Financial Planning and Forecasting PDF

Financial Planning and Forecasting Financial Planning and Forecasting Pro-Forma Financial Statements  Some Bad Forecasts "Everything that can be invented has been invented." --Commissioner, U.S. Office of Patents, 1899. "640K ought to be enough for anybody." -- Bill Gates, 1981 Some Bad Forecasts...

Financial Planning and Forecasting Financial Planning and Forecasting Pro-Forma Financial Statements  Some Bad Forecasts "Everything that can be invented has been invented." --Commissioner, U.S. Office of Patents, 1899. "640K ought to be enough for anybody." -- Bill Gates, 1981 Some Bad Forecasts "But what... is it good for?" --Engineer at the Advanced Computing Systems Division of IBM, 1968, commenting on the microchip. "There is no reason anyone would want a computer in their home." --President, Chairman and founder of Digital Equipment Corp., 1977 Some Bad Forecasts "I think there is a world market for maybe five computers." --Chairman of IBM, 1943 "We don't like their sound, and guitar music is on the way out." --Decca Recording Co. rejecting the Beatles, 1962.  Forecasting What is generally the first item to estimate when starting a business? What is the most difficult aspect of forecasting?  1. Explain the importance of planning. 2. Differentiate between strategic and operational planning. Learning 3. Identify and apply the steps in financial planning Objectives and forecasting. 4. Prepare budget. schedules. FINAMA A 5. Construct pro-forma financial statements. What is planning? “… the thinking process, the organised foresight, the vision based on fact and experience that is required for intelligent action.” - Alford and Beatt “… deciding in advance what is to be done. When a manager plans, he projects a course of action, for the future, attempting to achieve a consistent, coordinated structure of operations aimed at the desired results.” - Tlieo Haimann “… an intellectually demanding process; it requires that we consciously determine courses of action and base our decisions on purpose, knowledge and considered estimates.” - Weihrich FINAMA 3 and Koontz A  Other Definitions Corporate planning  Formal and systematic managerial process, organized by responsibility, time and information, to ensure that operational planning, project planning and strategic planning are carried out regularly to enable top management to direct and control the future of the enterprise Strategic planning  Long-range in nature; deals with overall direction of the firm Project (capital expenditure) planning  Working out detailed execution of an action outside scope of current operations Operational planning  Forward planning of existing operations; involves determination of how to effectively use current resources to attain both short-range goals and long-range objectives FINAMAA 4  Plan vs. Strategy Plan  detailed course of action designed today to do something tomorrow Strategy  an integration of an organization’s important objectives, policies and programs into a cohesive whole  marshals and allocates organization’s limited resources into a viable posture to best achieve organization’s goals, considering its weaknesses and strengths relative to expected opportunities and strengths in future environment; FINAMA A adopted in  Importance of Planning Provides road maps for guiding, coordinating and controlling the firm’s actions to achieve its objectives Management planning is about setting the goals of the organization and identifying ways on how to achieve them. FINAMA A  Operational Plan Begins with series of specific operational objectives that define where the firm wants to be at the end of the planning period Consists of  Marketing plan  Production plan  Human resource plan  