BA 141 CHAPTER 4 PLANNING

BA 141
CHAPTER 4
Prepared by: Ma. Rona Corda-Prado

Business Finance SY2017-2018
PLANNING
Planning is an important
aspect of the firm’s operations
because it provides road maps
for guiding, coordinating, and
controlling the firm’s actions to
achieve its objectives (Gitman
& Zutter, 2012).
✓ Management planning is about setting the goals of the organization and identifying
ways on how to achieve them (Borja& Cayanan, 2015).
BA141 | Business Finance
2
THE PLANNING PROCESS
The vision statement states where the
company wants to be.
The mission statement states the plans on how

to achieve the vision.
STEP 1: SET GOALS OR OBJECTIVES

For corporations, long term and short term objectives are usually identified.
These can be seen in the company’s vision and mission statements.
BA141 | Business Finance 4
JOLLIBEE FOOD
CORPORATION (JFC)
Vision: To excel in providing great tasting
food that meets local preferences better
than anyone; To become one of the three
largest and most profitable restaurant
companies in the world by 2020.
Mission: To serve great tasting food,
bringing the joy of eating to everyone.

MCDONALDS
PHILIPPINES
Vision: First to respond to the fast
changing needs of the Filipino family; First
choice when it comes to food and dining
experience; First mention as the ideal
employer and socially responsible
company; First to respond to the changing
lifestyle of the Filipino family
Mission: To serve the Filipino community
by providing great-tasting food and the
most relevant customer delight experience.

STEP 2:
IDENTIFY RESOURCES
Resources include production capacity, human resources
who will man the operations and financial resources (Borja
& Cayanan, 2015).

STEP 3:
IDENTIFY GOAL-
RELATED TASKS
✓Management must figure out how to
achieve an objective.
✓Create tasks that will help you achieve
your vision

STEP 4: ESTABLISH RESPONSIBILITY CENTERS
Establish responsibility centers for accountability and timeline.
• Accountability and timeline must be done on a per task basis.

STEP 5: ESTABLISH AN EVALUATION SYSTEM
• Establish the evaluation system for monitoring

and controlling.
• Management must establish a mechanism
which will allow plans to be monitored. This can
be done through quantified plans such as
budgets and projected financial statements.
• Management will then compare the actual
results to the planned budgets and projected
financial statements. Any significant deviations
from the budgets should be investigated.

STEP 6: DETERMINE CONTINGENCY PLANS
Budgets and projected financial statements

are anchored on assumptions.
If these assumptions do not become
realities…
…management must have alternative plans
to minimize the adverse effects on the
company.
In planning, contingencies must be

considered as well.

CHARACTERISTICS OF AN
EFFECTIVE PLAN
CHARACTERISTICS OF AN EFFECTIVE PLAN
SPECIFIC Target a specific area for improvement S
Quantify or at least suggest an indicator of

MEASURABLE M
progress.
ASSIGNABLE Specify who will do it. A
State what results can realistically be achieved,

REALISTIC R
given available resources.
TIME BOUND Specify when the result(s) can be achieved. T

1
In planning, the goal of maximizing
shareholders’ wealth must always be
put in mind.
2
A plan is useless if it is not quantified.
A quantified plan is represented
through budgets and projected or
pro-forma financial statements.

3
These budgets and pro-forma financial
statements are useful for controlling.
They serve as the basis for monitoring
actual performance.
4 Failing to meet the plans is not

equivalent to failure if the reasons for
not meeting such plans can be
justified especially when the reasons
are fortuitous in nature and are
beyond the control of management.
3
These budgets and pro-forma financial
statements are useful for controlling.
They serve as the basis for monitoring
actual performance.
4 Failing to meet the plans is not

equivalent to failure if the reasons for
not meeting such plans can be
justified especially when the reasons
are fortuitous in nature and are
beyond the control of management.
CHARACTERISTICS OF
AN EFFECTIVE PLAN
Measuring actual performance vis a vis the
plans even at the early start of the year
allows the management to assess the
company’s performance and come up with
BA141 | Busin
remedial actions if warranted .
KEY ASPECTS OF FINANCIAL PLANNING
CASH PLANNING
PROFIT PLANNING
• Maintenance of adequate cash is one of
Taken to achieve a targeted profit level
the prime responsibilities of the financial
through the development of an
manager
interlocking set of budgets that roll up
• Central point of finance functions and into a master budget. The core output are
Involves preparation of the firm’s cash pro forma financial statements.
budget. BA141 | Business Finance 18
FINANCIAL PLANNING HORIZON
Length of time that the financial plan projects into the future.
Short- term Within a year to 2 years

