Financial Planning and Forecasting Overview
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Questions and Answers

What is the total number of purchases needed for the month of January?

  • 1200 (correct)
  • 900
  • 800
  • 1000

How many units are forecasted for sales in the month of February?

  • 600
  • 300
  • 500 (correct)
  • 450

What is the total ending inventory planned for March?

  • 200
  • 250
  • 150
  • 100 (correct)

What will be the unit cost for purchases across all months?

<p>P4.00/unit (A)</p> Signup and view all the answers

What is the total forecasted sales for the first quarter?

<p>1900 (C)</p> Signup and view all the answers

What is the ending inventory for January?

<p>200 units (B)</p> Signup and view all the answers

What is the total sales forecast for the first quarter?

<p>1900 units (A)</p> Signup and view all the answers

What would be the total purchases needed for January?

<p>1000 units (C)</p> Signup and view all the answers

What is the unit cost mentioned for the goods?

<p>P4.00/unit (B)</p> Signup and view all the answers

How many total units does the company aim to have at the end of March?

<p>200 units (A)</p> Signup and view all the answers

What is the beginning inventory for each month?

<p>0 units (C)</p> Signup and view all the answers

What is the total forecasted sales for February?

<p>500 units (B)</p> Signup and view all the answers

Which month has the least forecasted sales?

<p>March (D)</p> Signup and view all the answers

What is a primary benefit of preparing several cash budgets based on different scenarios?

<p>To determine the financing needed for the most adverse situation (D)</p> Signup and view all the answers

Which method is best for creating a realistic pro forma income statement?

<p>Percent-of-sales method with fixed and variable expense segmentation (D)</p> Signup and view all the answers

In preparing a pro forma balance sheet, which approach is typically used?

<p>Judgmental approach with external financing as a balancing figure (A)</p> Signup and view all the answers

What inputs are commonly required to develop pro forma financial statements?

<p>Sales forecast for the coming year and key assumptions (C)</p> Signup and view all the answers

What is the purpose of determining required cash balances in cash budgeting?

<p>To ensure the ability to meet liabilities, like loan payments (D)</p> Signup and view all the answers

How many units does the company intend to have as ending inventory for March?

<p>100 (C)</p> Signup and view all the answers

What is the unit cost for purchases according to the plan?

<p>4 (C)</p> Signup and view all the answers

What was the beginning inventory for February?

<p>150 (B)</p> Signup and view all the answers

How many total units are planned to be purchased in January?

<p>1200 (C)</p> Signup and view all the answers

What is the difference between forecasted sales and total purchases in February?

<p>100 (C)</p> Signup and view all the answers

What is the total beginning inventory for the first quarter?

<p>350 (C)</p> Signup and view all the answers

What is the total of ending inventory across all three months?

<p>350 (B)</p> Signup and view all the answers

What is the total number of units the company plans to purchase in January?

<p>1200 (B)</p> Signup and view all the answers

If the company maintains an ending inventory of 150 units for February, how many units should it sell in February?

<p>500 (A)</p> Signup and view all the answers

What is the unit cost for purchases from January to March?

<p>P4.00/unit (C)</p> Signup and view all the answers

How many units does the company plan to have in its ending inventory for March?

<p>100 (D)</p> Signup and view all the answers

What is the total forecasted sales for the first quarter (1QT)?

<p>1900 (C)</p> Signup and view all the answers

What is the total number of units needed for purchase in February after accounting for beginning and ending inventory?

<p>450 (C)</p> Signup and view all the answers

If the company has no beginning inventory in January, what is the net total demand for January?

<p>1200 (B)</p> Signup and view all the answers

What is the total forecasted sales for March?

<p>400 (B)</p> Signup and view all the answers

What does a cash budget primarily estimate for a firm?

<p>Short-term cash inflows and outflows (A)</p> Signup and view all the answers

How is a cash budget typically structured in terms of time?

<p>Monthly divided into smaller time intervals (A)</p> Signup and view all the answers

If a firm has a beginning balance of P800 and needs a cash balance of P1,000 each month, what will be the cash deficiency at the end of the month?

<p>P200 (C)</p> Signup and view all the answers

In which month does the cash budget show a cash deficiency of 400?