Financial plan FINAMA A  The Financial Planning Process Begins with long-term (strategic) financial plans that in turn guide the formulation of short-term (operating) plans and budgets Key aspects  Cash planning – preparation of cash budget  Profit planning – construction of pro-forma statements FINAMA A  Strategic Financial Plans lay out a company’s planned financial actions and the anticipated impact of those actions over periods ranging from 2 to 10 years (Strategic = Long Term) FINAMA A  Strategic Financial Plans consider a number of financial activities including: Proposed fixed asset investments Research and development activities Marketing and product development Capital structure Sources of financing generally supported by a series of annual FINAMA A  Operating Financial Plans specify short-term financial actions and the anticipated impact of those actions Key inputs include the sales forecast and other operating and financial data. Key outputs include operating budgets, the cash budget, and pro forma financial statements. FINAMA A begins with a sales forecast *(this is where we start) after the sales forecast, the SALES PRODUCTION production FORECAST PLANS forecast From thewill production follow plans, direct labor, factory overhead, PRO-FORMA DIRECT LABOR, and operating INCOME FACTORY expense estimates The pro forma income STATEMENT, OVERHEAD, are developed. statement and cash CASH BUDGET, PRO-FORMA OPERATING EXPENSE budget are then BALANCE SHEET ESTIMATES prepared—ultimately leading to the Operating Financial development of the pro FINAMA 1  SALES FORECAST i.e. Compay A Forsecasted the Sale of number of units to be sold for every each month of the year Month Units Unit Total Month Units Unit Total Price Sales Price Sales JAN 1,000 10 10,000 JUL 400 10 4,000 FEB 500 10 5,000 AUG 500 10 5,000 MAR 400 10 4,000 SEPT 500 10 5,000 APR 500 10 5,000 OCT 1,000 10 10,000 MAY 300 10 3,000 NOV 1,500 10 15,000 JUN 300 10 3,000 DEC 2,000 10 20,000 FINAMA A  Required: SALES 1. Schedule 1. Projected Sales in units and in pesos per quarter and for FORECAST year 2024 2. Schedule 2. Estimated collection from customers per quarter and for Collection Patterns : 60% Same Quarter as Sales, 30% Next Quarter the year 2024 After the Sales, 8% Next Next Quarter after the Sales. 60%-30%-8% Charmaine Corporation made the following projections on its sales in the coming year 2024 Economy 1Q 2Q 3Q 4Q Probability Good 74,000 92,000 80,000 102,000 50% Fair 50,000 80,000 70,000 90,000 30% Bad 40,000 50,000 45,000 60,000 20% The unit sales price is expected to be constant @ P20.00. All sales are made on credit. Receivables from customers are collected 60% in the quarter sales, 30% in the quarter following the sales and 8% in the second quarter following the sale. The remaining 2% is considered uncollectibles. The account receivable balance on December 31, 2023 is estimated to be P640,000; 25% of which coming from 3rd Quarter sales of 2023.  Required: PRODUCTION 1. Schedule 3 Budgeted Production per Quarter and in Total PLAN 2. Schedule 4 Budgeted Materials purchases per quarter and in total 3. Schedule 5 Bdugeted Payment to merchandise suppliers (MANUFACTURIN G) Charmaine Corporation has a budgeted units sales of its product in 2024 up to the first uarter of 2025 as follows. The company has a policy of maintaining finished 2019 1Q 60,000 goods equal to 20% of the next Quarter sales and 2Q 80,000 material inventory of 30% of currecnt Quater’s 3Q 70,000 requirements. 