FINANCIAL

PLANNING
TOOLS &
CONCEPTS
Importance of
Planning
How will I
see myself 5
years from
now?
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).
 2 Phases of Financial
Planning

 Long-term
 Short-term
Long-term financial plans
- 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.
.
- 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 proforma financial
statements (Gitman & Zutter, 2012).
 Long-Term Short-Term
Planning Planning
Persons More participation from Top management is still involved but there
Involved top is more participation from lower level
management managers (production, marketing,
personnel, finance and plant facilities)
because their inputs are crucial at this
stage since they are the ones
who implement these plans
Time Period 2 to 10 years 1 year or less

Level of Less More

Detail
Focus Direction of the company Everyday functioning of the company
Financial Planning Process

1. Set goals or objectives.

• For corporations, long term and short

term objectives are usually
identified.
2. Identify Resources

• Resources include production

capacity, human resources who
will man the operations and
financial resources (Borja &
Cayanan, 2015).
3. Identify goal-related tasks

4. Establish responsibility centers

for accountability and timeline.
5. Establish the evaluation system for
monitoring and controlling

• 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.
6. Determine contingency plans
• 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
• 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 results can be
achieved.
Budgeting
1. Sales Budget
External Internal

• Gross Domestic Product • production capacity

(GDP) growth rate • man power requirements
• Inflation • management style of
• Interest Rate managers
• Foreign Exchange Rate • reputation and network of
• Income Tax Rates the controlling stockholders
• Developments in the • financial resources of the
industry company
• Competition
• Economic Crisis
• Regulatory Environment
• Political Crisis
 • Macroeconomic Variables
(external)

Macroeconomic variables such as the

GDP rate, inflation rate, and interest rates,
among others play an important role in
forecasting sales
 • 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.
 • Competition (external)

• Production Capacity and

man power (internal)
 2. Production Budget
Required production in units = Expected Sales + Target
Ending Inventories - Beginning Inventories
Example:
-[A] Company forecasts sales in units for January to May
as follows:
Jan Feb Mar Apr May
Units 2000 2200 2500 2800 3000
- Moreover, [A] Company would like to maintain 100
units in its ending inventory at the end of each month.
- Beginning inventory at the start of January amounts to 50
units.
- How many units should [A] Company produce in order
to fulfill the expected sales of the company?
 3. Operations Budget
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
 4. Cash Budget
• General form of the Cash Budget:
CASH BUDGET
Jan Feb … Nov Dec Total
Cash Receipts xxx xxx … xxx xxx xxx
Less: Cash Disbursements xxx xxx … xxx xxx xxx
Net Cash Flow xxx xxx … xxx xxx xxx
Add: Beginning Cash xxx xxx … xxx xxx xxx
Ending Cash xxx xxx … xxx xxx xxx
Required Ending Cash xxx xxx … xxx xxx xxx
Balance
Required Total Financing (xxx) … (xxx)
Excess Cash Balance xxx … xxx xxx
 Motives For Holding Cash

Primary Reasons
1. Transactional. This is the cash used for
paying expenses such as salaries, utilities,
rent and taxes, among others.
2. Compensating balance. This is the cash held
to meet bank requirements such as the
minimum cash balance you maintain for
checking accounts and if you have existing
loans, banks may also require a minimum
amount of deposit with them.
Motives For Holding Cash

Secondary Reasons
1. Precautionary. This is the cash
maintained for emergencies such as the
additional cash you keep during political
and economic uncertainties.
2. Speculative. This refers to the cash held
by the company to take advantage of
opportunities
 The Cash Budget
 The cash budget provides information regarding the
company’s expected cash receipts and disbursements over
a given period.
 It is useful for identifying future funding requirements or
excess cash within a given period
 This allows managers to find possible sources of financing if
the cash budget shows cash shortage or identify appropriate
tenors for money market placements for excess cash.
 Normally, a cash budget is prepared for a one year period
broken down into smaller intervals like months. This allows
managers to see the seasonality of the business which
affects the cash flows.
Cash Receipts

include all of a firm’s inflows of cash in a

given financial period
The most common components of cash
receipts are cash sales, collections of
accounts receivable, and other cash
receipts.
Cash Disbursements