(Operating)
Medium-term > Two to 5 years
Strategic
Long-term > Five to 10 years

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 plans are revised as significant new
information becomes available.
• Generally, firms that are subject to high degrees of
operating uncertainty, relatively short production
cycles, or both, tend to use shorter planning
horizons. BA141 | Business Finance 20
• Established during strategic planning

• Set of goals that lay out the overall direction of
the company.
• An integrated strategy that takes into account
various departments such as sales, production,
marketing, and operations for the purpose of
guiding these departments towards strategic
goals.
• Considers proposed outlays for fixed assets,

research and development activities, marketing
and product development actions, capital
structure, and major sources of financing.
• Also includes termination of existing projects,
product lines, or lines of business; repayment or
retirement of outstanding debts; and any planned
acquisitions (Gitman & Zutter, 2012).

OPERATING FINANCIAL PLANS
• Designed to support long and medium term goals

• Short-term financial actions and the anticipated
impact of those actions. These plans most often
are detailed, very specific and cover a 1- to 2-year
period.

OPERATING FINANCIAL PLANS
• Key inputs
• Sales forecast
• Various forms of operating and financial
data
• Key outputs
• Operating budgets
• Cash budget
• Pro forma financial statements

STRATEGIC VS OPERATING BA141 | Business Finance
FINANCIAL PLANNING
CASH PLANNING
SALES FORECAST
a prediction of the sales activity during a given period, based on external and/or
internal data.
• Used as a basis for estimating the monthly cash

flows that will result from projected sales and from
outlays related to production, inventory, and sales.
• May be based on an analysis of external data,
internal data, or a combination of the two.
• The process starts with internal forecasts and
adjusted by taking into consideration external
data
EXTERNAL FACTORS THAT AFFECT SALES FORECAST
GDP & Foreign

Competition
Inflation Exchange
Rate Rate
Industry
Developments Laws &
Tax and Regulations Economic
Interest & Political
Rate Factors

INTERNAL FACTORS THAT AFFECT SALES FORECAST
1 Production capacity
2 Human resources
The key to making a good
forecast is not in limiting
3 Management style
yourself to quantitative
information. - Nate Silver Reputation and network of controlling
4
stockholders
5 Financial resources

PRODUCTION PLAN
• Provides information regarding the number of units that
should be produced over a given accounting period
based on expected sales and targeted level of ending
inventories.
• Required production in units = Expected Sales + Target
Ending Inventories - Beginning Inventories
PRODUCTION PLAN
➢ Angel Company forecasts sales in units for January to

May as follows:
Jan Feb Mar Apr May
Units 2,000 2,200 2,500 2,800 3,000
➢ Moreover, Angel Company would like to maintain 100
units in its ending inventory at the end of each month.
➢ Beginning inventory at the start of January amounts
to 50 units.
➢ How many units should Angel Company produce in
order to fulfill the expected sales of the company?
FINANCIAL PLANNING
PRODUCTION PLAN BA141 | Business Finance
OPERATIONS BUDGET
Covers the variable and fixed costs needed to run the

operations of the company but are not directly attributable
to the generation of sales such as:
• Rent payments
• Wages and salaries of selling and administrative
personnel and professional fees
• Other administrative costs
• Travel and representation expenses
• Interest Payments
• Tax Payments
CASH BUDGET
01 02 03 04
Used by the firm Particular attention Forecasts the timing Also a control tool
to estimate its is being paid to of these cash to monitor the way
outflows and the company
short-term cash planning for
matches them with handles cash.
requirements. surplus cash and
cash inflows from
for cash shortages
sales and other
receipts
Statement of the firm’s planned inflows and outflows of cash.