4Q 90,000 It takes 3 pounds of material BX-23 to produce unit of 2020 1Q 75,000 product. The materials inventory at the start of the year was recorded at 75,000 pounds. Materials BX-23 cost P1.20 per pound to purchase. The term of purchased is 2/30, n/45. the company pays 55% of its purchases in the uarter of purchase and avail of the 2% trade discount. The remaining balance is paid on the following uarter. The accounts payable in December 31, 2023 ared valued at P81,000. PRODUCTION PURCHASE PLAN PLAN (MANUFACTURIN (MERCHANDISIN G) G) i.e. unit cost P4.00/unit, the company intends to continue to stock up an ending inventory of 200 unit FTM of JAN, 150 units FTM of FEB & 100 FTM of MAR JAN FEB MAR 1QT Forecasted 1000 500 400 1900 Sales FINAMA A PRODUCTION PURCHASE PLAN PLAN (MANUFACTURIN (MERCHANDISIN G) G) i.e. unit cost P4.00/unit, the company intends to continue to stock up an ending inventory of 200 unit FTM of JAN, 150 units FTM of FEB & 100 FTM of MAR JAN FEB MAR 1QT Forecasted 1000 500 400 1900 Sales Total Purchase (Q) FINAMA A PRODUCTION PURCHASE PLAN PLAN (MANUFACTURIN (MERCHANDISIN G) G) i.e. unit cost P4.00/unit, the company intends to continue to stock up an ending inventory of 200 unit FTM of JAN, 150 units FTM of FEB & 100 FTM of MAR JAN FEB MAR 1QT Forecasted 1000 500 400 1900 Sales Less: Beg. Inv Total Purchase (Q) FINAMA A PRODUCTION PURCHASE PLAN PLAN (MANUFACTURIN (MERCHANDISIN G) G) i.e. unit cost P4.00/unit, the company intends to continue to stock up an ending inventory of 200 unit FTM of JAN, 150 units FTM of FEB & 100 FTM of MAR JAN FEB MAR 1QT Forecasted 1000 500 400 1900 Sales Less: Beg. Inv Total Total Purchase (Q) FINAMA A PRODUCTION PURCHASE PLAN PLAN (MANUFACTURIN (MERCHANDISIN G) G) i.e. unit cost P4.00/unit, the company intends to continue to stock up an ending inventory of 200 unit FTM of JAN, 150 units FTM of FEB & 100 FTM of MAR JAN FEB MAR 1QT Forecasted 1000 500 400 1900 Sales Less: Beg. Inv Total Add: End Inv Total Purchase (Q) FINAMA A PRODUCTION PURCHASE PLAN PLAN (MANUFACTURIN (MERCHANDISIN G) G) i.e. unit cost P4.00/unit, the company intends to continue to stock up an ending inventory of 200 unit FTM of JAN, 150 units FTM of FEB & 100 FTM of MAR JAN FEB MAR 1QT Forecasted 1000 500 400 1900 Sales Less: Beg. Inv Total Add: End Inv Total Purchase (Q) x Unit Cost FINAMA A PRODUCTION PURCHASE PLAN PLAN (MANUFACTURIN (MERCHANDISIN G) G) i.e. unit cost P4.00/unit, the company intends to continue to stock up an ending inventory of 200 unit FTM of JAN, 150 units FTM of FEB & 100 FTM of MAR JAN FEB MAR 1QT Forecasted 1000 500 400 1900 Sales Less: Beg. Inv Total Add: End Inv Total Purchase (Q) x Unit Cost FINAMA A PRODUCTION PURCHASE PLAN PLAN (MANUFACTURIN (MERCHANDISIN G) G) i.e. unit cost P4.00/unit, the company intends to continue to stock up an ending inventory of 200 unit FTM of JAN, 150 units FTM of FEB & 100 FTM of MAR JAN FEB MAR 1QT Forecasted 1000 500 400 1900 Sales Less: Beg. Inv 0 Total Add: End Inv Total Purchase (Q) x Unit Cost FINAMA A PRODUCTION PURCHASE PLAN PLAN (MANUFACTURIN (MERCHANDISIN G) G) i.e. unit cost P4.00/unit, the company intends to continue to stock up an ending inventory of 200 unit FTM of JAN, 150 units FTM of FEB & 100 FTM of MAR JAN FEB MAR 1QT Forecasted 1000 500 400 1900 Sales Less: Beg. Inv 0 Total 1000 Add: End Inv Total Purchase (Q) x Unit Cost FINAMA A PRODUCTION PURCHASE PLAN PLAN (MANUFACTURIN (MERCHANDISIN G) G) i.e. unit cost P4.00/unit, the company intends to continue to stock up an ending inventory of 200 unit FTM of JAN, 150 units FTM of FEB & 100 FTM of MAR JAN FEB MAR 1QT Forecasted 1000 500 400 1900 Sales Less: Beg. Inv 0 Total 1000 Add: End Inv 200 Total Purchase (Q) x Unit Cost FINAMA A PRODUCTION PURCHASE PLAN PLAN (MANUFACTURIN (MERCHANDISIN G) G) i.e. unit cost P4.00/unit, the company intends to continue to stock up an ending inventory of 200 unit FTM of JAN, 150 units FTM of FEB & 100 FTM of MAR JAN FEB MAR 1QT Forecasted 1000 500 400 1900 Sales Less: Beg. Inv 0 