PLANNIN

G
DECISIO
NS
SHORT TERM OPERATING DECISIONS

• Operational decisions are short-term decisions that are made generally

weekly, daily, or hourly, focusing mainly on the details of operations,
day-to-day resource allocation, details of inventory control, and delivery
routing, to ensure the efficiency of operations and an optimized flow of
products along the biomass-based production chains. Operational
decisions can be revised and adjusted frequently, due to the dynamic
structure of internal and external conditions of supply chains and
associated activities

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 STEPS IN SHORT TERM DECISION
PROCESS
Identify alternative courses of
Define the goal
action

Gather and analyze information Choose the best alternative

Implement the alternative

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 OPERATIONAL PLAN

An operational plan is a practical document which

outlines the key activities and targets an organization will
undertake during a period of time, usually one year.  It is
often linked to funding agreements as well as being linked
overall to the organization's strategic plan.

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Advantages of 0perational Plan
• A benefit of operational planning is that a company
is able to analyze the effect of its operations on
 profit.
• Operational planning dissects a company’s
financial position, identifies weaknesses and
develops ways to increase profits.
• It provides the framework for an organization's day-
to-day operations.
• Operational plans bring accountability into daily
tasks.
• By having a operational plan it create impacts for
the performance of your business
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Operational planning – 5 key things you need to consider to do it well

1. Preparation

2. Grain and livestock marketing

3. Logistics

4. Human Resources (HR)

5. Financial limits
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CASH BUDGET

A cash budget is a document produced to help a business

manage their cash flow. A cash budget is prepared in advance
and shows all the planned monthly cash incomings (receipts) and
any planned cash outgoings (payments)
A cash budget is an estimation of the cash flows of a business
over a specific period of time. This could be for a weekly,
monthly, quarterly, or annual budget.
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BENEFITS OF CASH BUDGET

• It can identify any times where there may be a shortage of cash

and arrange extra funding such as a bank overdraft.
• It can help to regulate expenses. Any months where expenses are
high will be highlighted by a cash budget.
• It will clearly show where a business has more cash than
expected (surplus) or less cash than expected (deficit).

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 Cash budget for Jill'’'s beauty
salon for January - March

January February March

Opening balance 4, 000 2, 500 200

Receipts
Sales 3, 000 3, 000 4, 000
Subtotal 7, 000 5, 500 4, 200

Payments
Purchases 1, 000 800 800
Electricity 500 500 500
Rent 1, 000 1, 000 1, 000
Wages 2, 000 3, 000 2, 000
Subtotal 4, 500 5, 300 4, 300

Closing
9 balance 2, 500 200 -100
PRO-FORMA INCOME STATEMENTS

• Pro-forma, a Latin term that means “ for the sake of

form” or “as a matter of form”, is a method of calculating
financial results using certain projections or presumptions.
• A pro forma income statement is a document that shows
a business adjusted income if certain financial inputs were
removed. Also known as a profit and loss statement, this
accounting document shows sales transactions and
expenses, as well as the cost of goods or services sold and
projected net income and profit.

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 POSSIBLE OPERATING
RESULTS OF THE
BUSINESS

PROFIT LOSS

BREAK EVEN
SALES
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 ELEMENTS OF INCOME
STATEMENT

INCOME EXPENSES

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 It helps business owners
decide whether they can
generate profit by increasing
Importance of an
revenues, decreasing costs, income statement
or both. It also shows the
effectiveness of the strategies
that the business set at the
beginning of a financial
period.
FOLLOWING ARE THE FEW OTHER THINGS THAT AN INCOME STATEMENT INFORMS.

Frequent reports
While other financial statements are published annually, the
income statement is generated either quarterly or monthly.  

Pinpointing expenses
  This statement highlights the future expenses or any unexpected
expenditures which are incurred by the company, and any areas
which are over or under budget. Expenses include building rent,
salaries and other overhead costs.
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FOLLOWING ARE THE FEW OTHER THINGS THAT AN INCOME STATEMENT INFORMS.

Overall analysis of the company

This statement gives investors an overview of the business in
which they are planning to invest. 

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 Who uses an income statement?
• There are two main groups of people who use this financial
statement: internal and external users.
 
• Internal users include company management and the board
of directors, who use this information to analyze the business’s
standing and make decisions in order to turn a profit. They can
also act on any concerns regarding cash flow. 

• External users comprise investors, creditors, and competitors.

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 Income statement format with the major components:
• Revenue or sales
This is the first section on the income statement, and it gives you a
summary of gross sales made by the company. Revenue can be classified
into two types: operating and non-operating. 

Operating revenue: Refers to the revenue gained by a company by

performing primary activities like manufacturing a product or
providing a service.