include all outlays of cash

by the firm during a given
financial period.
 Exercise
B. Bugay Industries, a defense contractor, is developing a cash
budget for October, November, and December. Jungaya’s sales
in August and September were PHP100,000 and PHP200,000
respectively. Sales of PHP400,000, PHP300,000, and
PHP200,000 have been forecast for October, November, and
December respectively.
Historically, 20% of the firm’s sales have been for cash, 50%
have generated accounts receivable collected after 1 month, and
the remaining 30% have generated accounts receivable collected
after 2 months. In December, the firm will receive a PHP30,000
dividend from stock in a subsidiary.
Required: Prepare the cash receipts section of the cash budget.
The most common cash disbursements
are:
Cash purchases
Purchasing fixed assets
Payments of accounts payable
Interest payments
Rent (and lease) payments
Cash dividend payments
 Wages and salaries
 Principal payments (loans)
Tax
 Gitman & Zutter, 2012
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.
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.

- Continuing from previous example, assume selling price

is PHP100/unit. Sales for each month are expected to be
collected as follows:
‣ Month of sales : 20%
‣ A month after sales: 50%
‣ 2 months after sales: 30%
- How much is total receipts from sales?
 Jan Feb Mar Apr May Total
Units 2000 2200 2500 2800 3000 12500
Sales in Pesos 200000 220000 250000 280000 300000 1250000
Collection 40000 44,000 50,000 56,000 60,000 250,000
from current
month sales
Collection 100,000 110,000 125,000 140,000 150,000
from previous
month sales
Collection 60,000 66,000 75,000 84,000
from 2
months prior
sales
Total 40,000 144,000 220,000 247,000 275,000 926,000
Collection
from Sales
B. Identify other receipts.
- Examples:
‣ interest received
‣ return on principal investments
‣ proceeds from sale of non-operating assets
‣ issuance of capital stock
‣ proceeds from borrowings

Add these receipts to the collections from sales

to get to total receipts.
C. From the Production Budget, identify how much of the
purchases made will be paid by the company on the cash
budget period. Like
sales, purchases may be made in cash or on credit
depending on the supplier’s credit terms.

- Continuing from previous example:

‣ Assume that cost per unit is PHP50.
‣ All purchases this month are paid the following month.
How much is total cash disbursements for purchases?
 Jan Feb Mar Apr May Total

Required 2,050 2,200 2,500 2,800 3,000 12,550

production
Cost in Peso 102,500 110,000 125,000 140,000 150,000 627,500

Payment from 102,500 110,000 125,000 140,000 477,500

current months
sales
Payment from 150,000
previous
months sales
Payment from
two months
prior sales
Total 0 102,500 110,000 125,000 140,000 477,500
Payments for
Purchases
D. From the operations budget, identify
which expenses will be paid in cash during
the cash budget period.

- The following expense items will be paid

based on the following periods:
‣ Rent payments
‣ Wages and salaries
‣ Tax payments
E. Identify all other cash payments to be
made.

- Examples:
‣ Fixed-asset purchases in cash
‣ Cash dividend payments
‣ Principal Payments
‣ Repurchase of common stock
‣ Purchase of stock/bond investments
- It is important to recognize that
depreciation and other noncash charges are
NOT included in the cash budget.
- The following items will be paid based
on the following periods:
‣ Fixed-asset outlays
‣ Interest payments
‣ Cash dividend payments
‣ Principal payments (loans)
F. Match the receipts and disbursements on
the periods they become collectible and
payable, respectively.

G. Set a minimum required cash balance.

This balance is maintained in case
contingencies arise. Recall from the steps
in planning that we should also plan for
contingencies.
H. If the net cash flow is above the minimum
cash balance, the company is in excess cash and
may consider putting it in short term
investments. If it is below, the company should
make a short term borrowing during that period.

Example:
[A] Company has a beginning cash balance of
PHP80,000 and would like to maintain an ending
cash balance of PHP100,000 per month.
5. Projected Financial Statements
- Projected financial statements 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.

The following reports may be

forecasted:
‣ Projected Income Statement
‣ Projected Statement of Financial Position
‣ Projected Statement of Cash Flows
Projected Income Statement
Projected Statement of Financial Position
5C’s used in credit evaluation.

1. Character –the willingness of the

borrower to repay the loan
2. Capacity – a customer’s ability to
generate cash flows
3. Collateral – security pledged for payment
of the loan
4. Capital – a customer’s financial resources
5. Condition – current economic or business
conditions
 Steps on
Financial Statement
Projection
a. Forecast Sales
a. Forecast Sales