Total 1000 Add: End Inv 200 Total 1200 Purchase (Q) x Unit Cost FINAMA A PRODUCTION PURCHASE PLAN PLAN (MANUFACTURIN (MERCHANDISIN G) G) i.e. unit cost P4.00/unit, the company intends to continue to stock up an ending inventory of 200 unit FTM of JAN, 150 units FTM of FEB & 100 FTM of MAR JAN FEB MAR 1QT Forecasted 1000 500 400 1900 Sales Less: Beg. Inv 0 Total 1000 Add: End Inv 200 Total 1200 Purchase (Q) x Unit Cost 4 FINAMA A PRODUCTION PURCHASE PLAN PLAN (MANUFACTURIN (MERCHANDISIN G) G) i.e. unit cost P4.00/unit, the company intends to continue to stock up an ending inventory of 200 unit FTM of JAN, 150 units FTM of FEB & 100 FTM of MAR JAN FEB MAR 1QT Forecasted 1000 500 400 1900 Sales Less: Beg. Inv 0 Total 1000 Add: End Inv 200 Total 1200 Purchase (Q) x Unit Cost 4 FINAMA A PRODUCTION PURCHASE PLAN PLAN (MANUFACTURIN (MERCHANDISIN G) G) i.e. unit cost P4.00/unit, the company intends to continue to stock up an ending inventory of 200 unit FTM of JAN, 150 units FTM of FEB & 100 FTM of MAR JAN FEB MAR 1QT Forecasted 1000 500 400 1900 Sales Less: Beg. Inv 0 200 Total 1000 Add: End Inv 200 Total 1200 Purchase (Q) x Unit Cost 4 FINAMA A PRODUCTION PURCHASE PLAN PLAN (MANUFACTURIN (MERCHANDISIN G) G) i.e. unit cost P4.00/unit, the company intends to continue to stock up an ending inventory of 200 unit FTM of JAN, 150 units FTM of FEB & 100 FTM of MAR JAN FEB MAR 1QT Forecasted 1000 500 400 1900 Sales Less: Beg. Inv 0 200 Total 1000 300 Add: End Inv 200 Total 1200 Purchase (Q) x Unit Cost 4 FINAMA A PRODUCTION PURCHASE PLAN PLAN (MANUFACTURIN (MERCHANDISIN G) G) i.e. unit cost P4.00/unit, the company intends to continue to stock up an ending inventory of 200 unit FTM of JAN, 150 units FTM of FEB & 100 FTM of MAR JAN FEB MAR 1QT Forecasted 1000 500 400 1900 Sales Less: Beg. Inv 0 200 Total 1000 300 Add: End Inv 200 150 Total 1200 Purchase (Q) x Unit Cost 4 FINAMA A PRODUCTION PURCHASE PLAN PLAN (MANUFACTURIN (MERCHANDISIN G) G) i.e. unit cost P4.00/unit, the company intends to continue to stock up an ending inventory of 200 unit FTM of JAN, 150 units FTM of FEB & 100 FTM of MAR JAN FEB MAR 1QT Forecasted 1000 500 400 1900 Sales Less: Beg. Inv 0 200 Total 1000 300 Add: End Inv 200 150 Total 1200 450 Purchase (Q) x Unit Cost 4 FINAMA A PRODUCTION PURCHASE PLAN PLAN (MANUFACTURIN (MERCHANDISIN G) G) i.e. unit cost P4.00/unit, the company intends to continue to stock up an ending inventory of 200 unit FTM of JAN, 150 units FTM of FEB & 100 FTM of MAR JAN FEB MAR 1QT Forecasted 1000 500 400 1900 Sales Less: Beg. Inv 0 200 Total 1000 300 Add: End Inv 200 150 Total 1200 450 Purchase (Q) x Unit Cost 4 4 FINAMA A PRODUCTION PURCHASE PLAN PLAN (MANUFACTURIN (MERCHANDISIN G) G) i.e. unit cost P4.00/unit, the company intends to continue to stock up an ending inventory of 200 unit FTM of JAN, 150 units FTM of FEB & 100 FTM of MAR JAN FEB MAR 1QT Forecasted 1000 500 400 1900 Sales Less: Beg. Inv 0 200 Total 1000 300 Add: End Inv 200 150 Total 1200 450 Purchase (Q) x Unit Cost 4 4 FINAMA A PRODUCTION PURCHASE PLAN PLAN (MANUFACTURIN (MERCHANDISIN G) G) i.e. unit cost P4.00/unit, the company intends to continue to stock up an ending inventory of 200 unit FTM of JAN, 150 units FTM of FEB & 100 FTM of MAR JAN FEB MAR 1QT Forecasted 1000 500 400 1900 Sales Less: Beg. Inv 0 200 150 Total 1000 300 Add: End Inv 200 150 Total 1200 450 Purchase (Q) x Unit Cost 4 4 FINAMA A PRODUCTION PURCHASE PLAN PLAN (MANUFACTURIN (MERCHANDISIN G) G) i.e. unit cost P4.00/unit, the company intends to continue to stock up an ending inventory of 200 unit FTM of JAN, 150 units FTM of FEB & 100 FTM of MAR JAN FEB MAR 1QT Forecasted 1000 500 400 1900 Sales Less: Beg. Inv 0 200 150 Total 1000 300 250 Add: End Inv 200 150 Total 1200 450 