Financial Planning and Forecasting: Long Term and Short Term Strategies, Exams of Mathematics

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ROLE OF FINANCIAL PLANNING

At the end of the lesson, you are expected to:

1. Discuss the important role of financial planning

and forecasting

2. Foresee the business ’ investing and financing

needs to support its operations for next year or

beyond

3. Come up with short term and long term

financial plans or budget for the business

The financial planning process are being articulated in a document form Defined as the forecasting of a business future financing requirements

1. LONG TERM FINANCIAL PLAN also known as the strategic financial plan, involves forecasting the financing requirements of a business 3 to 5 years down the road.

2. SHORT TERM FINANCIAL PLAN also known as the operating financial plan, involves forecasting the financing requirements of a business within a year or less, and as is expected is more detailed than the long term.

1. Forecast your Sales

Predicted or Estimated target sales, in order

to meet the target sales, business must acquires

more assets to generate more sales. Example is

when business wants to increase sale by 25 %,

they must increase the assets by 25 % too.

2. Compute the dividend payout ratio and plowback ratio

Dividend Payout Ratio – is the ratio of total amount of dividend paid out

to shareholders relative to the net income of the company.

Percentage of Earnings paid to shareholders in dividend.

Plowback Ratio- proportion of net income that does not get paid out in

cash dividends.

Example:

Company Earnings: 5 million

Dividends to Shareholders: 3 million

Formula: 3 million / 5 million = 0.6 x 100 = 60 % 60 % is the DIVIDEND PAYOUT RATIO 40 % is the rest percentage, for PLOWBACK RATIO

3. Identify your spontaneously generated funds

Spontaneous means done naturally, the funds

come about as the result of normal business

operations. If business wants to increase the sale,

then they need to strategized the business and

load up an inventory.

If Accounts Payable and Accrued Expense

naturally increase it might result higher sales.

4. Use the percent of sales approach to prepare the pro forma financial statements Financial reports are based on hypothetical scenarios that utilize assumptions or financial projections only. Dividing expenses, liabilities, assets by sales figure. Sales figure can be based on the latest Financial Statement. The derived percentage can used to weights in preparing pro forma income statement and balance sheet.

5. Calculate your External Financing Needs (EFN)

Also known as Additional Funds Needed

(AFN) and Discretionary Financing Needs (DFN),

required additional financing, through additional

issuance of interest-bearing debt and common

stock, to acquire the needed assets.

SEE on NEXT SLIDE the SAMPLE

CALCULATION of EFN

Calculating External Financing Needs (EFN) EXAMPLE: Your Target Sales: 20 % next year And this is your SALES FIGURE today together with derived sales percentage FORMULA: Income Statement Sales – Cost of business = Income (income will deduct 30 % tax = NET INCOME SOLUTION Sales - Cost 9 , 268 , 315 – 5 , 097 , 573. 25 Income = 4 , 170 , 741. income x. 30 % Tax: 1 , 251 , 222. Income - Tax = 4 , 170 , 741.75 – 1,252,222. NET INCOME = 2 , 919 , 519. FORMULA: Percent of Sales Cost Sales %: Cost/Sales x 100 = 55 % Net Income % : Net Income/Sales x 100 = 31.50%

Calculating External Financing Needs (EFN)

This will be your PRO FORMA INCOME STATEMENT if you really want to

target the 20 % Sales in incoming year:

Go back to the previous slide and check again the income statement, since you wanted to target 20 % sale of company, this will be your projected income statement for next year:

FORMULA:

Sales x 20 % + Sales 9 , 268 , 315 x (. 20 ) 20 % = 1 , 853 , 663 9 , 268 , 315 + 1 , 853 , 663 = 11 , 121 , 978 Projected sales x 55 % = Cost Sales Projected sales x 31.50% = Net Income

CASH BUDGET Primary tools in short term financial planning. It plots the business projected cash inflows and outflow and is typically done monthly and used to cover year ’ s time only. 3 Parts of Cash Budget

1. Cash Receipts
2. Cash Disbursement
3. Excess Cash Balance/ required total Financing

CASH BUDGET

NET WORKING CAPITAL (NWC) Current liabilities – Current Assets = NWC NWC – measures money of liquidity High NWC – means business grow and earned more profit.

OPERATING CYCLE Refers to the days required for a business to receive inventory. Inventory is a current asset account found on the balance sheet, consisting of all raw materials, work-in-progress, and finished goods that a, sell the inventory, and collect cash from the sale of the inventory.

Inventory Period The average inventory period is a usage ratio that calculates the average number of days, over a given time period, goods are held in inventory before they are sold. In other words, it shows how long it takes a company to sell its current inventory. Accounts Receivable Period The accounts receivable collection period compares the outstanding receivables of a business to its total sales. This comparison is used to evaluate how long customers are taking to pay the seller.

CASH CYCLE The time it takes for the business to collect on its account receivables after it has paid for its supplies/materials. Accounts Payable Period – Operating Cycle = Cash Cycle

You need to carefully choose which customer to give credit: 5 C ’ s of Credit Guidelines in selecting customers:

1. Character – Customer ’ s track record of setting obligations on time
2. Capacity – capacity of customers to pay.
3. Capital – customer ’ s level of capital in relation to its debt level
4. Collateral – the value of assets that customers has and plans to secure the credit/debt
5. Conditions – general global and home country macroeconomics conditions and industry specific conditions.

ACTIVITY

See attached activity in PDF file. Answers:

If Typewritten: Write ACTIVITY 4 Business Finance Financial

Planning on top

Your Name and Grade, Section and Strand

Font (Arial or Calibri 12 size)

If Handwritten: Write ACTIVITY 4 Business Finance Financial

Planning on top

Your Name and Grade, Section and Strand

Put your answers on a clean 1 whole sheet of

paper or yellow pad

Picture and Send it to me (must be readable and

not blurred)

NEATNESS Orderly packet and in incredibly neat with no smudges or tears and readable Neat with few smudges and readable With several smudges and tears and slightly unreadable Disorderly with many smudges or tears and unreadable RELEVANCE Answers are best and related to the given subject matter Answers are almost shown and almost describe clearly Some relevance of subject matter are missing Little to none of the answers are correct TIMELINESS Received on or before given due date 1 day late 2 days late 3 or more days late COMPLETION Assigned task are completed Most of the assigned task is complete Some of the assigned task is complete Did not make a task

AUGUST 26 , 2021 Until 4 pm only

Resources: Exploring Small Business and Personal Finance Erlinda C. Pefianco,Ed.D Phoenix Publishing House Inc.