Financial Planning

Planning

• is an important aspect of the 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).
Financial planning -

• It is the process of formulating financial policies, procedures, and

budget forecasting in managing financial plans.
2 Phases of Financial Planning

• Long-term plan or strategic plan - set of goals that design the overall
direction of the company. It is an integrated strategy for strategic
goals.
• Short-term plan or tactical plan - a process of setting specific
strategies in a closer time frame that will ultimately reach overall
goals.
Long-term financial plans
• These are a set of goals that lay out the overall direction of the company.
• A long-term financial plan is an integrated strategy that takes into account various
departments such as sales, production, marketing, and operations for the purpose of
guiding these departments towards strategic goals.
• Those long-term plans consider proposed outlays for fixed assets, research and
development activities, marketing and product development actions, capital structure,
and major sources of financing.
• Also included would be termination of existing projects, product lines, or lines of
business; repayment or retirement of outstanding debts; and any planned
acquisitions(Gitman & Zutter, 2012).
Short-term financial plans
• Specify short-term financial actions and the anticipated impact of those actions. Part
of short-term financial plans include setting the sales forecast and other forms of
operating and financial data. This would then translate into operating budgets, the
cash budget, and pro forma financial statements (Gitman & Zutter, 2012).
• For the purpose of this topic, emphasis will be made on short-term financial planning.
The Importance of Financial Planning

To ensure adequate funds.

Help in making growth and expansion program which will aid the
long-run survival of the company.
Assures the suppliers of funds that their investments are well
managed.
Maintain a secure balance between outflow and inflow of funds for
stability.
Steps in the Financial Planning Process
1. Setting goals or objectives. Goal setting is a process that starts with careful
consideration of what you want to achieve and ends with a lot of hard work
to accomplish it. In setting goals, you have to identify the long-term and
short-term plans in order to achieve your mission and vision.
• 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
statements are as follows:
• Jollibee Foods Corporation (JFC)
• Vision: To excel in providing great tasting food that meets local preferences
better than anyone; To become one of the three largest and most profitable
restaurant companies in the world by 2020.
• Mission: To serve great tasting food, bringing the joy of eating to everyone.
Examples of a company’s Vision-Mission
statements are as follows:
• McDonalds Philippines
• Vision: First to respond to the fast changing needs of the Filipino family;
First choice when it comes to food and dining experience; First mention as
the ideal employer and socially responsible company; First to respond to
the changing lifestyle of the Filipino family
• Mission: To serve the Filipino community by providing great-tasting food
and the most relevant customer delight experience.
Steps in the Financial Planning Process
2. Identify resources. Resources include production capacity, human resources
who will man the operations, and financial resources (Borja & Cayanan,
2015).
• Resources include production capacity, human resources who will man the operations and
financial resources
Steps in the Financial Planning Process
3. Identify goal-related tasks – In this step, management should focus on
completing a task in order to achieve planned objectives. Task-driven or
results-driven uses targets to stay motivated in their work.
4. Establish responsibility centers for accountability and timeline. If the task is
already identified, the next step is to identify which department should be
held accountable. For example, if your goal is to achieve a 30% increase in
sales, this should be the responsibility of the head of the sales and marketing
department and there should also be other departments who should take
5. responsibility for achieving the goal.
Steps in the Financial Planning Process
5. Establish the evaluation system for monitoring and controlling. In financial
planning, the management must establish a monitoring and controlling
evaluation system so that there is a clear plan for the program or activity. It
will help the staffs decide how they are going to track and analyze data.
Quantified plans on budget and projected financial statements should also be
done.
• 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.
The management will then compare the actual results to the planned
budgets and projected financial statements. Any deviations from the
budgets should be investigated.
Steps in the Financial Planning Process
6. Determine the contingency plan. A contingency plan is often referred to as
Plan B because it can be used as an assumption for an unexpected result.
Determining a contingency plan helps an organization respond effectively to
a future event or situation that may or may not occur.
• 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).
Characteristics of an Effective Plan.
• In planning, the goal of maximizing shareholders’ wealth must
always be put in mind.
• The following criteria may be used for effective planning:
• Specific – target a specific area for improvement.
• Measurable – quantify or at least suggest an indicator of progress.
• Assignable – specify who will do it.
• Realistic – state what results can realistically be achieved, given available
resources.
• Time-related – specify when the result(s) can be achieved.
Budgeting and
Forecasting
Financial
Budget

• is an amount of money available for spending based on a plan and

for how it will be spent. It serves as a tool for planning and
controlling.
Types of Budget
• Sales Budget is the most important financial statement account in forecasting.
It is a financial plan that shows how the resources should be allocated to
achieve forecasted sales. It contains an itemization of a company’s sales
expectations for the budget period.
• Given the importance
of the sales forecast,
the financial manager
must be able to support
this figure with
reasonable
assumptions. The
following external and
internal factors should
be considered in
forecasting 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. A low GDP rate
coupled by a high inflation rate means that consumers are spending less on
their purchases of goods and services. This means that we should not
forecast high sales of the periods of low GDP
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. Consumer trends are always changing, thus the industry should be
competitive to be able to appeal to more customers and stay in the market
External and Internal Factors Influencing Sale