Purchase (Q) x Unit Cost 4 4 FINAMA A PRODUCTION PURCHASE PLAN PLAN (MANUFACTURIN (MERCHANDISIN G) G) i.e. unit cost P4.00/unit, the company intends to continue to stock up an ending inventory of 200 unit FTM of JAN, 150 units FTM of FEB & 100 FTM of MAR JAN FEB MAR 1QT Forecasted 1000 500 400 1900 Sales Less: Beg. Inv 0 200 150 Total 1000 300 250 Add: End Inv 200 150 100 Total 1200 450 Purchase (Q) x Unit Cost 4 4 FINAMA A PRODUCTION PURCHASE PLAN PLAN (MANUFACTURIN (MERCHANDISIN G) G) i.e. unit cost P4.00/unit, the company intends to continue to stock up an ending inventory of 200 unit FTM of JAN, 150 units FTM of FEB & 100 FTM of MAR JAN FEB MAR 1QT Forecasted 1000 500 400 1900 Sales Less: Beg. Inv 0 200 150 Total 1000 300 250 Add: End Inv 200 150 100 Total 1200 450 350 Purchase (Q) x Unit Cost 4 4 FINAMA A PRODUCTION PURCHASE PLAN PLAN (MANUFACTURIN (MERCHANDISIN G) G) i.e. unit cost P4.00/unit, the company intends to continue to stock up an ending inventory of 200 unit FTM of JAN, 150 units FTM of FEB & 100 FTM of MAR JAN FEB MAR 1QT Forecasted 1000 500 400 1900 Sales Less: Beg. Inv 0 200 150 Total 1000 300 250 Add: End Inv 200 150 100 Total 1200 450 350 Purchase (Q) x Unit Cost 4 4 4 FINAMA A PRODUCTION PURCHASE PLAN PLAN (MANUFACTURIN (MERCHANDISIN G) G) i.e. unit cost P4.00/unit, the company intends to continue to stock up an ending inventory of 200 unit FTM of JAN, 150 units FTM of FEB & 100 FTM of MAR JAN FEB MAR 1QT Forecasted 1000 500 400 1900 Sales Less: Beg. Inv 0 200 150 Total 1000 300 250 Add: End Inv 200 150 100 Total 1200 450 350 Purchase (Q) x Unit Cost 4 4 4 FINAMA A PRODUCTION PURCHASE PLAN PLAN (MANUFACTURIN (MERCHANDISIN G) G) i.e. unit cost P4.00/unit, the company intends to continue to stock up an ending inventory of 200 unit FTM of JAN, 150 units FTM of FEB & 100 FTM of MAR JAN FEB MAR 1QT Forecasted 1000 500 400 1900 Sales Less: Beg. Inv 0 200 150 0 Total 1000 300 250 Add: End Inv 200 150 100 Total 1200 450 350 Purchase (Q) x Unit Cost 4 4 4 FINAMA A PRODUCTION PURCHASE PLAN PLAN (MANUFACTURIN (MERCHANDISIN G) G) i.e. unit cost P4.00/unit, the company intends to continue to stock up an ending inventory of 200 unit FTM of JAN, 150 units FTM of FEB & 100 FTM of MAR JAN FEB MAR 1QT Forecasted 1000 500 400 1900 Sales Less: Beg. Inv 0 200 150 0 Total 1000 300 250 1900 Add: End Inv 200 150 100 Total 1200 450 350 Purchase (Q) x Unit Cost 4 4 4 FINAMA A PRODUCTION PURCHASE PLAN PLAN (MANUFACTURIN (MERCHANDISIN G) G) i.e. unit cost P4.00/unit, the company intends to continue to stock up an ending inventory of 200 unit FTM of JAN, 150 units FTM of FEB & 100 FTM of MAR JAN FEB MAR 1QT Forecasted 1000 500 400 1900 Sales Less: Beg. Inv 0 200 150 0 Total 1000 300 250 1900 Add: End Inv 200 150 100 100 Total 1200 450 350 Purchase (Q) x Unit Cost 4 4 4 FINAMA A PRODUCTION PURCHASE PLAN PLAN (MANUFACTURIN (MERCHANDISIN G) G) i.e. unit cost P4.00/unit, the company intends to continue to stock up an ending inventory of 200 unit FTM of JAN, 150 units FTM of FEB & 100 FTM of MAR JAN FEB MAR 1QT Forecasted 1000 500 400 1900 Sales Less: Beg. Inv 0 200 150 0 Total 1000 300 250 1900 Add: End. Inv 200 150 100 100 Total 1200 450 350 2000 Purchase (Q) x Unit Cost 4 4 4 4 FINAMA A PRODUCTION PURCHASE PLAN PLAN (MANUFACTURIN (MERCHANDISIN G) G) i.e. unit cost P4.00/unit, the company intends to continue to stock up an ending inventory of 200 unit FTM of JAN, 150 units FTM of FEB & 100 FTM of MAR JAN FEB MAR 1QT Forecasted 1000 500 400 1900 Sales Less: Beg. Inv 0 200 150 0 Total 1000 300 250 1900 Add: End. Inv 200 150 100 100 Total 1200 450 350 2000 Purchase (Q) x Unit Cost 4 4 4 4 FINAMA A  Cash Budgets a statement of the firm’s planned inflows and outflows of cash used to estimate its short-term cash