Financial Planning, Tools, and Concepts 1 (Budgeting)

Objectives:
At the end of the lesson, the learners are able to:
1. identify the role played by financial planning in a business
2. identify the steps involved in the financial planning process them..
3. define budget
4. identify the different types of budgets available
5. prepare budgets and analyze
Financial Planning Process
The financial planning process begins with long-term or strategic
financial plans, which in turn, are used to develop short-term or
operating financial plans and budget.

A long-term financial plan is generally supported by a series of

short-term financial plans. Short-term financial plans on the other hand
specify financial actions whose results or impact are expected to occur
for a short period of time. Typically, short-term financial plans cover
one to two years. Inputs on short-term financial plans would highlight
the firm’s operations in the short-run such as sales and production
forecasts for specific period. Outputs of short term financial planning
commonly include operating budgets, cash budgets, as well as
projected financial statements. Short-term financial plans provide
managers a picture of the entity’s anticipated results of operations and
resource allocation in the short-run.

PROFIT PLANNING
Profit planning projects the firm’s results of the operation and overall
financial position for a given period of time, on the basis of both
historical information and assumptions about the near future.
Assumptions include estimating future sales growth, cost of
inventories among others.
In profit planning, the firms makes a variety of assumptions in making
its projections, using internal and external, quantitative and qualitative
information that might affect the firm’s overall financial condition.

Budgets
A budget is a plan expressed in quantitative terms, which emphasizes
the resource use and resource allocation of an entity over a specified
period of time. Budget preparation is a planning and control tool often
utilized by most decision-makers. It facilitates the qualification of plans
And proposals along with the potential financial effects of such actions.
Advantages of preparing a budget
One of the advantages offered by budgeting is efficient and effective
resource utilization. Because resources that firms control are scare,
firms, through budgets, should be able to forecast its resource needs
and effectively allocate each resource along with current demands or
requirements.
Kinds of Budgets
Master budget – represents the overall plan of an organization for a
given period. It is an aggregation of all lower level budgets in an
organization.

Flexible budget- a budget that allows for varying provision based on

a given level of activity. Usually prepared at the end of the period for
purposes of comparing of actual with budgeted results.
Common budgets prepared in a business
a. Sales budget
Since budgets play a crucial role in organizational control and
coordination, it is important that an organization prepares its budgets
for a given period.
The most important assumptions to be considered in the process of
preparing a sales budget would be the firm’s sales forecast. A sale
forecast is a prediction of the firm’s sales over a specific period, based
on external and internal information.
For example, ABC Merchandising which is engaged in the reselling of
toys, is in the process of preparing its budgets for the calendar year
2015. Last year ABC was able to sell 150,000 toys with selling price
of 200 per toy. For the current year. On the basis of both external and
internal information, ABC expect to sell 40,000 toys for the first quarter
alone. The firm also expects that unit sales per quarter would
increase 10% . Selling price is also expected to increase by 10%.
Selling price is also expected to increase 10% for 2015.
 ABC Merchandising
Sales Budget
For the year ended Dec. 31, 2015
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER TOTAL

Forecasted sales ( in units) 40,000 44,000 48,400 53,240 185,640

Selling price per unit 44 44 44 44 44

Total Sales 1,760,000 1,936,00 2,129,600 2.342,560 8,168,160

Exhibit 4.1
b. Purchased budget
After preparing the sales budget, a merchandising business can
now start preparing a purchase budget. In preparing the purchases
budget, key inputs would be as follows:
Beginning inventory
Desired ending inventory
Estimated sales in units

Continuing our illustration on ABC Merchandising, ABC has a policy

that the ending inventory for the quarter is equal to the 20% of the
estimated unit sales of of the succeeding quarter. At the close 2014,
ABC still had 8,000 units of inventory on hand.
 ABC Merchandising
Purchases Budget
Exhibit 4.3 purchase budget For the year ended December 31, 2015
Ist Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
Expected Sales in Units 40,000 44,000 48,400 53,240 185,640

