QUARTER 1 - MODULE 2

BUSINESS FINANCE

FINANCIAL
PLANNING TOOLS
AND CONCEPT

Presented by: Reynacel Piogo

WHAT I NEED TO KNOW

1. Illustrate the planning process.

2. Prepare budgets and such as protected collections, sales

budget, production budget, income projected-statement of
comprehensive income, project of financial position, protected
cash flow statement.
WHAT IS FINANCIAL PLANNING PROCESS?
PLANNING is very much related to another management functions, controlling. These two management functions each
other, and both are very important for the success of an organization.
Management planning is about setting the goals of organization.

STEPS IN FINANCIAL PLANNING

[Link] goals or objectives - For corporation, long term or 4. Establish responsibility centers for accountability
short term identify the objectives. These has shown in and timeline- If we identified the task to achieve goals, the next
company’s vision and mission statements. important step to do is to identify which department held
accountable for this task.

2. Identify resources - Resources like production

5. Establish an evaluation system for monitoring and
capacity, human resources who will operate the
controlling - For corporations, the management must
operations and financial resources.
establish a mechanism to allow plans to monitor.

3. Identify goal related tasks - In this step, manager 6. Determine contingency plans - For planning contingencies or
must figure out how to achieve an objective. unforeseen events must be considered as well. Budgets and protected
financial statements anchored on assumptions.
PREPARATION BUDGETS AND PROJECTED FINANCIAL STATEMENT
is a description of quantitative usually money terms of
BUDGET desired future events.

SALES is the prediction of firm's sales over specific period,

BUDGET based on external and internal information.

Sales budget of ABC Company

For the year ended December 31, 2019

Series no. Particulars Quarter 1 Quarter 2

1 Sales Unit (Forecasted) 6,000 5,000

2 X Price per unit 100 150

Sales Revenue Php 600,000 Php 750,000

 is a financial planning related to the units of the production of the management think that the business
PRODUCTION should produce in the upcoming period to match the estimated sales quality, based on the management's
BUDGET judgement related to the competition in the market, economic conditions, production capacity, consumer
prevailing market demands and past trends.
Production budget of XYZ Company
For the year ended December 31, 2019

Series no. Particulars Quarter 1 Quarter 2

1 Sales Unit (Forecasted) 8,000 9,000

Add: Finished goods Inventory 2,000 3,000

Total Productions 10,000 11,000

Less: Beginning Inventory of Finished

2,500 2,000
goods

Units to be Produced Php 7,500 Php 9,000

 CASH is the statement of the firm that the planned inflows and outflows of cash. It forecast the timing of these
cash outflows and matches them with cash inflows from sales and other receipts.
BUDGET
Example: Assume selling price is Php100/ unit sales for each month that has expected to be collected as follow;
Month of sales: 20%. A month aftersales: 50%. 2 month aftersales: 30%
How much is the total receipts from sales?

Jan Feb Mar Apr May Total

Units 2,000 2,200 2,500 2,800 3,000 12,500

Sales in Pesos 200,000 220,000 250,000 280,000 300,000 1,250,000

Collection from monthly

40,000 44,000 50,000 56,000 60,000 250,000
sales (sales in Pesos x 20%)

Collection from previous

monthly sales (sales in 100,000 110,000 125,000 140,000 150,000
Pesos x 50%)

Collection from two months

prior sales (sales in Pesos x 60,000 66,000 75,000 84,000
30%)

Total collections from sales 40,000 144,000 220,000 247,000 275,000 926,000
 PROJECTED FINANCIAL STATEMENTS
is a tool of a company to set an overall all goal of what the company's
performance and position will be for as of the end of the year. It sets targets
to control and monitor the activities of the company.