Non-operating revenue: Revenue is gained by performing non-

core business activities such as installation, operation, or
17 maintenance of a system.
 Income statement format with the major components:
• Cost of goods sold (COGS)
This is the total cost of sales or services, also referred to as the cost
incurred to manufacture goods or services.
• Gross profit
Gross profit is defined as net sales minus the total cost of goods sold in
your business. Net sales is the amount of money you brought in for the goods
sold.
• Gains
Gain is a result of a positive event that causes an organization’s income to
increase.  Gains indicate the amount of money realized by the company from
various business activities like the sale of an operating segment.
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 Income statement format with the major components:
• Expenses
Expenses are the costs that the company has to pay in order to generate
revenue. Some examples of common expenses are equipment depreciation,
employee wages, and supplier payments.  There are two main categories for
business expenses: operating and non-operating expenses.
Operating expenses: Expenses generated by the company’s core business activities.
Non-operating expenses: the ones which are not generated by core business
activities.
• Advertising expenses
 These expenses are simply the marketing costs required to expand the client
base. 
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 Income statement format with the major components:

• Administrative expenses
 It can be defined as the expenditure incurred by a business
or company as a whole rather than being the ones associated
with specific departments of the same company. 
• Depreciation
Depreciation refers to the practice of distributing the cost
of a long-term asset over its life span. 

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 Income statement format with the major components:
• Earnings before tax (EBT)
 This is a measure of a company’s financial performance.
EBT is calculated by subtracting expenses from
income, before taxes.
• Net income
Net profit can be defined as the amount of money you
earn after deducting allowable business expenses. It is
calculated by subtracting total expenses from total
revenue.
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 TWO STEPS OF INCOME STATEMENT
Multiple-Step
Single- Step ( Service Type)
( Manufacturing)

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THE INCOME STATEMENT CAN ALSO BE VISUALIZED BY THE
FORMULA:
REVENUE – EXPENSES = NET INCOME (PROFIT/LOSS).
PRO-FORMA BALANCE SHEET

The pro-forma balance sheet looks at a forecast after a

change, like financing or acquisition. It includes assets and
liabilities, as well as accounts receivable, cash equivalents,
account payable, and inventories.

What is the difference between pro-forma income statement and balance sheet?

The balance sheet reports assets, liabilities, and equity, while the income statement
reports revenues and expenses that net to a profit or loss. The income statement also
notes any tax expense, while the balance sheet contains any unpaid tax liabilities.
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 ELEMENTS OF
BALANCE SHEET

ASSETS
_ LIABILITIE
S

=
OWNER’S EQUITY

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EXAMPLE OF
BALANCE SHEET

2,000

7,600
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64,300
 It is important because pro
forma balance sheet is a
tabulation of future
projection and it can help
your business manage your
Why pro-forma
assets now for the better
results in the future. It can
balance sheet is
assure that there are no
surprises in the future when
important?
it comes to paying your bills
getting return on investors
and keeping your inventories
in stock.
LONG-TERM (STRATEGIC) DECISIONS

Strategic decisions are those that concern the entire

environment in which the firm operates, the entire resources and
the people who comprise the company, as well as the interface
between the two.

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CHARACTERISTICS/ FEATURES OF STRATEGIC DECISIONS

• Strategic decisions have significant resource implications for an

organization
• Strategic decisions are concerned with aligning organizational resource
capabilities
• Strategic decisions are concerned with a wide range of organizational
activities
• Strategic decisions entail a significant change
• Strategic decisions are difficult to make
• Strategic decisions are made at the highest level, are uncertain because
they deal
with the future, and are fraught with danger
• Administrative and operational decisions are not the same as strategic
decisions
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THE DIFFERENCES BETWEEN STRATEGIC, ADMINISTRATIVE, AND OPERATIONAL DECISIONS

Strategic Decisions Administrative Decisions Operational Decisions

Long-term decisions Taken daily Not frequently taken

Considered where the future Short-term based Medium-period based

planning is concerned
Taken in accordance with Taken according to strategic and Taken in accordance with strategic
organizational mission and vision operational decisions and administrative decisions

Are related to overall counter Are related to working of Are related to production
planning of all organization employees in an organization
Deals with organizational growth Are in welfare of employees Are related to production and
working in an organization factory growth
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• Long-Term Sources of Fin
ance
• Medium Term Sources of
Finance
• Short Term Sources of Fin
Sources of Finance
ance
• Owned Capital
• Borrowed Capital
• Internal Sources
• External Sources
LONG-TERM SOURCES OF FINANCE
Long term finance means capital requirements for a period of more than 5 years to
10, 15, 20 years or maybe more depending on other factors. Capital expenditures in
fixed assets like plant and machinery, land and building, etc of business are funded
using long-term sources of finance. Long-term financing sources can be in the form of
any of them:

Share Capital or Equity Share

 Preference Capital or Preference Share
 Retained Earnings or Internal Accruals
 Debenture/bonds
 Term loans from Financial Institutes, Government, and Commercial Banks
 Venture Funding
 Asset Securitization
 International Financing by way ofEuro issue, Foreign Currency Loans, ADR, GDR,
etc.
 
