BUSINESS FINANCE

FINANCIAL PLANNING
TOOLS AND CONCEPTS
PT.1
LEARNING OBJECTIVES
At the end of the lesson, the
learners will be able to:
•Explain the importance of planning.
•Differentiate between strategic
planning and tactical planning.
•Enumerate and apply the steps in
planning.
INTRODUCTION
Why Is Planning Important?

 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).
STRATEGIC VS. TACTICAL PLANNING
 Strategy - defines your long-term goals and how you’re
planning to achieve them. In other words, your strategy gives
you the path you need toward achieving your organization’s
mission.
 Tactics - are much more concrete and are often oriented
toward smaller steps and a shorter time frame along the way.
They involve best practices, specific plans, resources, etc.
They’re also called “initiatives.”
- Overall, the rule of thumb for understanding the difference
between strategy and tactics is, “Think strategically, act
tactically.”
 There are two phases of financial planning. Financial
planning starts with long term plans which would then
translate to short term plans.
LONG-TERM FINANCIAL PLANS
 These are a set of goals that lay out the overall direction of
the company.
 A long-term financial plan is 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.
 Those long-term plans consider proposed outlays for fixed
assets, research and development activities, marketing and
product development actions, capital structure, and major
sources of financing.
 Also included would be termination of existing projects,
product lines, or lines of business; repayment or retirement
of outstanding debts; and any planned acquisitions(Gitman
& Zutter, 2012).
SHORT-TERM FINANCIAL PLANS
 Specify short-term financial actions and the anticipated
impact of those actions. Part of short term financial plans
include setting the sales forecast and other forms of operating
and financial data. This would then translate into operating
budgets, the cash budget, and pro forma financial statements
(Gitman & Zutter, 2012).
 For the purpose of this topic, emphasis will be made on short-
term financial planning.
 Long-Term Planning Short Term Planning
Persons More participation from top Top management is still Involved
management involved but there is more
participation from lower
level managers (production, marketing,
personnel, finance and plant facilities)
because
their inputs are crucial at this
stage since they are the ones who implement
these plans.

Time Period 2 to 10 years 1 year or less

Level of Less More

Detail

Focus Direction of the company Everyday functioning of

the company

Table 1: Comparison of Short-Term and Long-Term Planning (Gitman & Zutter,

2012)
WHAT IS THE PLANNING PROCESS?
 The planning process is the step a company takes to
develop budgets to guide its future activities.
STEPS IN THE PLANNING PROCESS
1) Set goals or objectives.
2) Identify Resources.
3) Identify goal-related tasks.
4) Establish responsibility centers for accountability
and timeline.
5) Establish the evaluation system for monitoring and
controlling
6) Determine contingency plans
CHARACTERISTICS OF AN EFFECTIVE
PLAN
 In planning, the goal of maximizing shareholders’ wealth must
always be put in mind.

The following criteria may be used for effective planning:

 Specific – target a specific area for improvement.

 Measurable – quantify or at least suggest an indicator of progress.

 Assignable – specify who will do it.

 Realistic – state what results can realistically be achieved, given

available resources.
 Time-related – specify when the result(s) can be achieved. (Doran,
G. T. (1981).
"There's a S.M.A.R.T. way to write management's goals and
objectives". Management Review (AMA FORUM) 70 (11): 35–36.)
PLANNING AND CONTROLLING

 What is a budget?

 What is the importance of a budget?

 What will happen if the budget is not met?

 A plan is useless if it is not quantified. A quantified plan is
represented through budgets and projected or pro-forma
financial statements.
 These budgets and pro-forma financial statements are useful
for controlling. They serve as the bases for monitoring actual
performance.
 Meeting the plans is good. However, 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.
 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 remedial actions
if warranted (Cayanan, 2015).