FINANCIAL

PLANNING TOOLS
AND CONCEPTS
Learning Outcomes:
1. Identify the steps in the financial planning process;
2. Illustrate the formula and format for the preparation of
budgets.
Financial Planning
 It is a process of controlling and managing the use of money to achieve
personal economic satisfaction and independence.
It focuses on what the firm intends to do in the near future. It covers the
processes of:
1. Setting primary objectives;
2. Identifying alternative courses of action;
3. Choosing the best alternative to achieve its objective.
 It also involves systematically thinking the possible barriers a firm has to
confront to lessen, if not eliminate, the risks in the future.
 It is a system that guides the top management to direct the actions of the
different units in the organization in achieving its objectives. (Kolb and Demong,
1988.)
Financial Planning
 It is not the sole responsibility of the top management or finance manager,
because it involves the whole organization. The overall objective is set by the
top mgt. and is carried down to the lowest level of the organization.
 The main function of the finance manager is to integrate the different plans
and develop a forecast, which then leads to the preparation of the financial
plan.
Financial plan – a formal statement regarding the expected sales, expenses,
production, and other related transactions for a certain period. It gives
direction on the firm’s operations and serves as a control device in measuring
the firm’s performance.
Dimensions of Financial Planning
Its dimensions does not only in the period, but also in purpose,
orientation, financial strength, and degree of detail.
Short-range planning – usually covers the next twelve months; it
helps the firm analyze any difference in the action plan; involves a
great deal of details and direct guidelines from time to time.
 Long-term planning - it has a time frame of two to five or more
years; serves as a guide for the long-term goals. Usually, this is
revised every year to incorporate perceptions about the future. It
is more difficult and more prone to errors because of the time
frame involved.
Approaches to Financial Planning
1. ZERO-BASED APPROACH – its baseline is “zero” – where the
previous year’s budget is irrelevant in allocating financial
resources for the current year. Usually, this requires presentation
and justifications of all the required expenses, and the budget has
to be based on certain conditions and assumptions.
2. INCREMENTAL-BASED APPROACH – “traditional approach” – the
budget starts with the previous year’s budget and then an amount
is added or subtracted according to the anticipated plans. An
increment or increase is always subject to justifications before it is
approved.
Objectives of Financial Planning
1. PLANNING – It helps to determine its objectives and courses of
action.
2. COORDINATION – It creates a harmonious relationship among the
different units of the organization – they will learn to coordinate,
communicate and work with each other.
3. CONTROL – It becomes an important tool in enhancing and
measuring the performance of the company; it also serves as a
basis to evaluate individual performance.
Process of Financial Planning
# 1 – Assess the present or current financial situation
List down the sources of revenue, possible debts and business
expenses incurred to identify if there are enough money left to save
or there are just enough money coming in to satisfy business needs.
# 2 – Develop financial goals and objectives
Identify the basic expenses, and set up priorities on the use of
money. Focus only on those that are essential for the achievement of
financial goals such as saving or investing for the future.
Process of Financial Planning
# 3 – Develop alternative courses of action
Consider all possible alternatives for an effective and satisfying decisions.
Ex. 1. Continue with the same action. 4. Take a new course of action.
2. Expand the current situation.
3. Change the current situation
# 4 – Evaluate possible alternatives
In evaluating the courses of action, take into considerations the situation,
values, and current economic conditions. The best way to consider risk is to
gather information based on experiences (yours and others) and to use the
financial planning information.
Process of Financial Planning
# 5 – Create and follow financial plan
Develop an action. Select ways to achieve your goals. As you achieve your
immediate or short-term goals, the goal next in priority will come into focus.
# 6 – Review and revise the financial plan
Financial planning is an ongoing process that needs to continue even if a
particular action had been taken.
Monitoring and regular assessment of the financial decisions is needed.
Financial planning will change and affect your life as this will serve as a tool
for achieving your financial goals that will lead to financial security and
independence, thus, improving the quality of life or business.
MASTER BUDGET
 It is the combined budgets of the different units of the
organization. It is a control measure that helps the firm
determine if the set of objectives are attained.
 This is classified into two categories:
a. Operating budget – shows the plan of operations.
b. Financial budget – shows the budgeted financial
resources of the firm.
OPERATING BUDGET
1. Sales Budget – refers to the planned volume of production a firm is expected
to sell based on forecasted sales.
2. Production Budget – this identifies the number of units to be produced after
the sales budget has been established and the
ending inventory has been set.
3. Ending Inventory Budget – this is a budget that specifies a number of units
that the company desires to have in their balance
sheet at the end of the period.
4. Direct Materials Budget – this shows the quantity of materials required to
meet the production units and the number of units to be
purchased per unit of production.
OPERATING BUDGET
5. Direct Labor Budget – this refers to the budget that provides the total cost of
labor to meet the production requirement.
6. Factory Overhead Budget – this is a schedule of all manufacturing costs other
than the direct materials and direct labor.
7. Selling and Administrative Budget – this details the sales and administrative
expenses in selling the product of the company.
8. Pro-forma Income Statement – this is one of the major schedules in financial
planning showing the projected income of the company.
FINANCIAL BUDGET
1. Cash Budget – it is prepared to determine the financial needs of
the company. It shows the detailed lists of all cash receipts
and expenses for a particular period.
2. Pro-forma Balance Sheet – this budget presents the forecasted
components of the balance sheet at a future date. The actual
balance sheet of the previous period is the starting point of the
pro-forma balance sheet.
Basic Steps in Preparing the Budget
Budget preparation is done in a sequential manner. Leaving out one of the processes could
result to an error in preparing a budget. The budget normally identifies the following items:
1. Firm’s Sales 8. Cost of goods sold
2. Production Volume 9. Selling and Administrative expenses
3. Materials’ cost 10. Cash Budget
4. Materials purchased 11. Pro-forma Income Statement
5. Direct labor cost 12. Pro-forma Balance Sheet
6. Factory overhead
7. Inventory level
Sales Budget
Company A
Forecasted Sales Budget
For the Year Ending December 30, 2017