Add: desired ending 8,800 9,680 10,648 0 0

inventory (in Units)
Total inventory Requirement 48,800 53,680 59,048 53,240 214,763
Less: Beginning inventory (in 8,000 8,800 9,640 10,648 8,000
units)
Estimated Purchase (in 40,800 44,880 49,368 42,592 177,640
units)
Referring to the exhibit 4.3, observe that each quarter’s desired ending
inventory is based on 20% of the unit sales of the succeeding quarter
(as seen in exhibit 4.1) Furthermore, the beginning inventory for each
quarter is the ending inventory in units carried forward from the
proceeding quarter. For instance, first quarter ending inventory is
obtained by multiplying the 2nd quarter unit sales of 44,000 by 2o%.
Furthermore, its beginning inventory of 8,000 is obtained by multiplying
40,000 by 20%. Observe that for the total purchases requirement, the
ending inventory as of the fourth quarter and the beginning ineventory of
first quarter were used.
Referring back to ABC Merchandising, ABC estimates that each toy would cost P 30.00 for 2015. And thus, its
purchases budget can further be updated : cost P 30.00.
ABC Merchandising
Purchases Budget (in peso)
For the year ended December 31, 2015

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total

Estimated Purchases in units 40,800 44,880 49,368 53,092 217,268

Multiplied by Cost per unit 30 30 30 30 30

Estimated Total Cost Purchases 1,224,000 1,346,400 1,481,040 1,592.760 6.518,040

Exhibit 4.4
 c. Cash budget
A cash budget showed the planned flows and outflows of cash in th
entity for a given period of time. This schedule will aid the firm towards
estimating the short-term cash requirements. The schedule
emphasizes the firm may experience cash shortages, in which case, it
would use to borrow additional cash to meet financing requirements or
cash surplus, that might present short-term investment opportunities for
the firm. Generally, a cash budget could further be divided into cash
receipts and cash disbursements schedules.
Cash Receipts Budget
A firm’s cash receipts budget focuses on all cash inflows expected by
the firm for a given time period. The most common sources of cash
would be cash sale of goods and services, accounts receivable
collections, and other cash receipts.
ABC Merchandising is the process of estimating its cash receipts for
the fourth quarter of the year. It is estimated for the sales for each
month will be as follows: October- 70,000, November- 80,000,
December 842,560. 20% of each month’s sales are cash sales and the
balance is expected to be collected as follows: 30% in the month after
the sales and 50% two months after the sale, the balance is
uncollectible. ABC”S expects to receive a P 140,000 dividend from one
of its investments for both October and December.
 CASH RECEIPT SCHEDULE
OCTOBER NOVEMBER DECEMBER TOTAL
Sales Forecast P 700,000 P 800,000 842,560 P 2,342,560

Cash Sales 140,000 160,000 168,512 468,512

Collection of account receivables ---- ------- --------- -------
One month lagged - 168,000 192,000 360,000
Two Months lagged 280,000 320.00 600,000

Other cash receipts 140,000 140,000 280,000

Budgeted Cash receipts P 280,000 608,000 820,512
1,708,512
Cash Disbursements
A firm cash disbursements, on the other hand, shows possible outflows
or use of cash for given time period. Typical disbursements of cash
include, cash purchases for inventory or raw materials, payment of
accounts payable, rental payments, payment of wages, tax payments,
and possibly interest payments.
Continuing Exhibit 4.5. ABC has the following inventory purchases
for the fourth quarter:” October 160,000, November; 200,000,
December: 220,000. ABC pays 30% of the purchases on the month
purchase, 40% of the balance being paid a month after and the
remaining 30% two months after the sale. ABC pays a monthly rent
5,000 and pays mpnthly wages of 20,000 to its four workers.
 Cash Disbursements Schedule
October November December Total
Purchases P160,000 P 200,000 P 220,000 P 580.000

