SAINT ANTHONY ACADEMY OF GONZAGA SY 2020-2021

Subject Teacher: KELVIN JAY S. SAPLA Subject: Business Finance

Topic: The Steps in the Financial Planning Process and the Formula and Format
for the Budget Preparation and Projected Financial Statement
INTRODUCTION: All individuals, professionals, businessmen will have their goals to be in
profession or business. However, about objectives at business finance, we have to
plan them. You should know how you can save a lot, you must know your goals.
Here is the step by step financial planning process which includes six steps in
financial planning process which will assist you. You should be aware of the life
cycle approach of financial planning process to structure your goals.
The long-term goals that you plan to achieve in the future, play an
important role in s you already have in mind a set of plans for the next five years.
If you are not yet sure what you want in five years from now will probably still
have an idea of what kind of life you want. You are still in the process of
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. Management planning is about setting the goals of the
organization and identifying ways on how to achieve them.
There are two phases of financial planning. Financial planning starts with
long term plans which would then translate to short term plans.
STANDARDS: Content Standard:
The financial planning process, including budget preparation, cash management
and working capital management.
Performance Standard
1. Illustrate the financial planning process
2. Prepare budgets such as projected collection, sales budget, production budget,
and income projected statement of comprehensive income, projected of financial
position, and projected cash flow statement
3. Describe concepts and tools in working capital management
Learning Competencies:
The learners shall be able to:
-identify the steps in the financial planning process. (ABM_BF12-IIIc-d-10)
-illustrate the formula and format for the preparation of budgets and projected
financial statements. (ABM_BF12-IIIc-d11)
TRANSFER: At the end of the module, you will be able to:
1. determine and apply the tools used in planning and forecasting
2. state and apply the tools used in budgeting
3. illustrate the formula and format for the preparation of budgets and projected
financial statements
ACTIVITY: As the COVID-19 pandemic continues to strike pain on small and large
businesses, thousands of enterprises are closing down that affects millions of workers.
Camille Jazul-Salita, 28, beauty adviser in Qatar Airways, is one those Filipino overseas
who came home. She was planning to resign in August but she did it earlier because of
the COVID. Jazul-Salita quips that she plans to enroll in a baking class at a state-owned
technical school while she is here in the Philippines (Tadalan, 2020).
In today’s difficult times, planning is essential to the success of any business.
When a company has plan to follow, it is ready to face the future. As Book of Luke
chapter 14 verse 28 says “Suppose one of you wants to build a tower. Won’t you first sit
down and estimate the cost to see if you have enough money to complete it?”
If you were Jazul-Salita, are you going to open a small business amid this crisis?
How will you manage the cost of your small venture?
NEW IDEA: In this activity, I learned that:______________________________________________
DISCUSSION (LESSON 1) : Strategic vs. Tactical Planning
Long-term financial plans or the strategic plans 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. It also include would be
termination of existing projects, product lines, or lines of business; repayment or retirement of
outstanding debts; and any planned acquisitions.
Short-term financial plans or the tactical 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.
The Financial Planning Processes
 There are six steps of financial planning processes that you should know. It
includes:
Step 1: Determine Your Current Financial Situation
In this first step of the financial planning process, you will determine your current financial
situation with regard to income, savings, living expenses, and debts. Preparing a list of current
asset and debt balances and amounts spent for various items gives you a foundation for
financial planning activities.
Step 2: Develop Financial Goals
You should periodically analyze your financial values and goals. This involves
identifying how you feel about money and why you feel that way. The purpose of this analysis
is to differentiate your needs from your wants. Specific financial goals are vital to financial
planning. Your financial goals can range from spending all of your current income to
developing an extensive savings and investment program for your future financial security.

Long-Term Planning Short Term Planning

Persons More participation from Top management is still involved but there is more
Involved top management 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

