Business Finance

UNIT 9. Financial Planning Process

UNIT 10. BUDGETING

LORENZO M. GABRIEL
 Business Finance
UNIT 9. Financial Planning Process

LEARNING OBJECTIVES
At the end of this lesson,
you will be able to:
1. Discuss budgeting
2. Identify the benefits of
budgeting; and
3. Explain the budgeting
process.
Budgeting

Budgeting is the process or act of preparing a financial

budget.

Budget refers to a plan which is expressed in a

quantitative monetary value. In other words, a budget
is the final output of the whole budgeting process.
 Planning is facilitated.
Benefits of
Budgeting Financial coordination is established.

Resources are properly allocated.

Morale of employees is improved.

Control mechanism is enhanced.

 • During the time of planning, goals and objectives
1. Planning is are set. The direction of the business is defined
and the appropriate strategies to be adopted are
facilitated identified.
• The budget assists the formulation of plans of
scheduling the activities based on the monetary
implications they provide for the business.
• The schedules are reviewed and evaluated
critically in relation to the goals and the expected
financial implications.
 • A unit in organization does not operate
independently. Rather, its activities are properly
coordinated with other units or departments in
2. Financial the organization. The plan of a particular unit is
Coordination is also coordinated with that of the other
Established departments to produce a unified output.
• The budget binds into one stronghold the
different activities of various units or
departments which have financial implications.
All activities of the business shall be geared or
carried out toward one common direction.
• The budget is an excellent medium that
coordinated the financial activities of the various
operating units.
 • Business resources are scarce, and by
3. Resources nature, are limited. On the other hand,
are Properly business needs or requirements are
Allocated almost unlimited. The business is placed
in a dilemma when these two opposing
realities strongly interact. The business,
therefore, is left with one and only
alternative which is to properly
allocated resources among the various
departments and units.
 • When employee are given the
4. Morale of opportunity to participate in the
Employees is preparation of the budget, employees
Improved feel that they are valued, and their
contributions have a significant effect
on the organization. Consequently,
employees become highly motivated
resulting in improved production
performance.
 • The budget is the final result of all planning
activities that have been expressed in
5. Control monetary forms. The budget is also an
effective financial control mechanism. It
Mechanism is directs the financial course of the business
Enhanced so the goals and objectives are achieved.
• Through the budget, the financial activities
that are not in accordance with what has
been planned are easily directed to the
right course. In such a case, the
management adopts an appropriate
remedial course of action to ensure that all
financial activities are aligned with the plan.
 Period Covered by the Budget

Short-term budget

Medium-term or intermediate budget

Long-term or strategic budget

 • The short-term budget provides the financial
Short-term requirements of all departments for one
year. This types is prepared almost year by
Budget all levels of management. Each unit makes
sure that the financial requirements of the
proposed programs and projects are
properly provided. The short-term budget is
anchored on the targets and activities for
one-year operation.
 • The medium term budget sets the
budgetary requirements of the business for
Medium-term the year three or five years of operations. It
is prepared once every three or five years
Budget and reviewed almost every year if some
adjustments due to developments are worth
considering.
• The medium-term plan is anchored on the
broad programs of each functional area. It is
supported by the short-term budget.
 • The long-term budget is the financial
expression of the vision-mission of the
Long-term business. It defines the financial direction of
Budget the business for the next five or ten years.
• The strategic budget is fully supported by
the medium-term budget. The highest level
of management is highly responsible for the
preparation and administration of the long-
term budget.
Types of Budget or
Budgeting
a. Fixed budget
b. Flexible budget
c. Continuous or rolling budget
d. Cash budget
e. Sales budget
f. Production budget
g. Operating budget
h. Financial budget
i. Capital budget
j. Master budget
a. Fixed budget

A budget prepared based only on one level of production

company. For example, the normal capacity of the
business is to produce and sell 50,000 units of a certain
product during the year.
b. Flexible budget

A budget prepared showing the projected cost at

different levels of production capacity; for example, a
budgetary cost at 20,000 units, 30,000 units, 40,000
units, and 50,000 units.
c. Continuous or rolling budget

A one-year budget continuously prepared every month

by adding another month once the current month has
passed. For example, a 12-month budget has been
prepared for the period January 1 to December 31, 2018.
after January 2018 has elapsed, the January 2019 budget
is added thereby coming up with a 12-month budget
again.
d. Cash budget

A budget that reflects the expected cash receipts from

cash sales, collections of accounts and notes receivable,
sale of other assets proceeds of borrowings, and the
expected cash disbursement on payments of operating
expenses, interest, taxes, and loans. The cash budget
should reflect the project cash balance at the end of
every period covered.
e. Sales budget

A budget that reflects the expected number of units to be

sold based on forecast made from the performance of
previous years and other marketing variables.
f. Production budget

A budget that shows the cost of producing the product.

The cost of production includes direct materials, direct
labor, and factory overhead.
g. Operating budget

A budget that reflects the sales and production budgets.

h. Financing budget

A budget that usually includes the cash budget and

budgeted balance sheet.
i. Capital budget

A long-range budget that incorporates the major

expenditures for plant and machineries.
j. Master budget

The overall budget of the business.

Illustration: Sales Budget
Jenny Manufacturing Company sold 23,430 units of Product X in 2018 which was higher by 10%
compared to the units sold in 2017. The products were sold at P300 per unit.
Because of heavy advertising and other promotional activities and shift in buyers’ preferences, the
company expects to increase the sales by 15% in 2019 against the 2018 performance. The company
plans to sell the product at P350 per unit.
Required: Prepare the sales budget in 2019. P2,401,750
Answer: The sales budget of Jenny Manufacturing Company for 2019 appears as follows:

Jenny Manufacturing Company

Sales Budget
For year 2019
Selling Units Estimated Price Sales

Projected sales (23,430 x. 1.15) 26,945 P350 P9,430,750

It is emphasized that the budgeted peso amounts are not expressed in exact figures but rounded to
thousands.
Illustration: Production Budget
Juan Manufacturing Company has one product line – Product WZ. Last year, the company has sold 40,000 units
at P40 per unit. Next year, the business expects to increase its sales volume by 10%. There are no beginning
and ending finished goods inventories.
In the manufacture of one unit of Product WZ, the company uses three types of direct raw materials as follows:
Raw material A – P4.00 per unit
Raw material B – P5.00 per unit
Raw material C – P7.00 per unit
There are no beginning and ending raw materials inventories.
Required: Determine the raw materials requirements to produce the total units planned to be sold the
following year.
Answer: Direct materials requirements
Material A (44,000 x 4) P 176,000
Material B (44,000 x 5) 220,000
Material C (44,000 x 7) 308,000
Total estimated material requirements P 704,000

Units to be sold next year (40,000 x. 1.10) = 44,000 units

  Aduana N. (2017). Business Finance in the
Philippine Setting for Senior High School. C & E
Publishing, Inc. Quezon City
 Cayanan, A. & Borja (forthcoming). Business
Finance. Quezon City. Rex Bookstore.
References:
 Gitman, L. J. & Zutter C. J. (2012), Principles of
Managerial Finance (13th Ed), USA: Prentice-Hall
 http://www.businessdictionary.com
 http://www.accountingtools.com
 https://www.investopedia.com
 Business Finance
UNIT 9. Financial Planning Process

That’s all for today!