Application of the Projected Financial Statement

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A. Establish the sales of support projected sales. A. Target capital structure
projection. B. Projected funds generated through B. Effect of short term borrowing on its current ratio;
B. Project the cost of sale. accounts payable and accruals, and C. Conditions of debt and equity markets; or
C. Prepare the production by retained and earnings through D. Restrictionsimposed by existing debts agreements
schedule and project the profit generated.
corresponding production C. Project liability and stockholder's
equity accounts that will not rise Step 4: Consider Financing Feedbacks
costs, direct materials, direct
labor and overhead for spontaneously with sales.
D. Determine of additional funds Depending on whether additional funds
manufacturing companies.
needed by using the following borrowed or has raised through ordinary shares,
D. Estimate selling and
formula: consideration has given on additional interest
administrative expenses.
Additional Funds Needed (AFN)= in the income statement or the dividends, this
E. Consider financial
Required Increase in assets- decreasing the retained earnings.
expenses.
SpontaneousIncrease in Liabilities-
F. Determine the net profit.
Increase in Retained Savings
The Mellinial Company has the following statements representative of the company’s historical average.

MELLINIAL COMPANY
INCOME STATEMENT
FOR YEAR ENDED DECEMBER 19, 2019

Sales P 2,000,000
Cost of Sales (1,200,000)
Gross profit 800,000
Operating Expenses (380,000)
Earnings before interest and taxes 420,000
Internet expense 70,000
Earnings before taxes 350,000
Taxes (35%) (122,500)
Net Income/Earnings after taxes P 227,500

Dividends P 136,500
 MELLINIAL COMPANY
STATEMENT OF FINANCIAL POSITION
FOR YEAR ENDED DECEMBER 19, 2019

Assets Liabilities and Stockholder’s Equity

Cash P 50,000 Account Payable P 250,000
Accrued Expenses 10,000
Accounts Receivable 400,000 Accrued Taxes 20,000
Total Current Liabilities P 280,000
Inventory 750,000 Notes Payable-bank 70,000
Long-term Debt
150,000
Total Current Assets P 1,200,000 Total Liabilities
P 500,000
Ordinary shares
Retained Earnings
1,200,000
Fixed Assets (net) 800,000 300,000
Total Shareholder’s
equity 1,500,000
Total Assets P 2,000,000 Total liabilities and equity P 200,000
Using the percentage of sales method, determine whether the company has eternal financing needs or a surplus of funds.
SOLUTION:
STEP 1. FORECAST THE INCOME STATEMENT.
The projected Income Statement will show the following:

Sales (P2M x 120%) P 2,400,000

Cost of Sales (P2.4M x 60%) (1,440,000)
Gross Profit 960,000
Operating expenses (P2.4M x 19%) 456,000
Earnings before interest and taxes 504,000
Interest expense (70,000)
Earnings before taxes 434,000
Taxes (35%) (151,900)
Earnings after taxes P 282,100

Dividends (36% payment) P 101,600

STEP 2. FORECAST THE STATEMENT OF FINANCIAL POSITION.
The projected statement of financial position will show the following:
Assets
Cash (1) P 60,000
Accounts Receivable (2) 480,000
Inventory (3) 900,000
Total Current Assets P 1,440,000
Fixed Assets (net) 800,000
(4)
Total Assets P 2,240,000
Liabilities and Equity
Accounts Payable (5) P 300,000
Accrued Wages (6) 12,000
(7)
Accrued Taxes 24,000
Total Current Liabilities P 336,000
Notes payable-bank (4) 70,000
Long-term debt (4) 150,000
(4)
Ordinary shares 1,200,000
(8)
Retained Earnings 480,000
Total P 2,236,500
Additional Financing required 3,500
Total P 2,240,000
SUPPORTING COMPUTATIONS:
(1) Cash = 2.5% x P2.4M sales
(2) Accountsreceivables = 20% of 2.4 M
(3) Inventory = 27.4% of 2.4 M
(4) No percentage computed for the fixed
assets,notes payable, long- term debt, ordinary
shares and retained earnings because they are not
Formula method*
assumed to maintain a direct relationship with sales Additional Financing Needed
volume. To simplicity, for depreciation is not (AFN) may also computed as follows;
Additional Funds Needed = required increase in
considered. assets - Spontaneous increase in liabilities-
(5) Accounts payable =12.5% of 2.4 M Increase in retained earnings
Where;
(6) Accrued expenses =0.5% of P2.4 M Required increase in assets = Changesin sales x
(7) Accrued taxes =1% of P2.4 M current assets (present) ÷ sales (present)
Spontaneous increase = Changes in sales × current
(8) Retained earning = P 300,000+282,100 -101,600 liabilities (present) ÷ sales (present)
Increase in retained earnings = Earnings after taxes-
dividend applied to Millenial Co. AFN computed as
follows;
AFN = [400,000 × 1,200,000/ 2,000,000-]
= [400,000 × 1,200,0000/ 2,000,000- 282,100 - 101,600
240,000 - 56,000 -180,500
= P 3,500
 WHAT IS CASH
FLOW STATEMENT?
It is a process of closely monitoring of
in and out of cash in the business.
Example: Ms. Amelia Enriquez engaged in a laundry shop. It was already her 2 year of operation and all the
in and out of cash for the month as follows:

