 18676 15960 20090 31115
Direct Labor
Cost
Working Capital
Management
- Any firm employs short-term assets as well as short-term financing
sources to carry out its day to day business. The management of
both current assets as well as current assets as well as current
liabilities from current assets of a firm on the day the balance sheet
is drawn up.
Advantages:
1. Higher Return on Capital
2. Improved Credit Profile and Solvency
3. Higher Profitability
4. Higher Liquidity
5. Increased Business Value
6. Favorable financing conditions
7. Uninterrupted Production
8. Ability to face shocks and peak demand
9. Competitive advantage
Elements of Working
Capital Management
- Working capital management commonly
involves monitoring cash flows, assets and
liabilities through ratio analysis of key
elements of operating expenses, including the
working capital ratio, collection ratio and the
inventory turnover ratio. Management of
working capital includes management of
accounts receivables, inventory and accounts
payables.
a. Working Capital Ratio
b. Collection Ratio
c. Inventory Management
Objectives of Working
Capital Management
Maintaining Maintaining the working capital operating cycle and to ensure its
smooth operation.

Mitigating Mitigating the cost of capital

Maximising Maximising the return on current asset investment.

The Working Capital
Cycle
The working capital cycle refers to the
minimum amount of time which is
required to convert net current assets
and net current liabilities into cash.
• Cash – refers to the funds available for the
purchase of goods.
• Creditors and Debtors – the creditors refer to the
accounts payable. Debtors refer to the accounts
receivables.
• Inventory – inventory refers to the stock in hand.
Inventories are an integral component of working
capital and careful planning. a
Factors for determining the
amount of working capital needed

1. Nature of business
2. Size of business unit
3. Terms of purchase and terms of
sale
4. Turnover of inventories
5. Process of manufacture
6. Importance of labor
End of Session
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