FINANCIAL

PLANNING
Learning Objectives:

At the end of the lesson, the students are expected to:

1. Discuss the important role of financial planning and forecasting;
2. Foresee the business’ investing and financing needs to support its
operations for next year or beyond and
3. Come up with short-term and long-term financial plans or budget for
the business.
Generally speaking financial planning process is articulated in a document
called FINANCIAL PLAN. The financial plan is divided into:

1. The LONG-TERM FINANCIAL PLAN, also known as STRATEGIC

FINANCIAL PLAN; and
2. The SHORT-TERM FINANCIAL PLAN, also known as the
OPERATING FINANCIAL PLAN.
FINANCIAL PLANNING

 Defined as the forecasting of a business’ future financing requirements.

LONG TERM F.P. – 3-5 YEARS

SHORT-TERM F. P. – WITHIN A YEAR

 Basically, developing the long-term plan comes down to a few simple steps:
a. FORECAST YOUR SALES
- In forecasting sales, it helps to start with an understanding of the industry your business belongs to,
knowing your target market segment from that industry, and forecasting your market share in terms
of sales form that segment.
- Business acquires assets to generate sales. If it wants to increase sales, then it has to acquire more
assets. This relationship is captured by the capital intensity ratio, which is calculated as:

Capacity Intensity Ratio= Total Assets/Total Sales

--A capital intensity ratio, say five, means that it takes P5 worth of assets to generate a peso worth of
sales.
b. COMPUTE THE DIVIDEND PAYOUT RATIO AND THE PLOWBACK RATIO
PAYOUT RATIO – The proportion of net income paid out as dividends.
PLOWBACK RATIO – is the proportion of net income that does not paid out in cash dividends.
c. IDENTIFY YOUR SPONTANEOUSLY-GENERATED FUNDS- Loading up inventory; Accounts payable
and accrued expenses “naturally” increase as a result of higher sales.
d. USE THE PERCENT OF SALES APPROACH TO PREPARE THE PRO-FORMA FINANCIAL
STATEMENTS – This approach calls for dividing expenses, assets and liabilities by the sales figure. This
sales figure can be based on the latest available financial statement, the average figure the past few years or
a combination of both. The derived percentages are then used as weights in preparing the pro forma income
statement and balance sheet. It is interesting to note that pro forma is a Latin word which means “as matter
of form” and is used to emphasize projected figures.
e. CALCULATE YOUR EXTERNAL FINANCING NEED (EFN)
EFN, also known as ADDITIONAL FUNDS NEEDED (AFN) and DISCRETIONARY
FINANCING NEEDS (DFN), is the required additional financing, through the additional issuance of interest-
bearing debt and common stock, to acquire the needed assets.
 BELOW IS AN EXAMPLE

 LET US SAY SALES ARE FORECASTED TO GROW 20% NEXT YEAR.

INCOME STATEMENT PERCENT OF SALES

Sales 9,268,315
Costs 5,097,573.25 55%
Taxable Income 4,170.741.75
Taxes (30%) 1,251,222.53
Net Income 2,919,519.23 31.50%
Dividends (0%) 0
Addition to Retained Earnings 2,919,519.23
 PRO FORMA INCOME PERCENT OF
STATEMENT SALES

Projected Sales (20%) 11,121,978

Costs (55%) 6,117,087.90 55%

Taxable Income 5,004,890.10

Taxes (30%) 1,501,467.03

Net Income 3,503,423.07 31.50%

Dividends (0%) 0

Addition to Retained Earnings 3,503,423.07

CAPITAL INTENSITY RATIO

CALCULATED AS TOTAL ASSETS DIVIDED BY TOTAL SALES.

A CAPITAL INTENSITY RATIO OF 5, MEANS IT TAKES P5 TO GENERATE A

PESO SALE.
 BALANCE SHEET PERCENT OF SALES

CASH AND CASH EQUIVALENTS (20%) 1,482,930.40 16.00%

ACCOUNTS RECEIVABLE (44%) 4,078,058.60 44.00%
INVENTORY (60%) 5,560,989.10 60.00%
CURRENT ASSETS 11,121,978.00 120.00%

PPE-net 16,682,967.00 180%

TOTAL ASSETS 27,804,945.00

ACCOUNTS PAYABLES (30%) 2,780,494.50 30.00%

ACCRUED EXPENSES 926,831.50 10.00%
NOTES PAYABLES 88,150.00N/A
CURRENT LIABILITIES 3,795,476.00N/A
NONCURRENT LIABILITIES 500,597.00N/A
LIABILITIES 4,296,073.00N/A