DATE PARTICULARS DEBIT CREDIT BALANCE PAYMENTS OF

12 P 50,000
LAUNDRY EQUIPMENT

FEB. 1 INITIAL INVESTMENT P 350,000

PAYMENTS OF RENT
15 P 4,000
EXPENSE
3 WITHDRAWAL P 5,000

18 COLLECTION P 10,000
PURCHASE OF
4 P 25,000
LAUNDRY EQUIPMENT
28 SALARIES EXPENSE P 8,000

PURCHASE OF
6 P 25,000 PAYMENT
LAUNDRY SUPPLIES 28 P 4,000
TELEPHONE EXPENSE

8 LAUNDRY REVENUE P 30,000

28 ADVANCE PAYMENT P 15,000

PAYMENTS OF UTILITIES
9 P 6,000 TOTAL P 405,000 P 127,000 P 278,000
EXPENSES
 AMELIA LAUNDRY SHOP
STATEMENT OF CASH FLOW STATEMENT
FOR THE MONTH OF FEBRUARY 28, 2019

Cash Flow from Operating Activities:

Cash received from customers (dated Feb. 8,18,28)
P 55,000
Payment for Purchase of Supplies (25,000)
Payments for Utilities (6,000)
Payments for Rent (4,000)
Payments for Salaries (8,000)
Payments for Laundry Equipment (50,000)
Payments for Repair & Maintenance (4,000)
Net Cash used from Operating Activities P (42,000)

Cash Flow from investing activities:

(25,000)
Purchase of Laundry Equipment
Net Cash used from Investing Equipment (25,000)

Cash Flow from Financing Activities:

Investment by Owner 350,000
Owner’s Withdrawal (5,000)
Net Cash used from financing activities 345,000
Net Increase in Cash 278,000
Add: Beginning Balance -0-
Ending Cash Balance P 278,000
Let us assume that Amelia shop projected 3 months of cash flow for planning an
expansion for her business. Let us say there is an increase of collection of 25% and all
expenses will stay the same. By month of May, Amelia granted a loan amounted
P 150,000. How much is the cash flow ending balance of Amelia for the month of May?

MARCH APRIL MAY MARCH APRIL MAY

BEGINNING CASH RENT 4,000 4,000 4,000

278,000 249,750 221,500
BALANCE
SALARIES 8,000 8,000 8,000
CASH COMING IN
LAUNDRY EQUIPMENT 50,000 50,000 50,000
CASH RECEIVED FROM
68,750 68,750 68,750
CUSTOMERS (SALES)
REPAIR & MAINTENANCE 4,000 4,000 4,000

LOAN TRANSFER 150,000

TOTAL P 97,000 P 97,000 P 97,000

TOTAL CASH IN P 346,750 P 318,500 P 440,250

CASH OUT
ENDING CASH BALANCE 249,750 221,500 343,250
SUPPLIES 25,000 25,000 25,000

UTILITIES 6,000 6,000 6,000

Amelia has P 343,250 of cash used for expansion of her business.
If cash is flowing out of your business significantly faster than it is
coming in, you need to examine three aspects of your cash flows:

• How and when cash comes into your business

• How and when it goes out again
• Where it hastied up in the meantime
 WORKING CAPITAL MANAGEMENT
WORKING CAPITAL NET WORKING WORKING CAPITAL
CAPITAL MANAGEMENT
refers to company's investment in
refers to the difference between specificially refers to the efficient
short term assets such as cash,
the firm's current assets and current management of firm's current assets (cash,
inventory, short term marketable
liabilities. receivable, and inventory) and current
securities, and account receivable.
liabilities (short term payable).
CASH MANAGEMENT
SYSTEM

involves the maintenance of cash

and securities investment level, which
REASONS FOR HOLDING CASH
will enable the company to meet its
[Link] motive - cash needed to facilitate the normal transaction of
cash requirements at the same time
optimize the income on idle funds.
the business, that is to carry out its purchases and sales activities.
2. Precautionary motive - cash may held beyond its normal operating
requirement level in order to provide for buffer against contingencies such
as unexpected slow-down in accounts receivable collection, strike or
increase in cash needs beyond management's original projections.
3. Speculative motive - cash held ready for profit making or investment
opportunities that may come up such as a block of raw materials inventory
offered at discounted price or merger proposal.
4. Contractual motive - a company may be required by a bank to
maintain a certain compensating balance in its demand deposit account
as a condition of a loan extended to it.
CASH CONVERSION CYCLE ILLUSTRATION: CREDIT SCORING
Bloom manifacturing had a had an average Another used in granting credit to customers
A firm operating cycle begins from the is through credit scoring.
age
time goods for sale manufactured to
of inventory of 18.5 days, an average collection One popular credit selection technique is the
the eventual collection of cash from
period of 48.5 days, and an average payment used of 5 C's of credit.
the sale of these goods.
period of 53.5 days. Bloom is operating and
OPERATING CYCLE cash 1. Character - The applicant's record of
conversion cycle obtain as follows: meetings its past obligation has judged.
refers to the days required for a
business to receive inventory, sell the
2. Capacity - This emphasize the
Operating cycle = Average Age of Inventory +
inventory, and collect cash from the customer's ability to repay its obligation
Average Collection Period
sale of the inventory. = 18.5 days + 48.5 days in reference to its current financial
position or standing.
AVERAGE AGE OF THE = 67 days
3. Capital - The applicant's net worth
INVENTORY Cash Conversion Cycle = Operating cycle - which can be arrived at by deducting
refers to the time when the sale made Average Payment Period total liabilities from the assets.
and collected. Both measured in days. = 67 days- 53.5 days
4. Collateral - The amount of assetsthe
= 13.5 days
AVERAGE PAYMENT PERIOD customer has been that could serve as
is the time it takes for the firm to pay its INVESTMENT MANAGEMENT the security in the event that the
accounts payable expressed in number The objective in managing the inventory is to obligation is not paid.
of 4 days. convert it as quickly as possible to cash 5. Condition - This include economic
Cash Conversion Cycle = Average Age
without losing sales due to stock outs. and industry that might affect the
of Inventory + Average Collection Period
- Average Payment Period THREE TYPES OF INVENTORY customer's ability to repay its obligations.
OPERATING CYCLE FORMULA
Operating Cycle = Average Age of Inventory
[Link] materials - these are purchased
materials not yet put into production.
ACCOUNTS RECEIVABLES
+ Average of Collection Period 2. Work in process - these are goods or MANAGEMENT
CASH CONVERSION CYCLE labor put into production but not finished.
3. Finished goods - these are goods put into represents assets of the entity that expected
FORMULA production and [Link] are ready to to be collected and thus converted to cash.
sold.
Cash Conversion Cycle = Operating cycle -
Average Payment Period
 ASSESSMENT:
Identify the term is being describe by each statement.

[Link] the planned inflows and outflows of

cash in a entity in a given period.
2. It refers to the company's investment in short
term assets such as cash, inventory,short term
marketable securities, and account receivable.
3. The applicant's record of meeting its past
obligation has judged.
4. Firms operating cycle begin from the time
goods for sale has manufactured to the eventual
collection of cash from the sale of these goods.
5. Cash to facilitate the normal transactions of
the business, that is, to carry out its purchases
and sales activities.
”STOP DREAMING
AND START
DOING”
THANK YOU