requirements typically designed to cover a 1-year period, divided into smaller time intervals. The more seasonal and uncertain a firm’s cash flows, the greater the number of intervals. I.E. Beginning Balance - P800; Required Cash Balance every month P1,000. any cashFINAMA A dificiency will be taken  General Format of the Cash Budget. i.e. Quarter Jan Feb Mar 1Qtr *In the month of Cash Cash Sales 20 10 80 1,10 February, there is a cash Receipts 800 1,25 Cash 30 15 0 0 0 0 difeceincy of 400 and it Total Cash 500 2 05 1,6 * 2 0,3 Collections*/Loa will be taken from a short Less: 0 00 50 n Cash Receipts 0 term loan with a bank Cash (15 (25 (20 (600 Disbursement Cash 0) 0) ) **In and the month to be of March, collected on Purchases Total Cash 0) (70 (1,65 Disbursement ((20 5 (75 ( 50 ( 50 (1,05 there is excess cash of the following month as Net Cash Flow Disb’t. 0) 0) 0) 0) * Beginnig Add: 0) 0) 0) 0) 500, cash with this excess of receipts 300 (500 900 700 Ending Cash 800 1,10 600 800 Cash Required Cash 1,10 ) 1,500 1,500 cash the company can Balance 600 Required 0 1,00 1,00 1,00 pay the 400 loan on the Balance 1,00 Excess Cash 0 400 General Format of the Cash Budget FINAMA A Coping with Uncertainty in the Cash Budget Prepare several cash budgets based on several forecasted scenarios (e.g., pessimistic, most likely, optimistic). From this range of cash flows, the financial manager can determine the amount of financing necessary to cover the most adverse situation. FINAMA A  Pro Forma Financial Statements projected, or forecast, income statements and balance sheets. Inputs commonly required to develop pro forma statements: Financial statements from preceding year The sales forecast for coming year Key assumptions about a number of factors FINAMA A  Preparing Pro Forma Income Statement Percent-of-sales method Based on the sales forecast, express the cost of goods sold, operating expenses, interest expense, and other accounts as a percentage of projected sales. The best way to generate a more realistic pro forma income statement is to segment the firm’s expenses into fixed and variable components. FINAMA A  Preparing Pro Forma Balance Sheet Judgmental approach Estimate the values of certain balance sheet accounts and use its external financing as a balancing, or “plug,” figure. Alternative method (formula): External funds needed = Required increase in assets – Spontaneous increase –in(L/S) EFN = (A/S)∆S liabilities ∆S – – Increase in retained earnings (PM) (PS) (1-d) A/S = assets that increase spontaneously with sales as a percentage of sales L/S = liabilities that increase spontaneously with sales as a percentage of sales ∆S =change in sales PM = profit margin on sales FINAMA PS = projected sales A Evaluation of Pro Forma Statements major weaknesses lie in two assumptions: That the firm’s past financial performance will be replicated in the future That certain variables (such as cash, accounts receivable, and inventories) can be forced to take on certain “desired” values. These assumptions cannot be justified solely on the basis of their ability to simplify the calculations involved. FINAMA A Recap: Budget Preparation 1 2 3 4 5 Prepare a Determine Estimate Determine Formulate sales expected manufacturing cash flow projected forecast. production costs and and other financial volume. operating financial statements. expenses. effects. FINAMA A Master Sales Budget Budget Desired Ending Inventory Production Budget Budget Direct Direct Labor Factory Materials Overhead Cost of Goods Sold Selling Expense Budget Administrative Expense Budget Capital Pro-forma Balance Pro-forma Income Cash Budget Sheet Statement Budget FINAMA A  Example 1 Toba’s Sport Shop projects the following sales: P75,000 (April), P95,000 (May) and P110,000 (June). 