COMMON STOCK 16,456,210.40N/A

RETAINED EARNINGS 7,052,661.60N/A
OWNER'S EQUITY 23,508,872.00N/A
TOTAL LIABILITIES + OWNER'S EQUITY 27,804,945.00N/A
 BALANCE SHEET PERCENT OF SALES
CASH AND CASH EQUIVALENTS 1,779,516.48 16.00%
ACCOUNTS RECEIVABLE 4,893,670.32 44.00%
INVENTORY 6,673,186.80 60.00%
CURRENT ASSETS 13,346,373.00 120.00%

PPE-net 20,019,560.40 180%

TOTAL ASSETS 33,365,934.00

ACCOUNTS PAYABLES 3,336,593.40 30.00%

ACCRUED EXPENSES 1,112,197.80 10.00%
NOTES PAYABLES 88,150.00N/A
CURRENT LIABILITIES 4,536,941.20N/A
NONCURRENT LIABILITIES 500,597.00N/A
LIABILITIES 5,037,538.20N/A

COMMON STOCK 16,456,210.40N/A

RETAINED EARNINGS 10,556,084.57N/A
OWNER'S EQUITY 27,012,295.00N/A
TOTAL LIABILITIES + OWNER'S EQUITY 32,049,833.20N/A
EXTERNAL FINANCING NEEDED 1,316,100.80
THE BUDGET PRESENTATION

 THE PRIMARY TOOL IN SHORT-TERM FINANCIAL PLANNING IS THE

CASH BUDGET, ALSO KNOWN AS CASH FORECAST. IT PLOTS THE
BUSINESS’ PROJECTED CASH INFLOW AND OUTFLOW AND IS
TYPICALLY DONE MONTHLY AND IS USED TO COVER YEAR’S TIME.
AN EXAMPLE OF A CASH BUDGET IS SHOWN BELOW.
 CASH BUDGET
JAN. FEB. MAR
CASH RECEIPTS
LESS: CASH DISBURSEMENTS
NET CASH FLOW
ADD: BEGINNING CASH
ENDING CASH

LESS: MINIMUM CASH BALANCE

REQUIRED TOTAL FINANCING
EXCESS CASH BALANCE
 IT IS DIVIDED INTO THREE PARTS, WHICH ARE AS FOLLOWS:
1. CASH RECEIPTS
2. CASH DISBURSEMENTS
3. EXCESS CASH BALANCE/REQUIRED TOTAL FINANCING
JUST LIKE THE LONG-TERM PLAN, PREPARING THE CASH
BUDGET COMES DOWN TO A FEW SIMPLE STEPS:
1. FORECAST THE BUSINESS’ MONTHLY SALES. AGAIN, THIS
CAN BE DONE USING HISTORICAL FIGURES.
2. FORECAST THE CASH SALES AND THE CREDIT SALES
FROM THE PROJECTED MONTHLY SALES. CASH SALES ARE
MORE PREFERABLE TO CREDIT SALES. IF SALES ARE MADE
ON CREDIT, THEN ESTIMATE WHEN THOSE RECEIVABLES
WILL BE COLLECTED.
3. TAKE INTO ACCOUNT OTHER CASH RECEIPTS.
4. SUM UP THE TOTAL CASH RECEIPTS.
5. FORECAST THE BUSINESS’ MONTHLY PURCHASES.
6. FORECAST THE CASH PURCHASES AND THE CREDIT PURCHASES FROM
THE PROJECTED MONTHLY PURCHASE. IF PURCHASES ARE MADE ON
CREDIT, THEN FORECAST WHEN THOSE PAYABLES WILL BE PAID.
7. TAKE INTO ACCOUNT OTHER CASH DISBURSEMENTS.
8. SUM UP THE TOTAL CASH DISBURSEMENTS.
9. SUBTRACT THE TOTAL CASH DISBURSEMENTS FROM THE TOTAL CASH
RECEIPTS TO GET THE NET CASH FLOW.
10. ADD THE BEGINNING CASH BALANCE TO THE NET CASH FLOW TO GET
THE ENDING CASH BALANCE.
11. SUBTRACT THE MINIMUM CASH BALANCE FROM THE ENDING CASH
BALANCE.
 CONSIDER THE SITUATION THAT FOLLOWS.
SALES IN JANUARY AND FEBRUARY WERE 150,000 AND 220,000,
RESPECTIVELY. SALES OF 380,000,340,000, AND 295,000 HAVE BEEN
FORECASTED FOR MARCH, APRIL AND MAY RESPECTIVELY. THUS, WE
ARE TRYING TO DEVELOP A CASH BUDGET FOR MARCH TO MAY.
BASED ON HISTORICAL DATA, 15% OF THE BUSINESS SALES ARE IN
CASH FORM, 55% HAVE GENERATED ACCOUNTS RECEIVABLES
COLLECTED AFTER ONE MONTH, AND THE REMAINING 30% HAVE
GENERATED ACCOUNTS RECEIVABLES COLLECTED AFTER TWO
MONTHS. IT ALSO RECEIVES A MONTHLY INTEREST PAYMENT OF
150,000 FROM A BANK CERTIFICATE OF DEPOSIT.