<p>February (C)</p> Signup and view all the answers

What happens when there is a cash deficiency in a cash budget?

<p>Short-term loans may be required (A)</p> Signup and view all the answers

What is the outcome during March according to the cash budget?

<p>Excess cash available (C)</p> Signup and view all the answers

What would NOT be considered when preparing a cash budget?

<p>Investment portfolio growth (D)</p> Signup and view all the answers

In the context of a cash budget, what do excess cash flows imply?

<p>Possibility of investment or loan repayments (A)</p> Signup and view all the answers

Flashcards

Forecasted Sales (Jan)

The projected number of units (1000) a company expects to sell in January.

Beginning Inventory (Jan)

The number of units in stock at the start of the period, in this case 0.

Ending Inventory target(Jan)

Goal of units in stock at the end of the month (200 Units)

Total units needed (Jan)

Calculated by adding sales and desired ending inventory, then subtracting the beginning inventory (1000)

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Unit cost

The price (P4.00) of producing or acquiring one unit of a product.

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Purchase quantity (Jan)

The number of units the company needs to buy or produce in a period, to meet its sales and inventory targets. (1200)

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Forecasted Sales (1Qt)

Total forecasted sales over first quarter of the year (1900)

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Ending Inventory (Mar)

Targeted inventory level at the end of March (100 Units)

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Sales Forecast

A prediction of how many units a company expects to sell in a given period.

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Beginning Inventory

The number of units a company has on hand at the start of a period.

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Ending Inventory Target

The desired number of units a company wants to have in stock at the end of a period.

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Total Units Needed

The total number of units a company requires to meet its sales and inventory targets.

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Purchase Quantity

The number of units a company needs to buy or produce in a period.

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Production Plan

A schedule outlining how many units a company will make in a given period.

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Purchase Plan

A schedule outlining how many units a company will buy in a given period.

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Units Needed

The total number of units required to meet sales and desired ending inventory levels, taking into account the beginning inventory.

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What does 'FTM' stand for?

FTM refers to 'Forecast to Match,' which is a method of planning production or purchasing based on sales forecasts and desired inventory levels.

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Ending Inventory

The number of units a company aims to have in stock at the end of a specific period, like a month or quarter.

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How are forecasted sales used?

Forecasted sales are used to predict future demand and guide production or purchasing decisions.

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What is the 'Total' column calculated by?

The 'Total' column in the table represents the total number of units needed to fulfill sales and maintain ending inventory levels by combining the forecasted sales, beginning inventory, and ending inventory.

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What is the impact of inventory on profits?

Having the right amount of inventory is crucial for profitability. Too much inventory ties up capital and risks waste, while too little leads to lost sales and potential customer dissatisfaction.

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Cash Budget

A financial plan that forecasts cash inflows and outflows over a period of time, helping to ensure the company has enough cash on hand to meet its obligations.

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Pro Forma Financial Statements

Projected financial statements that show what the company's income statement and balance sheet will look like in the future, based on assumptions and forecasts.

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Percent-of-Sales Method

A method used to create pro forma income statements by expressing key expenses as a percentage of forecasted sales.

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Judgmental Approach

A method for creating pro forma balance sheets where certain account values are estimated, and external financing is used to make the balance sheet balance.

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Coping with Uncertainty in Cash Budget

Creating multiple cash budgets based on different scenarios (optimistic, pessimistic, most likely) to assess cash needs and potential financing requirements.

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Cash Receipts

The sources of cash coming into a business, including cash sales, collections from customers, and other cash inflows.

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Cash Disbursements

The payments made by a business, including expenses like salaries, rent, and purchase of inventory.

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Net Cash Flow

The difference between a company's cash inflows and outflows, showing the overall cash flow.

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Required Cash Balance

The minimum amount of cash a company needs on hand to meet its short-term obligations and maintain financial stability.

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Cash Deficiency

A situation where a company's cash outflows exceed its inflows, resulting in a shortage of cash.

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Seasonal Cash Flows

Cash flows that fluctuate throughout the year due to variations in business activity, like higher sales during holidays.

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Short-term Loan

A loan taken out for a short period, typically to cover temporary cash shortages.