90% of Toba’s sales are on credit with 60% of receivables collected in the month after the sale and the rest of receivables collected in the 2nd month after the sale. February sales were P60,000 and March sales were P70,000. In the past, Toba’s bad debt percentage has been 0 and is expected to continue. Required: a. Prepare a monthly schedule of cash receipts for April – June. b. What is the balance of Receivables at the end of June? FINAMA A  Problem 1 a. February March April May June Sales ₱ 60,000 ₱ 70,000 ₱ 75,000 ₱ 95,000 ₱ 110,000 Credit sales 54,000 63,000 67,500 85,500 99,000 Collections: Cash Solution (10% of Sales) 60% first month 6,000 7,000 7,500 9,500 11,000 to after sale 37,800 40,500 51,300 40% second month after sale 21,600 25,200 27,000 Example Total Receipts b. Receivables at End of June: ₱ 66,900 ₱ 75,200 ₱ 89,300 1 90% of June Sales 40% of May Credit Sales ₱ 99,000 34,200 ₱ 133,200 FINAMA 2 A 5 Exampl e A2ssume that sales for 20X1 are P20M, projected sales for 20X2 are P24M, net income is 5% of sales, and dividend payout ratio is 40%. Also assume the following for 20X1 (in Millions): Current assets 2.0 Common stock 0.1 Fixed assets 4.0 Capital surplus 0.2 Total assets 6.0 Retained earnings 1.2 Current liabilities 2.0 Total equity 1.5 Long-term debt 2.5 Total liabilities and Total liabilities 4.5 equity 6.0 Required: Determine the external funds needed. FINAMA 2 A 6  % of Sales (20x1 Projected (20x2 Solution 20x1 Sales Sales = =20) 24) to Current assets 2.00 10 2.40 Exampl Fixed assets 4.00 20 4.80 e2 Total assets Current liabilities 6.00 2.00 10 7.20 2.40 Long-term debt 2.50 n.a. 2.50 Total liabilities 4.50 4.90 Common stock 0.10 n.a. 0.10 Capital surplus 0.20 n.a. 0.20 Retained earnings 1.20 1.92 Total equity 1.50 2.22 7.12 External financing 0.08 needed Total liab. & SHE 6.00 7.20 FINAMA 2 A 7  Solution to Example 2 using EFN Formula A/S = 6/20 = 30% L/S = 2/20 = 10% ∆S = (24 – 20) = 4 PM = 5% on sales PS = 24 D = 40% EFN = 0.3(4) - 0.1(4) – FINAMA A Additional Readings 1. http://www.economicsdiscussio n.net/ management/planning- management/planning- introduction/32333 2. https://smallbusiness.chron.co m/plan ning-important-74858.html 3. https://www.pwc.com/ph/en/as- easy- as-abc/column/rent-in-the- time-of- covid-19.html FINAMA A  Self-test Questions 1. “As a practical matter, planning and control mean exactly the same thing”. Do you agree or disagree? Explain your answer. 2. What is the financial planning process? Contrast strategic financial plans and short-term financial plans. 3. What is the purpose of the cash budget? 4. How is the percent-of-sales method used to prepare pro- forma income statement? 5. Describe the judgmental approach for the simplified preparation of the pro- forma balance sheet. FINAMA A  Learning Activity ABC Company expects sales of P2,400,000 in 2019 and the same amount in 2020.Sales are spread evenly throughout the year. On the basis of the information shown on the next slide, prepare a forecast statement of income and statement of financial position for 2020. FINAMA A Cash Minimum of 4% of annual sales Accounts receivable 60-day average collection period based on annual sales Inventories Turnover of 8 times a year Net fixed assets P500,000 now. Capital expenditures equal to depreciation Accounts payable One month’s purchases Accrued expenses 3% of sales Bank borrowings P50,000 now. Can borrow up to P250,000 Long-term debt P300,000 now, payable P75,000 at year end Ordinary share capital P100,000. No additions planned Retained earnings P500,000 now Net profit margin 8% of sales Dividends None Cost of goods sold 60% of sales Purchases 50% of cost of goods sold Income taxes 50% of before-tax profits FINAMA 4- A FINAMA 3 A 3