PROFORMA CASH BUDGET BA141 | Business Finance
36
STEPS IN PREPARING THE CASH BUDGET
Continuing from previous example, assume selling price is PHP100/unit.
Step 1: Project the cash receipt from sales forecast.

Sales for each month are expected to be collected as follows:
(1) Month of sales:20%; (2) A month after sales:50%; (3) 2 months after sales:30%
Step 2: Identify other receipts such as:

(1) Interest received; (2) Return on principal investments; (3) Proceeds from sale of non-
operating assets; (4) Issuance of capital stock and (5) Proceeds from borrowings
From the Production Plan…
Step3: …identify how much of the purchases made will be paid…

…by the company on the cash budget period. Assume that cost per unit is PHP50 and
payment of production cost is done one month after the production schedule.
From the Operations Budget….
Step 4: … identify which expenses will be paid in cash during the cash budget period.…
The following expense items will be paid based on the following periods: (1) Rent
payments of PHP5,000 monthly; (2) Fixed salaries of PHP8,000/month; (3) Wages
are estimated as 10% of monthly sales; and (4) Tax payments: Taxes of
PHP25,000 must be paid in April. BA141 | Business Finance 40
From other reports and budgets…
Step 5: Identify all other cash payments such as…
(1) Fixed-asset purchases in cash; (2) Cash dividend payments; (3) Principal
payments; (4) Repurchase of common stock; and (5) Purchase of stock/bond
investments
OTHER CASH PAYMENTS
➢ Fixed-asset outlays: New machinery costing

PHP130,000 will be purchased and paid for in
April;
➢ Interest payments: An interest payment of
PHP10,000 is due in May;
➢ Cash dividend payments: Cash dividends of
PHP20,000 will be paid in January; and
➢ Principal payments (loans): A PHP20,000
principal payment is due in February.

Cash dividend
CASH DISBURSEMENTS BA141 | Business Finance

43
Step 6: Match the receipts and disbursements
…on the periods they become collectible and payable, respectively

Step 7: Set a minimum required cash balance.
This balance is maintained in case contingencies arise.

Step 8: Determine your cash position at the end of each period.
If the net cash flow is above the minimum cash balance, the company is in excess
cash and may consider putting it in short term investments. If it is below, the
company should make a short term borrowing during that period.
CASH BUDGET/CASH FORECAST
Angel Company has a beginning cash balance of PHP80,000 and would like
to maintain an ending cash balance of PHP100,000 per month. Prepare
Angel Company’s Cash Budget for January to May. Prepare a cash budget.

ASSIGNMENT
P4-9 Farmers Delight
P4-11 Xenocore

. 3-48
48
Scenario Analysis
Preparation of several cash budgets—based on
pessimistic, most likely, and optimistic forecasts.
Simulation
Statistics-based behavioral approach that applies
predetermined probability distributions and random
numbers to estimate risky outcomes
UNCERTAINTIES IN THE CASH BUDGET

Budgets are based on assumptions hence they enable management to explore many
alternatives.

PROFIT PLANNING
PREPARATION OF PROJECTED
FINANCIAL STATEMENTS
Tool of the company to set an overall goal of what the

company’s performance and position will be for and as of
the end of the year.
It sets targets to control and monitor the activities of the
company

STEPS IN PREPARING PRO FORMA FS
Step 1: Forecast Sales.

• Most of the income statement items are related to sales.
• Profitability financial ratios are related to sales
Step 2: Forecast COGS and Operating Expenses

• Forecast COGS and OPEX using percentage of sales method.
• Caveat: Generally tends to understate profits when sales are increasing and overstate
profits when sales are decreasing BA141 | Business Finance 53
Step 3: Forecast Net Income

To forecast net income, interest expense and income tax expense should also be
considered using the relevant interest and tax rates.
Step 4: Forecast Retained Earnings.

Step 5: . Prepare projected SFP.

• Percentage of sales.
• Use historical ratios to project from SCI to SFP.
• Judgmental approach (most common). BA141 | Business Finance 56
And the rest….
Determine payment Determine external funds
schedule for loans. needed (EFN).
Loans EFN
6 8
7 9
Consolidate EFN Funding
Check for other Determine how external

information. funds needed may be
financed.