YEAR 1 YEAR 2 YEAR 3 YEAR 4

Sales Units 1,320 954 1,103 1,766
Price Per Unit P 91 P 92 P 97 P 112
Total Sales P 120,120 P 87,768 P 106,991 P 197,792
 Production Budget
Company A
Forecasted Production Budget
For the Year Ending December 30, 2017

Year 1 Year 2 Year 3 Year 4

Budgeted Sales Units 1,320 954 1,103 1,766
+ Planned Ending Units 48 55 88 98
- Beginning Units 0 48 55 88
Planned Production in Units 1,368 961 1,136 1,776

Note: The ending inventory level of the present quarter/year will be the beginning inventory level of the next quarter/year.
Direct Material Purchases Budget
Company A
Direct Material Purchases Budget
For the Year Ending December 30, 2017
Year 1 Year 2 Year 3 Year 4
Planned Production in Units 1,334 912 1,148 1,778
x Direct Labor Hours Required per P 3.5 P 3.5 P 3.5 P 3.5
unit
Budgeted Direct Labor Hours Required 4,669 3,192 4,018 6,223
x Cost per Direct Labor Hour P4 P5 P5 P5
Budgeted Direct Labor Cost P 18,676 P 15,960 P 20,090 P 31,115
Selling and Administrative Expense Budget
Company A
Selling and Administrative Expense Budget
For the Year Ending December 30, 2017
Year 1 Year 2 Year 3 Year 4
Budgeted Selling Expenses:
Sales Commission P 2,620 P 2,380 P 2,410 P 3,590
Freight-out 3,890 3,510 3,050 5,030
Budgeted Admin. Expenses
Office rent 8,000 8,000 8,000 8,000
Office Salaries 10,000 10,000 10,000 10,000
Office Supplies 1,120 1,030 1,560 2,370
Miscellaneous Expenses 700 700 700 700
Total Selling & Admin. Expense P 26,330 P 25,620 P 25,720 P 29,690
Expected Cash Collections
Company A
Schedule of Expected Cash Collections
For the Year Ending December 30, 2017
Year 1 Year 2 Year 3 Year 4

Beg. Accounts Receivable P 62,130

Year 1 Sales (x 70%); (x 30%) 84,084 P 36,036
Year 2 Sales 61,438 P 26,330
Year 3 Sales 74,894 P 32,097
Year 4 Sales 138,454 Remaining will be carried
To the next year as beg,
Total Collections P 146,214 P 97,474 P 101,224 P 170,551 AR.

Expected collections will be 70%, and the rest 30% are expected to be collected in the next period.