3.
OPERATIONAL PLANNING
Chapter 5: Financial Forecasting, Corporate
Planning and Budgeting Part 1
LEARNING OUTCOMES
1. Know and explain the basic concepts involving
financial forecasting, corporate planning and budgeting;
2. Know and explain what are pro-forma financial
statements and percent-of- sales method;
3. Construct pro-forma statements In designing a
financial forecast; and
4. Apply percent-of-sales method in the designing a
financial forecast
Corporate Planning
Corporate planning is defined as a formal, systematic,
managerial process, that is organized by responsibility,
time and information to assure that strategic planning,
project planning and operational planning are carried out
regularly to enable top management to direct and control
the future of the company.
3 Forms of Corporate Planning
1. STRATEGIC PLANNING
• This involves the creation of strategies that are
aimed in maximizing the entity's future position
taking into consideration the various elements and
factors that may pervade the company's internal and
external environment. A strategy is a design that
integrates the corporate objectives, policies and
programs in a well-developed unified whole. The
company's strategic plans serve as a control
measure that systematically distributes the scarce
resources of the entity in order to assure the best
means of achieving corporate objectives
• The process of strategic planning involves the
SWOT analysis. Under this process, strategies
addressing the current and future threats and
opportunities in the external environment of the
company are assessed and designed. Concurrent
with this is the development of strategies that
address the strength and weakness of the entity.
• it is important to point out that the different levels of
management are involved in the creation of strategic
plans. In other words, the corporate strategic plans
may be composed of research strategies; production
strategies; marketing strategies and each of the
strategies are created to suit the general strategy of
the company.
2. PROJECT PLANNING
Sometimes called as capex planning or capital
expenditure planning entails detailed plans involving
acquisition of new property, plant and equipment,
creation of new products, modification or acquisition or
adoption of new systems, and acquisition of new entities.
In evaluating acquisitions that involve significant capital
expenditures, systematic and scientific methods are
used like discounted cash flows (DCF), rate of returns
(ROR), and cost of capital assessment.
This is much concerned on how to efficiently and
effectively utilize the entity's resources to achieve the
company's short-term and long-term objectives set up
during strategic planning. The shortterm as well as long-
term plans are broken down into the differential
functional areas of management (operations, marketing,
finance, research, etc). The short-range plans of these
functional areas are then collated and quantified in the
budgeting process of the entity.
BUDGETING
• After the creation of the delineated corporate plans,
the next equally important step is to be made. This
involves the quantifying of the plans in terms of
monetary value. For example, if the corporate plan
states that the firm needs to increase revenue in
order to maintain its current market share, budgeting
would then quantify this by assigning a figure of, let
us say, increase sales revenue by P 1,200,000 and
decreasing administrative expenses by P200,000.
The budget could be defined as a formal statement
of a plan presented in quantitative terms.
• The firm's formed budget serves as a barometer to
which the results of the daily operations of the
company are matched, coordinated, evaluated and
controlled. This is the budgetary control function of
budgets. Management compares the actual figures
of company operations vis-a-vis the budgeted
figures and see if there are favorable or unfavorable
differences or variances. The differences or
variances are then assessed and accounted for.
Accountabilities are pointed out as to who and/or
what caused the favorable or unfavorable variances.
Adjustments in the budget may also be done to
depending on the results of the evaluation
• The firm's budget is prepared, usually, for one year.
This however is delineated with separate budgets
presented on monthly or quarterly basis. The
company may also opt to present the budget on a
monthly basis for the first 6 months of the year and
the remainder is shown on a quarterly basis.
Revisions on the monthly and quarterly budgets may
be done after comparing actual figures from prior
month or prior quarter.
• A rolling budget may also be done when a company
makes a whole year budget then makes new
budgets on a monthly or quarterly basis. For
example, the company creates a budget for January
to December 31, 2015. In December 2014, the
company begins to prepare a budget for January to
March 2015, then in March 2015, the company
starts to prepare the budget for the next quarter April
to June 2015, and so on.
REASONS FOR BUDGETING h) Cost of goods sold
Planning. In the development of operational and project i) Selling expenses
plans, proposed activities (like acquisition of new j) Administrative expenses
equipment or system, creation of a new product or k) Financing charges
product line, or increasing sales volume, etc.) should FINANCIAL RESOURCES BUDGET
involve profit generation. The profit to be generated in This is mainly made up of:
the execution of the plan is found in the proforma or a. Cash budget
budgeted income statements. The budgeted income b. Pro-forma or budgeted Statement of Financial
statement helps management in paving (planning) the Position (SFP)
way to achieve the desired profit found in the budgeted c. Projected funds flow statement
income statement
CAPITAL EXPENDITURES BUDGET
Coordination. Budgeting tends to synchronize the firm's
This involves plans on material modification, acquisition
operations, because the budget serves as a guide as to and disposal of property plant and equipment or material
what the company should achieve. modification, acquisition or renewal of a firm's
Control. As mentioned, budgeting provides the computerized accounting information system
barometer or the yardstick against which the firm can
BUDGETED FINANCIAL RATIOS
measure and compare their actual results of operations.
The ratios are taken from the pro-forma or budgeted
The differences or variance between budget and actual
financial statements prepared. These are like the ones
results are then assessed so that adjustments may be
discussed in the previous chapters, the only difference is
done if needed.
that the figures here are estimated and budgeted.
BUDGET MANUALS
PROCESS IN PREPARING THE MASTER BUDGET
To facilitate budgeting procedures, a budget manual is
1. Formulation of the corporate objectives, plans,
usually prepared by management. An average run of the
policies and assumptions, which will give direction in the
mill budget manual may be composed of the following;
formulation of the budget estimates. This is done by top
1. Objectives;
management.
2. Definition of Authority;
2. Formulation of the corporate objectives, plans,
3. Responsibilities and duties of persons involved in
policies and assumptions, which will give direction in the
preparing the budget;
formulation of the budget estimates. This is done by top
4. Procedures of budgetary control;
management.
5. Time schedule for preparing the budget
3. Individual budgets from the different functional areas
6. Forms of schedules
as well as sub-units or responsibility centers (example -
7. Procedures in obtaining budget approval
production, marketing, research, finance department,
8. Form and nature of performance report; and
etc.) of the company are prepared based on the planned
9. Advantages of budgetary control.
volume of units to be sold. Heads or supervisors from
COMPONENTS OFTHE MASTER BUDGET each of these areas are responsible for the preparation
As mentioned earlier, the different functional areas or of their individual budgets. Under this process, the
sub-units of the firm have their own budgets, these production schedule and the associated use of new raw
budgets are then fused to form one company-wide materials, direct labor and overhead are done to
budget referred to as master budget. Figure below compute cost of goods sold.
presents the components of a master budget and its 4. Consolidation of the individual budgets is done to
movement as they go through the budgetary process. A create a draft master budget. The corporate planning
typical master budget should contain the following: department of a firm can do this.
5. Revision of the preliminary drafted master budget is
OPERATIONS BUDGET/PROFIT PLAN
done to come up with the final draft subject to approval
Composed of a detailed presentation of revenues,
of top management.
expenses and net profit. This takes the form of the pro-
6. Approval and, dissemination of final master budget to
forma or budgeted income statement. The formation of
department heads or supervisors.
this budgeted income statement came about by the
infusion of the different budgets on:
a) Sales
b) Production volume
c) Cost of raw materials
d) No. of raw materials units to be purchased
e) Cost of direct labor
f) Factory overhead
g) Inventory levels