• Competition (external)
• Suppose you are selling bread and you know that each person in your community
eats an average of one loaf of bread a day. The population of your community is
500 people. If you are the only person selling bread in your town, then your sales
forecast is 500 units of bread. However, you also have to take account your
competition. What if there are 4 other sellers of bread? You will need to have to
divide the sales between the 5 of you. Does this mean your new forecast should be
100 units of bread? Not necessary. You should also know the preference of your
consumers. If more of them would prefer to buy more bread from you, then you
should increase your sales forecast.
External and Internal Factors Influencing Sale

• Production Capacity and manpower (internal)

macroeconomic factors and identified that
• Suppose that you have already evaluated the
there is a very strong market for your product and consumers are very likely to
buy from you. You forecasted that you will be able to sell 1,000 units of your
product. However, you only have 20 employees who are able to produce 20 units
each. Your capacity cannot cover your expected demand hence, you are limited by
it. To be able to increase capacity, you should be able to expand your operations
Example:
Types of Budget
• 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:
Example:
• KGE Company plans to produce plastic bottle for the year, the
production needs as follows:
Types of Budget

• Projected Collection refers to the calculation of expected cash collections

based on the total sales figure obtained from the sales budget. The management
estimates the proportion in which sales are expected to be collected in the
current and following periods. This is used to determine how much sales are
expected to be collected during a period.
Types of Budget
• 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
Types of Budget
• Budgeting Cash
• Cash Budget
• Recall from the start of the term the exercise you did where the learners were asked
how much allowance they were given and how much expenses they would incur in a
day. Recall that at the end of the activity, they were able to identify whether they had
excess cash or they had a deficit.
• Relate that this is what the cash budget aims to do.
• 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.
• The cash budget, or cash forecast, is a statement of the firm’s planned inflows and outflows
of cash. It is used by the firm to estimate its short-term cash requirements, with particular
attention being paid to planning for surplus cash and for cash shortages
The following are the steps in formulating a cash
budget:
• A. Form the sales forecast, identify how much would be collected in
the cash budget period. Sales may be made in cash or for credit.
Cash sales are translated to cash at the point of sale while credit
sales are collected depending on the credit period. Credit periods
may range from 10 days to more than a month depending on the
strategy of the company.
The following are the Steps in Formulating
Budget
• 1. Obtaining Estimates
• 2. Coordinating Estimates
• 3. Communicating Budget
• 4. Implementing the Budget Plan
• 5. Reporting Interim Progress towards Budgeted Objectives
Projected Financial Statement
• 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. Forecast or calculate the following reports:
• Projected Income Statement
• Projected Statement of Financial Position
• Projected Cash Flow Statements
Projected Income Statement

• is an estimate of the financial results you’ll see from your business

in a future period of time. It is often presented in the form of an
income statement.
Example
Projected Statement of Financial Position

• Refers to the informed projection of its business’s assets, liabilities,

and capital. It allows businesses to see what they’re likely to own
and owe at a future date, which can help them plan for future
purchases and other important business decisions. Businesses
examine past financial statements and use that historical data to
make projections about their future capital assets, debt, and equity.
Example:
• Steps in Projecting Statement of Financial Position:
1. Format your Financial Position
2. Enter Starting Balances
3. How Sales Impact the Balance Sheet
4. How Expenses Impact the Balance Sheet
5. How does a New Loan Impact the Balance Sheet
Projected Cash Flow Statements
• refer to estimate the amount of cash flowing into and out of your
company for a specific future period. A pro forma cash flow
statement can help you identify where your business may experience
cash shortfalls in the future, so you can plan accordingly to offset
lean times.
Example
• The financial statement method will be used in projecting financial
statement. The following are the steps in making financial
projections:
a. Forecast sales. In making financial projections, always begin with the statement
of profit or loss and the most vital account to forecast is sales.
b. Forecast cost of sales and operating expenses. For the cost of sales, the average
cost of sales over the historical data analyzed can be used.
c. Forecast net income and retained earnings. To forecast net income, there
should be information on income taxes and how much financing cost a
company will have. Financing costs will be based on the amount of loan
that a company has.
d. Determine balance sheet items that will vary with sales or whose balances
will be correlated with sales. Sales, cash, accounts receivable,
inventories, accounts payable, and accrued expenses payable are the
balance sheet items that may vary with sales.
e. Determine the payment schedule for loans. The payment schedule for
loans can be based on the disclosures provided in the notes of the
financial statement.
f. Determine the external funds needed. The Balance Sheet has to be
balanced. After assumptions are made the projected statement of financial
position has to be balanced.
g. Determine how external funds will be financed. Once EFN, is computed,
the management decides how to finance it either debt or equity, or a
combination of debt and equity

The formula for EFN is: EFN = Change in Total Assets – (Change in Total
Liabilities + Total Change in Stockholders’ Equity). If the EFN is on the
liabilities and stockholders’ equity section and the amount is positive, there
will be additional financing. However, if the amount is negative there will be
excess cash.