FINANCE Reviewer
FINANCIAL PLANNING PROCESS
1. determining your current financial situation
2. developing financial goals
3. identifying alternative courses of action
4. evaluating alternatives
5. creating and implementing a financial action plan
6. reevaluating and revising the plan.
Sales Budget
Sales budget is the first and basic component of master
budget and it shows the expected number of sales units of a
period and the expected price per unit. It also shows total
sales which are simply the product of expected sales units
and expected price per unit.
 Estimates of expected volume of sales and selling
expense
 Sales volume of sales budget is based on sales forecast
 Sales budget is slightly lower than the sales forecast
 Suggest the importance of sales forecasting and sales
quotas for territory management
Sales Budget influences many of the other components of
master budget either directly or indirectly. This is due to
the reason that the total sales figure provided by sales
budget is used as a base figure in other component budgets.
Production Budget
The production budget calculates the number of units of
products that must be manufactured, and is derived from a
combination of the sales forecast and the planned amount
of finished goods inventory to have on hand (usually as
safety stock to cover for unexpected increases in demand).
The production budget is typically prepared for a "push"
manufacturing system, as is used in a material
requirements planning environment.
The planned amount of ending finished goods inventory
can be subject to a considerable amount of debate, since
having too much may lead to obsolete inventory that must
be disposed of at a loss, while having too little inventory
can result in lost sales when customers want immediate
delivery. Unless a company is planning to draw down its
inventory quantities and terminate a product, there is
generally a need for some ending finished goods inventory.
Cash Collection Budget
To identify quarter cash collection:
1. Identify the quarter sales by multiplying with
collection rate/percentage
2. Add beginning Receivable to each quarter cash
collection
3. Add the 1st quarter collection to the 2nd quarter
collection
4. Add the 2nd quarter collection to the 3rd quarter
collection
5. Add the 3rd quarter collection to the 4th quarter
collection
6. Get the total collection for the year
Schedule of expected cash collections from customers
shows the budgeted cash collections on sales during a
period. It is a component of master budget and it is
prepared after the (preparation of) sales budget and before
the preparation of cash budget.
The calculation of expected cash collections is based on the
total sales figure obtained from 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.
Projected Income Statement
Projected Income Statement normally includes your
estimated future Business Revenues, Cost of Goods Sold,
Gross Profit, Controllable Expenses, Non-Controllable
Expenses and Net Profit. This statement is utilized to
project your financial future in your business.
Projected income 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,
although it doesn't have to be. Usually projected income
starts with projecting the revenue or sales for the next
period
Projected Balance Sheet
The balance sheet projection shows a financial snapshot of
the business at a specific point in time, usually at the end of
each accounting year.
A projected balance sheet, also referred to as pro forma
balance sheet, lists specific account balances on a business'
assets, liabilities and equity for a specified future time. A
forecasting balance sheet is a useful tool for business
planning in general, and it particularly benefits those
individuals responsible for arranging and bringing in
additional financing. Using a projected balance sheet,
financial personnel can present lenders and investors with
detailed financial information about planned future asset
expansion, making it easier to persuade capital providers to
supply the required financing.
To create a projected balance sheet, a business makes
certain assumptions about how individual balance Sheet
items may change over time in the future. Business plans
often focus on anticipated future sales. A projected balance
sheet also starts with forecasting sales revenues. Certain
balance sheet items, such as inventory, accounts receivable
and accounts payable, exhibit relatively constant
relationships to sales, and projections on those items can be
made based on projected sales. Other balance sheet items,
particularly fixed assets, debt and equity, change only in
accordance with a business's policies and management
decisions, independent of future sales.
Working Capital Management
Working capital management refers to a company's
managerial accounting strategy designed to monitor and
utilize the two components of working capital, current
assets and current liabilities, to ensure the most financially
efficient operation of the company. The primary purpose of
working capital management is to make sure the company
always maintains sufficient cash flow to meet its short-term
operating costs and short-term debt obligations.
COMPONENTS OF WORKING CAPITAL
MANAGEMENT:
1. Cash management is the corporate process of
collecting and managing cash, as well as using it for
(short-term) investing. It is a key component of
ensuring a company's financial stability and solvency.
Corporate treasurers or business managers are
frequently responsible for overall cash management
and the related responsibilities to remain solvent.
2. Accounts receivable management
As sales on account cannot be avoided most of the time,
management must face the difficulty squarely and make
it work to the advantage of the firm. This is important
because when accounts receivable are not properly
managed, the financial viability of the firm may be
impaired.
The following are the objectives of accounts receivable
management:
a) To determine the cost and probability of credit sales
b) Projection of cash flows from receivables. This will
provide essential input in the preparation of the
firm’s financial plan.
c) To determine the direction and control of activities
involved in the extension of credit to customers.
3. Inventory management
This refers to the activity that keeps track of how many
the procured needed to create a product or service are on
hand, where each item is, and who has responsibility for
each item.
This consists of two aspects: liquidity and profitability.
The liquidity aspect is usually measured in terms of
inventory turnover. The profitability aspect is measured
in terms of inventory level at a given level of sales and
profit. A successful inventory management program’s
main objective is to strike a balance among three key
elements as follows:
a) Customer service
This is because the period between when the order is
made and the date of delivery is important to the
customer
b) Inventory investment
This is when funds are tied up in inventory and it should
be ideally kept to a minimum without sacrificing
customer service.
c) Profit
The level of inventory carried by the company most often
affects the profitability of the company.
Debt Financing
Debt financing is where you borrow money from a lender
that you’ll eventually pay back, plus interest. If you’ve ever
taken out a loan, you’ve financed something with debt.
In here, the business relationship with a bank that loans
you money is very different from a loan from an investor -
and requires no need to give up a part of your company.
But if you take on too much debt, it's a move that can stifle
growth.
Advantages to debt financing:
1. The bank or lending institution (such as the Small
Business Administration) has no say in the way you run
your company and does not have any ownership in your
business.
2. The business relationship ends once the money is paid
back.
3. The interest on the loan is tax deductible.
4. Loans can be short term or long term.
5. Principal and interest are known figures you can plan in
a budget (provided that you don't take a variable rate loan).
Disadvantages to debt financing:
1. Money must paid back within a fixed amount of time.
2. If you rely too much on debt and have cash flow
problems, you will have trouble paying the loan back.
3. If you carry too much debt you will be seen as "high
risk" by potential investors – which will limit your ability to
raise capital by equity financing in the future.
4. Debt financing can leave the business vulnerable during
hard times when sales take a dip.
5. Debt can make it difficult for a business to grow because
of the high cost of repaying the loan.
6. Assets of the business can be held as collateral to the
lender. And the owner of the company is often required to
personally guarantee repayment of the loan.
Equity financing
Equity financing is where you trade ownership of your
business to angel investors or venture capitalists – in return
for their capital.
Equity is especially important for certain industries and
kinds of businesses, like technology startups and companies
with global aspirations.
Advantages to equity financing:
1. It's less risky than a loan because you don't have to pay it
back, and it's a good option if you can't afford to take on
debt.
2. You tap into the investor's network, which may add
more credibility to your business.
3. Investors take a long-term view, and most don't expect a
return on their investment immediately.
4. You won't have to channel profits into loan repayment.
5. You'll have more cash on hand for expanding the
business.
6. There's no requirement to pay back the investment if the
business fails.
Disadvantages to equity financing:
1. It may require returns that could be more than the rate
you would pay for a bank loan.
2. The investor will require some ownership of your
company and a percentage of the profits. You may not
want to give up this kind of control.
3. You will have to consult with investors before making
big (or even routine) decisions -- and you may disagree
with your investors.
4. In the case of irreconcilable disagreements with
investors, you may need to cash in your portion of the
business and allow the investors to run the company
without you.
5. It takes time and effort to find the right investor for your
company.
Banking and Non-Banking Financial Institutions
Banking Financial Institutions are establishments that
conduct financial transactions such as investments, loans
and deposits. The institution that performs banking is the
bank.
Types of banks:
1. Commercial Bank - a commercial bank is one that
receives demand deposits and gives out short-term
loans. Nowadays, however, the commercial bank does
not only concentrate of these functions but also attends
to numerous services. This is possible due to the
process of departmentalization.
2. Central Bank - a central bank is bank of the banks, as it
does not deal directly with the public. It is usually the
supervisory and regulatory agency, which makes all
banks “tow the line” so to speak. The Bangko Sentral
ng Pilipinas is a good example of this type. It is rather
unique as compared with other central banks since it is
purely government- owned and operated.
3. Development bank -a development bank takes care of
giving loan to be used for developing the economy and
may therefore engage in medium and long-term
lending. The organization and operation of private.
Development banks shall be under the control and
supervision of the Development Bank of the
 Philippines (formerly Rehabilitation Finance
Corporation).
4. Savings Bank - a savings bank is one which primarily
receives for safekeeping funds from persons who have
no immediate need for cash and invests these funds in
long term investment. This should not be mistaken for
the savings and loan associations which may either be
organized as stock or non-stock corporations, and are
largely friendship organizations for mutual benefits.
5. Rural Bank - a rural bank is organized primarily to
cater to the needs of small farmers, small businesses,
small cottage industries, and cooperative associations.
They also receive deposits and loan out funds.
Operations and organization of rural banks are
governed by Republic Act 720, as amended.
Some services provided by Banks:
REMINDER: *Don’t just read your lessons. You must
also understand what you are reading. Ilagay natin sa
braincells 
*no need to memorize the disadvantages and advantages of
debt financing and equity financing. Just UNDERSTAND