* LET US NOW PREPARE A CASH RECEIPT SCHEDULE USING STEPS 1

TO 4 ARTICULATED ABOVE
SALES FORCAST JAN FEB MAR APR MAY
150,000 220,000 380,000 340,000 295,000
CASH SALES (15%) 22,500 33,000 57,000 51,000 44,250
ACCOUNTS
RECEIVABLES
COLELCTIONS

LAGGED 1
MONTH 82,500 121,000 209,000 187,000

LAGGED 2
MONTHS 45,000 66,000 114,000
OTHER CASH
RECEIPTS 150,000 150,000 150,000 150,000 150,000
TOTAL CASH
RECEIPTS 172,500 265,500 373,000 476,000 492,250
 LET US NOW PREPARE THE CASH DISBURSEMENT FOR THE SAME
PERIOD USING STEPS 5-8.
 CONSIDER THE CASE THAT FOLLOWS
PURCHASES REPRESENT 80% OF SALES. OF THIS AMOUNT, 5% IS
PAID IN CASH, 80% AND 15% ARE PAID AFTER ONE MONTH AND TWO
MONTHS, RESPECTIVELY. AFTER THE PURCHASE, THE BUSINESS ALSO
PAYS A RENT OF 15,000 EVERY MONTH.
WAGES ARE 5% OF MONTHLY SALES. ON THE OTHER HAND,
FIXED SALARY COST FOR THE YEAR IS 144,000 OR 12,000 PER MONTH.
TAXES OF 40,000 WILL BE PAID IN APRIL WHILE CAPITAL
EXPENDITURE IN THE FORM OF NEW MACHINERY COSTING 200,000
WILL BE PURCHASED AND PAID IN FULL IN MARCH.
FURTHERMORE, AN INTEREST PAYMENT OF 110,000 IS DUE
EVERY MONTH. A 150,000 PRINCIPAL PAYMENT IS ALSO DUE IN MAY.
 JAN FEB MAR APR MAY
PURCHASES 120,000 176,000 304,000 272,000 235,000
CASH PURCHASES 6,000 8,800 15,200 13,600 11,800

ACCOUNTS PAYABLE
PAYMENTS

LAGGED 1
MONTH 96,000 140,800 243,200 217,600

LAGGED 2
MONTHS 18,000 26,400 45,600
RENT PAYMENTS 15,000 15,000 15,000 15,000 15,000
WAGES AND SALARIES 19,500 23,000 31,000 29,000 26,750
TAX PAYMENTS 40,000
FIXED ASSET OUTLAY 200,000
INTEREST PAYMENT 110,000 110,000 110,000 110,000 110,000
PRINCIPAL PAYMENT 150,000
TOTAL CASH
 AT THE END OF FEBRUARY, THE CASH BALANCE WAS 70,000. IT
WANTS TO HAVE A TARGET CASH BALANCE OF 90,000.

CASH BUDGET

JAN. FEB. MAR APR MAY

CASH RECEIPTS 172,500 265,500 373,000 476,000 495,250

LESS: CASH DISBURSEMENTS 150,500 252,800 530,000 477,200 576,750

NET CASH FLOW 22,000 12,700 -157,000 -1,200 -81,500

ADD: BEGINNING CASH 70,000 -87,000 -88,200

ENDING CASH 70,000 -87,000 -88,200 -169,700

LESS: MINIMUM CASH BALANCE 90,000 90,000 90,000

REQUIRED TOTAL FINANCING -177,000 -178,200 -259,700

EXCESS CASH BALANCE