PREPARATION OF PROJECTED
FINANCIAL STATEMENTS
Positive EFN >> company needs more funds equivalent to
the positive value of EFN. As to how this will be raised
depends on the management and the company’s ability to
access funds.
Negative EFN >> company has excess cash. This can be

disposed by adding it to the projected cash balance or it
can be used to retire some of the debt if pre-termination is
allowed, repurchasing stock, or increasing dividends.

ILLUSTRATION
4-19 Red Queen
ASSIGNMENT: 4,-13, 4-14, 4-20 Provincial Imports

ASSIGNMENT
4-13 Markham
4-14 Brownstein
4-20 Provincial Imports

. 3-60
60
CASH FLOWS
OPERATING CASH FLOWS
Cash flow it
generates from its normal
operations—producing
and selling its output of
goods or services.
NOPAT – Net operating profit after tax which represent the firm’s earnings before
interest and after taxes

FREE CASH FLOWS
Amount of cash flow

available to investors
(creditors and owners) after
Where:
the firm has met all operating
needs and paid for
investments in net fixed
assets (NFAI) and net current
assets (NCAI).

MACRS
MODIFIED ACCELERATED COST RECOVERY SYSTEM (MACRS)
• Under the basic MACRS procedures, the

depreciable value of an asset is its full cost,
including outlays for installation.
• No adjustment is required for expected salvage
value.
• For tax purposes, the depreciable life of an
asset is determined by its MACRS recovery
predetermined period.
MACRS PROPERTY CLASSES

. 3-66
66
DEPRECIATION PERCENTAGES UNDER MACRS

. 3-67
67
SEATWORK
E4-1
E4-2
E4-3
E4-4
E4-5

. 3-68
68
ASSIGNMENT
P4-4
P4-6
Projected FS to be sent thru email

. 3-69
69

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BA 141

Prepared by: Ma. Rona Corda-Prado

The mission statement states the plans on how

STEP 1: SET GOALS OR OBJECTIVES

BA141 | Business Finance 5

BA141 | Business Finance 6

BA141 | Business Finance 7

BA141 | Business Finance 8

Establish responsibility centers for accountability and timeline.

• Accountability and timeline must be done on a per task basis.

BA141 | Business Finance 9

• Establish the evaluation system for monitoring

BA141 | Business Finance 10

Budgets and projected financial statements

In planning, contingencies must be

BA141 | Business Finance 11

SPECIFIC Target a specific area for improvement S

Quantify or at least suggest an indicator of

ASSIGNABLE Specify who will do it. A

State what results can realistically be achieved,

TIME BOUND Specify when the result(s) can be achieved. T

BA141 | Business Finance 13

BA141 | Business Finance

4 Failing to meet the plans is not

4 Failing to meet the plans is not

Short- term Within a year to 2 years

Medium-term > Two to 5 years

Long-term > Five to 10 years

BA141 | Business Finance 19

• Lay out a company’s planned financial actions and

• Established during strategic planning

• Considers proposed outlays for fixed assets,

BA141 | Business Finance 22

• Designed to support long and medium term goals

BA141 | Business Finance 23

BA141 | Business Finance 24

• Used as a basis for estimating the monthly cash

GDP & Foreign

BA141 | Business Finance 29

BA141 | Business Finance 30

➢ Angel Company forecasts sales in units for January to

Covers the variable and fixed costs needed to run the

Statement of the firm’s planned inflows and outflows of cash.

BA141 | Business Finance 35

Step 1: Project the cash receipt from sales forecast.

Step 2: Identify other receipts such as:

Step3: …identify how much of the purchases made will be paid…

Step 5: Identify all other cash payments such as…

➢ Fixed-asset outlays: New machinery costing

BA141 | Business Finance 42

CASH DISBURSEMENTS BA141 | Business Finance

Step 6: Match the receipts and disbursements

…on the periods they become collectible and payable, respectively

BA141 | Business Finance 44

Step 7: Set a minimum required cash balance.

This balance is maintained in case contingencies arise.

BA141 | Business Finance 45

Step 8: Determine your cash position at the end of each period.

BA141 | Business Finance 47

BA141 | Business Finance

UNCERTAINTIES IN THE CASH BUDGET

BA141 | Business Finance 49

Tool of the company to set an overall goal of what the