*for computation focus on Sales budget – Projected Income
statement
Exam: Multiple choice (20pts) and Computation (40pts)
P.S. Ang tulog nababawi, ang grades mahirap bawiin.
Pagpuyatan din natin ang acads. GOODLUCK ON
YOUR EXAMS! GODBLESS! KAYA NIYO YAN!

 Deposit
 Checking account
 Savings accounts
 Loan
 investments in stocks and bonds.
 Credit cards
 automatic teller machines (ATM)
 Telephone banking
 Online Banking
 Trust Services

Non-bank financial institution refers to companies that

offer financial services, but do not hold banking licenses
and cannot accept deposits. Insurance companies,
brokerage firms, and companies offering microloans are
examples of non-bank financial institutions.

A non-bank financial institution (NBFI) is an organization

that provides financial services, but is not a licensed bank
and is not allowed to accept deposits from customers.

The types of services offered by a NBFI typically fall into

the following categories:

1. Risk Pooling Institutions are organizations such as

insurance companies that spread financial risk among a
large number of entities.

2. Institutional Investors are organizations such as pension

funds and mutual funds that trade securities in volumes
that qualify for lower commissions.

3. Other Non-Bank Financial Institutions are organizations

that provide financial services such as leasing of assets,
market makers (who provide liquidity), management
companies, financial advisors, and securities brokers.