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Study Notes

Financial Planning and Forecasting

  • Financial planning involves a structured process, organized by responsibility, for strategic, project, and operational planning. This ensures effective enterprise control and direction.
  • Strategic planning is long-term, focusing on the overall direction of a firm.
  • Operational planning focuses on existing operations, determining effective resource use to achieve short-term and long-term objectives.
  • Project planning involves detailed execution of actions outside the current operational scope.
  • Corporate planning is a formal and systematic process that ensures effective operational, strategic, and project planning by top management.

Pro-Forma Financial Statements

  • Pro-forma statements are estimated, or forecast, balance sheets and income statements.
  • Information for pro-forma statements comes from the preceding year's financial statements, sales forecasts, and key assumptions.
  • The percent-of-sales method projects expenses as percentages of anticipated sales.
  • Judgmental approach: Estimates account values and external financing to "balance" pro-forma statements.

Cash Budgets

  • Cash budgets track predicted cash inflows and outflows, used to estimate short-term cash requirements.
  • Typical cash budgets cover one year, divided into smaller time intervals.
  • The more seasonal/uncertain, the more intervals.

Forecasting (Bad Forecasts)

  • Past examples of poor business predictions include: inventions were considered "fully invented" already(i.e., 1899); limited computer storage was considered adequate for all needs; computers in the home were considered impractical etc.
  • Historical examples of bad forecasts highlight unpredictability in technological advancement.
  • Business leaders and experts can sometimes make wrong predictions.

Important Planning Concepts

  • Planning is a thought process involving foresight, based on facts and experience, that results in intelligent action.
  • Planning is the act of deciding in advance what needs to be done, to create structure for future operations and achieve desired results.
  • Planning is an intellectually demanding process and should include purpose/knowledge/estimated of future events.
  • Planning is a detailed course of action designed to accomplish future goals.
  • Planning is needed to guide, coordinate, and control company actions to achieve objectives.
  • Management is responsible for setting objectives and defining how to achieve them.

Operational Plan

  • It starts with specific operational objectives that define future goals.
  • It consists of different plans for marketing, production, human resources.
  • The financial plan is an important element for effective operations.

Strategic Financial Plans

  • Strategic financial plans outline a company's planned financial activities and their impact over 2-10 years.
  • These plans typically involve detailed consideration of financial activities such as proposed fixed asset investments, research and development, and marketing/product developments.
  • These plans also involve identifying the financial sources required for successful implementation of strategic plans.

Operating Financial Plans

  • These are short-term financial plans that follow up on strategic plans with anticipated outcomes for those actions.
  • Key inputs include the sales forecast and other financial/operational data,
  • Key outputs include operating budgets, cash budget, and pro-forma financial statements.

Budget Preparation (Recap)

  • Prepare a sales forecast,
  • Determine expected production volume
  • Estimate manufacturing costs, overhead, and other operating expenses
  • Determine cash flow and other financial impacts.
  • Formulate forecast financial statements

Master Budget

  • A master budget is a comprehensive summary of a company's plans for a period of time usually 1 year, starting with a sales budget, leading to productions plans, direct labor factory overhead etc and covering all major financial tasks such as cash budget, pro-forma income statement and statements of financial position.

Example 1 (Cash Receipts)

  • Cash receipt schedules detail the timing of cash inflows.
  • A company's projected sales, credit terms, and collection patterns impact planned inflows and outflows.
  • The collection patterns can impact cash flow and overall business planning.

Example 2 ( External Funds Needed)

  • External Funds Needed (EFN) calculations determine the need for financing to cover projected increases in assets.
  • EFN is calculated using formulas based on asset/liability relationships to sales, and are specific to each company.

Additional Readings

  • Links to various resources related to financial planning and forecasting.

Self-Test Questions

  • Questions about planning, financial planning process, cash budgets, and pro-forma statements to test understanding.

Learning Activity

  • An activity to develop forecast statements of income and financial position based on previously provided data and information.

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Related Documents

Financial Planning and Forecasting PDF

Description

This quiz covers essential concepts in financial planning, including strategic, operational, and project planning. It also explores pro-forma financial statements, emphasizing their purpose and preparation using historical data. Test your knowledge on how effective planning impacts organizational success.

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