Payment of Purchases on
Account ----- ------- ------------ -----

Month of Purchase 48,000 60,000 66,000 174,000

One Month lagged ---- 64,000 80,000 144,000
Two months lagged - - 48,000 48,000
Rental payments 5,000 5,000 5,000 15,000
wages 20,000 20,000 20,000 60,000
Budgeted Cash Disbursements 73,000 149,000 219,000 441,000
Since both cash receipts and disbursement schedules were already
prepared, we are now ready to prepare the firm’s cash budget for the
three-month period provided. ABC requires that a minimum cash
balance of P 50,000 is maintained at all times. The ending cash
balance for the month of September was P 10,000.
 Cash budget
October November December
Cash Receipts 280,000 608,000 820,512
Less: Cash Disbursements 73,000 149,000 219,000
Net Cash Flow 207,000 459,000 601.12
Add: Beginning Balance 10,000 217,000 676.00
Ending Balance 217,000 676.00 1,277,512
Less: Minimum Cash Balance 50,000 50,000 50,000
Required Financing ----
Excess Cash 167,000 626,000 1,277,512
ABC’s cash budget shows a projection of its net cash position for each of the months covered in
the schedule. Observe that both cash receipts and disbursements were crucial in estimating the
cash balance at the end of each month. Aside from that, the presence of minimum cash balance
might require the firm to borrow in the event that the ending cash balance goes below the
minimum cash balance, there is excess cash that the entity can invest and thus, no borrowing is
needed.
One of the most crucial schedule to prepare in doing a budgeted income statement would be the estimated cost of
goods sold to that period. The following is a pro-forma computation for estimating cost of goods sold for a given
period.
Cost of Goods Sold Budget

Estimated beginning inventory xxxxxxxxxx

Add: Budgeted Purchases (Goods Manufactured for a xxxxxxxxxxx

manufacturing firm.
Estimated Goods Available for Sale xxxxxxxxxxx

Less: Ending inventory ( in peso) xxxxxxxxxx

Budgeted Cost of Good Sold xxxxxxxxxxx

 ABC Company
Budgeted of Cost Good Sold
Exhibit 4.9 For the year ended December 31 2015
Ist Quarter 2nd Quarter 3rd Quarter 4th Quarter Total

Estimated Beginning Inventory (in 240,000 290,400 240,000

peso)
Add: Budgeted Purchases 1,224,000 1,481.040 6518.040

Estimated Goods Available for Sale 1,464.000 1,610,400 1,771,400 1,912.200 6.758.040

Less Ending inventory (in peso) 264,000 3,19440 315,000 315,000

Budgeted Cost of Goods Sold 1,200.000 1,320.000 1,452.000 1,597,200 6,443.040

Budgeted income statement.
in the process of short-term financial planning, the entity would be interested
towards projecting its probable results of operation given the budgeted sales and
purchases levels forecast previously. The budgeted income statement shows the
entity’s budgeted sales, budgeted cost of sales, along with budgeted operating
expenses in order to arrive at the projected net profit for that given accounting
period.
Once the budgeted cost of goods sold has been prepared, it will now be easy for the
firm to complete its budgeted income statement with assumptions on its operating
expenses being taken into consideration. Continuing the illustration using ABC
Merchandising, it is estimated that total operating expenses incurred by the company
is 10% of the quarter gross sales. With that assumption, presented below is ABC’s
budgeted income statement for 2015.
 Exhibit 4.10
ABC COMPANY
Budgeted Income Statement
For the Year ended December 31, 2015
Ist Quarter 2nd Quarter 3rd Quarter 4th Quarter Total

Sales P 1,760,000 P 1,936,000 P 2,129,600 P 2,342 8,168,160

Cost of Good Sold 1,200,000

Gross Profit 560,000

Less Operating Expenses 176,000 234,256 816,816

Net Income P 384,000 P 422,400 464,640 511,104 556,920

Budgeted statement of financial position.
A budgeted statement of financial position shows a projection of
the resources, claims and residual interests in the firm for a specific
date. This will facilitate the evaluation of the firm’s projected
financial position.