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MEDIUM TERM SOURCES OF FINANCE

  Medium term financing means financing for a period of 3 to 5 years and is used
generally for two reasons. One, when long-term capital is not available for the time
being and second when deferred revenue expenditures like advertisements are
made which are to be written off over a period of 3 to 5 years. Medium term
financing sources can in the form of one of them:

 Preference Capital or Preference Shares

 Debenture / Bonds
 Medium Term Loans from
 Financial Institutes
 Government, and
 Commercial Banks
 Lease Finance
 Hire Purchase Finance
 

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SHORT TERM SOURCES OF FINANCE

 
 
Short term financing means financing for a period of less than 1 year. The need for
short-term finance arises to finance the current assets of a business like an inventory
of raw material and finished goods, debtors, minimum cash and bank balance etc.
Short-term financing is also named as working capital financing.

Short-term finances are available in the form of:

 Trade Credit
 Short Term Loans like Working Capital Loans from Commercial Banks
 Fixed Deposits for a period of 1 year or less
 Advances received from customers
 Creditors
 Payables
 Factoring Services
 Bill Discounting etc.
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OW NED CAPIT AL

 
 
Owned
. capital also refers to equity. It is sourced from promoters of the
company or from the general public by issuing new equity shares. Promoters
start the business by bringing in the required money for a startup. Following
are the sources of Owned Capital:

 Equity
 Preference
 Retained Earnings
 Convertible Debentures
 Venture Fund or Private Equity
 

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Borrowed Capital
 

Borrowed or debt capital is the finance arranged from outside sources.

These sources of debt financing include the following:

 Financial institutions,
 Commercial banks or
 The general public in case of debentures

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INTERNAL SOURCES AND EXTERNAL SOURCES
 

The
   internal source of capital is the one which is generated internally by the business.
These are as follows:

 Retained profits
 Reduction or controlling of working capital
 Sale of assets

An external source of finance is the capital generated from outside the business. Apart
from the internal sources of funds, all the sources are external sources.

• Equity
• Debt or Debt from Banks
• All others except mentioned in Internal Sources

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 Is the effective interest rate
that a company pays on its
debts, such as bonds and
loans. The cost of debt can
refer to the before-tax cost of What is the cost of
debt, which is the company’s
cost of debt before taking long-term debt?
taxes into account, or the
after-tax cost of debt. The
key difference in the cost of
debt before and after taxes
lies in the fact that interest
expenses are tax-deductible.
HOW THE COST OF LONG-TERM DEBT
WORKS?
 

  Debt is one part of a company’s capital structure, which also includes

equity. Capital structure deals with how a firm finances its overall
operations and growth through different sources of funds, which may
include debt such as bonds or loans.

The cost of long-term debt measure is helpful in understanding the

overall rate being paid by a company to use these types of debt
financing. The measure can also give investors an idea of the
company’s risk level compared to others because riskier companies
generally have a higher cost of debt.
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COST OF EQUITY CAPITAL

The cost of equity share capital maybe explained as the “minimum rate of
return, a company is required to earn on the part of equity financed to its
investment in such a manner that the market value of its stock remains
unaffected”

This can be calculated by applying following methodology/formulae:

Dividend Yield Method
Dividend yield plus growth in dividend method
Earning yield method
Earning growth method
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DIVIDEND YIELD METHOD

It is also known as dividend-price ratio and is calculated by dividing ‘

dividend per share’ by ‘price per share’. It can also be obtained by dividing ‘total
dividend payment by a company in a year’ by its ‘market capitalization’ provided
there is no change in the number of share. It is indicated as a percentage.
FORMULA:

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 EXAMPLE:

A company issues 1000 equity share of ₱100 each at a premium of 10%. The
company has been paying 20% dividend to equity shareholders and also expecting
to keep same performance in future years. Compute the cost of equity capital will
it make any difference if the market price of equity share is ₱160

SOLUTIONS:

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  DIVIDEND YIELD PLUS GROWTH IN DIVINDEND METHOD

The basis of this method is the presumption of a situation. In which there is a

growth of a company and also the market value of its share shows an increasing
trend. Under such situation, the shareholders expectations would be more than
simply dividends , they may like to have a part of the additional profit earned by
the company. It maybe calculated by using following formula.
FORMULA:

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 EXAMPLE:

The current market price of an equity share of a company is ₱90 the current
dividend per share is ₱4.50. the expected growth rate of dividend is 7%. Calculate
the cost of equity capital.

SOLUTIONS:

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 EARNING YIELD METHOD

Under the Earning Yield Method, the minimum rate of return required to be earned
on the market price of a share is the cost of equity capital.

FORMULA:

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 EXAMPLE:

A company shares are currently trading at a price of ₱70 with 500,000 outstanding
shares. Their expected profit after tax for the coming year is ₱8,400,000. Calculate
the cost of equity capital as per earning yield method.

SOLUTIONS:

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 EARNING GROWTH METHOD

Under this method, the cost of existing share capital is calculated by replacing the
Net Proceeds with Market Price and adding Growth Rate in Earning as under:

FORMULA:

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 EXAMPLE:

The current price of an equity share of ₱10 is quoted in the market at ₱20. The
earning per share is ₱3. Growth rate in earning is given to be 10% p.a Calculate
the cost of equity capital based on earning growth model.

SOLUTIONS:

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