FINANCIAL

PLANNING
TOOLS AND
CONCEPTS
CHAPTER 3
FINANCIAL PLAN

• helps you see the big picture and set long

and short-term business goals
• it's easier to make financial decisions and
stay on track to meet your goals
 FINANCIAL PLANNING
PROCESS
Step 1: Calculate set-up costs
• comparing your set-up costs or your operating
costs to your start-up equity investment
• Set-up costs or start up for another operating
period will include:

• Accounting fees
• Registrations and licenses/or renewal
• Equipment and fit out
• Initial working capital
FINANCIAL PLANNING PROCESS

Step 2: Profit and loss forecast

A forecast of sales and expenses, usually for the next or

another 12 months of operations. To produce it:
• Compare potential sales revenue to cost of goods sold
and fixed costs of doing business
• Calculate likely margins and put your pricing model to
the test
 FINANCIAL PLANNING PROCESS
Step 3: Cash-flow forecast

A vital component of any financial plan.

• New businesses or another operating period often need

cash to build the capacity necessary to service customers
• Customers may be slow to pay
• The resulting cash-flow gap could leave you vulnerable if
you’re not prepared
 FINANCIAL PLANNING
PROCESS

Step 4: Balance sheet forecast

• A snapshot of the business after 12 months of
operations. You should base it on:

• The purchases you anticipated in your set-up

costs
• The results of your profit and loss forecast
FINANCIAL PLANNING PROCESS

Once you’ve forecast

your fixed costs, you can
calculate how much
revenue you need to
Step 5: Break-even analysis
break even. If you’ve
decided on your pricing,
it’s easy to calculate
revenue based on sales.
 FINANCIAL PLANNING PROCESS

STEP 5: BREAK-EVEN PREPARE SEVERAL DOCUMENT YOUR ASSUMPTIONS

ANALYSIS FORECASTS, AND THE REASONS BEHIND THEM,
BASED ON BEST- THEN TEST AND UPDATE THEM IN
CASE, WORST- LINE WITH YOUR CURRENT
CASE AND KNOWLEDGE AND BUSINESS
AVERAGE PERFORMANCE
SCENARIOS
BUDGET AND BUDGET
PREPARATION
 BUDGETING
process of
creating a Budget-
plan to spendin
spend your
money. g plan

IMPORTANCE OF BUDGETING
itensures that you
Following a budget
will always have
or spending plan will
enough money for
also keep you out of
the things you need
debt or help you
and the things that
work your way out
are important to
of debt
you.
 TYPES OF BUDGETS FOR BUSINESSES
Master Budget

• an aggregate of a company's individual budgets designed to present a

complete picture of its financial activity and health.
• combines factors like sales, operating expenses, assets, and income streams
to allow companies to establish goals and evaluate their overall performance
 TYPES OF BUDGETS FOR
BUSINESSES
Operating Budget
• a forecast and analysis of projected
income and expenses over the course of
a specified time period
• It must account for factors such as sales,
production, labor costs, materials costs,
overhead, manufacturing costs, and
administrative expenses.
• created on a weekly, monthly, or yearly
basis
TYPES OF BUDGETS FOR
BUSINESSES
Cash Flow Budget
• means of projecting how and when cash
comes in and flows out of a business
within a specified time period
• useful in helping a company determine
whether it's managing its cash wisely
• consider factors such as accounts
payable and accounts receivable
 TYPES OF BUDGETS FOR BUSINESSES
Schedule of Expected Cash Collections
• shows the budgeted cash collections on
sales during a period.
• a component of master budget and it is
prepared after the preparation of sales
budget and before the preparation of
cash budget
• to determine how much sales are
expected to be collected during a
period
 TYPES OF BUDGETS FOR BUSINESSES
Sales Budget
• 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
• shows total sales which are simply the product of expected sales
units and expected price per unit
TYPES OF BUDGETS FOR
BUSINESSES
Production Budget
• a schedule showing planned production in
units which must be made by a
manufacturer during a specific period to
meet the expected demand for sales and the
planned finished goods inventory
• prepared after sales budget
• Planned Production in Units
= Expected Sales in Units + Planned Ending
Inventory in Units − Beginning Inventory in
Units
 BUDGETED INCOME STATEMENT
• contains all of the line items found in a normal income
statement, except that it is a projection of what the
income statement will look like during future budget
periods
• extremely useful for testing whether the projected
financial results of a company appear to be reasonable
 PROJECTED BALANCE
SHEET
• communicates expected changes in
future asset investments,
outstanding liabilities and equity
financing
• a way to facilitate long-term,
strategic planning
• A business' long-term plans often
concern future asset growth and
how it may be supported by
increased financing through both
debt and equity
WORKING CAPITAL

• A measure of both a company's efficiency and its short-term

financial health
• Working capital is the money used to cover all of a company's
short-term expenses, which are due within one year
• Working capital is used to purchase inventory, pay short-term
debt, and day-to-day operating expenses
• Working capital also called net working capital reflects the
amount of money a company has at its disposal to pay for
immediate expenses
 Working Capital = Current Assets - Current Liabilities

Working capital ratio (Current Assets/Current Liabilities) indicates whether a company has
enough short term assets to cover its short term debt.
Anything below 1 indicates negative W/C

While anything over 2 means that the company is not investing excess assets
If a company's current
assets do not exceed its
current liabilities, then it
may run into trouble
paying back creditors in
the short term. The worst-
case scenario is
bankruptcy.
INTERPRETING WORKING
CAPITAL
If a company is not
operating in the most
efficient manner
(slow collection); it
will show up as an
increase in the
working capital.
 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.
ELEMENTS OF WORKING CAPITAL
MANAGEMENT

Money coming
in, money
going out, and
the
management
of inventory.

Provides the average number of

days it takes a company to Considered a key
receive payment, in other indicator of a company's
words, to convert sales into
cash. The lower a company's fundamental financial
collection ratio, the more health
efficient is its cash flow.

Collection ratio, also

known as the
average collection
period ratio- a
principal measure of
how efficiently a
company manages
its accounts
receivables
5C’S USED IN CREDIT EVALUATION
ELEMENTS OF
WORKING CAPITAL
MANAGEMENT
Inventory management
• A company has to carefully
balance sufficient inventory on
hand to meet customers' needs
while avoiding unnecessary
inventory that ties up working
capital for a long period of time
before it is converted into cash.
Inventory turnover ratio
• Calculated as revenues divided by inventory
cost
• Reveals how rapidly a company's inventory
is being sold and replenished
3 TYPES OF INVENTORIES IN
MANUFACTURING COMPANY
KEY TAKEAWAYS

A company has negative working capital If the ratio of current assets

to liabilities is less than one.

Positive working capital indicates that a company can fund its

current operations and invest in future activities and growth.

High working capital isn't always a good thing. It might indicate

that the business has too much inventory or is not investing its
excess cash.