Step 3: Identify Alternative Courses of Action

Developing alternatives is crucial for making good decisions. Although many factors will
influence the available alternatives, possible courses of action usually fall into these categories:
• Continue the same course of action.
• Expand the current situation.
• Change the current situation.
• Take a new course of action.
• Not all of these categories will apply to every decision situation; however, they do
represent possible courses of action.
• Creativity in decision making is vital to effective choices.
Step 4: Evaluate Alternatives
You need to evaluate possible courses of action, taking into consideration your life situation,
personal values, and current economic conditions.
Consequences of Choices. Every decision closes off alternatives. For example, a decision to
invest in stock may mean you cannot take a vacation. A decision to go to school full time may
mean you cannot work full time. Opportunity cost is what you give up by making a choice.
Decision making will be an ongoing part of your personal and financial situation. Thus, you will
need to consider the lost opportunities that will result from your decisions.
Evaluating Risk. In many financial decisions, identifying and evaluating risk is difficult. The best
way to consider risk is to gather information based on your experience and the experiences of
others and to use financial planning information sources.
Financial Planning Information Sources. Relevant information is required at each stage of the
decision-making process. Changing personal, social, and economic conditions will require that
you continually supplement and update your knowledge.
Step 5: Create and Implement a Financial Action Plan
In this step of the financial planning process, you develop an action plan. This requires choosing
ways to achieve your goals. As you achieve your immediate or short-term goals, the goals next in
priority will come into focus.
To implement your financial action plan, you may need assistance from others. For
example, you may use the services of an insurance agent to purchase property insurance or the
services of an investment broker to purchase stocks, bonds, or mutual funds.
Step 6: Re-evaluate and Revise Your Plan
Financial planning is a dynamic process that does not end when you take a particular action. You
need to regularly assess your financial decisions. Changing personal, social, and economic factors
may require more frequent assessments.
When life events affect your financial needs, this financial planning process will provide a vehicle
for adapting to those changes. The figure below represents the financial planning processes.
 Figure 1: The Financial Planning Processes

LESSON 2: Formula and Format for the Preparation of Budgets and Projected Financial
Statement
INTRODUCTION: In planning, the goal of maximizing shareholders’ wealth must always be
put in mind. Therefore, the following criteria must be used for an 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.)
ACTIVITY: What are your insights on the following questions?
1 What is a budget? ______________________________________
2 What is the importance of a budget? _____________________
3 What will happen if the budget is not met? _______________
DISCUSSION: Cayanan, A. (2015) said, 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.
The Sales Budget
This is how a sales budget is formulated. The most important account in the financial statement in
making a forecast is sales. To forecast means is to plan beforehand. Since most of the expenses are
correlated with sales, the sales budget is formulated. Financial Statement analysis discussed in your
Accounting subjects that cost of sales ratio, gross profit ratio, and variable operating expenses ratio are
based on the sales figure. Given the importance of the sales forecast, the financial manager must be able
to support this figure with reasonable assumptions.
SALES BUDGET Formula: Forecasted unit sales x Price per unit= Total gross sales
The following external and internal factors should be considered in forecasting sales:

External Internal

• Gross Domestic Product • production capacity

(GDP) growth rate • man power requirements
• Inflation • management style of managers
• Interest Rate • reputation and network of the controlling
• Foreign Exchange Rate stockholders
• Income Tax Rates
• financial resources of the company
• Developments in the industry
• Competition
• Economic Crisis
• Regulatory Environment
• Political Crisis

Figure 2: Factors that Influence Sales

 Let us discuss the external and internal factors that influence sale.
External Factors
Macroeconomic Variables. Macroeconomic variables such as the GDP rate,
inflation rate, and interest rates, among others play an important role in forecasting sales because it
tells us how much the consumers are willing to spend. A low GDP rate coupled by a high inflation
rate means that consumers are spending less on their purchases of goods and services. This means
that we should not forecast high sales of the periods of low GDP.
Developments in the Industry. Products and services which have more
developments in its industry would likely have a higher sales forecast than a product or service in
slow moving industry. Consumer trends are always changing, thus the industry should be
competitive to be able to appeal to more customers and stay in the market.
Competition. Suppose you are selling bread and you know that each person in your
community eats an average of one loaf of bread a day. The population of your community is 500
people. If you are the only person selling bread in your town, then your sales forecast is 500 units
of bread. However, you also have to take account your competition. What if there are 4 other
sellers of bread? You will need to have to divide the sales between the 5 of you. Does this mean
your new forecast should be 100 units of bread? Not necessary. You should also know the
preference of your consumers. If more of them would prefer to buy more bread from you, then you
should increase your sales forecast
Internal Factors
Production Capacity and manpower. Suppose that you have already evaluated the
macroeconomic factors and identified that there is a very strong market for your product and
consumers are very likely to buy from you. You forecasted that you will be able to sell 1,000
units of your product. However, you only have 20 employees who are able to produce 20 units
each. Your capacity cannot cover your expected demand hence, you are limited by it. To be able
to increase capacity, you should be able to expand your operations.
There is an implications if sales budget is not correct. If understated, there can be lost
opportunities in the form of forgone sales. If it is too optimistic, the management may decide to
unnecessarily increase capacity or hire more employees and end up with more inventories.
Production Budget
What a production budget is and how it is formulated? A production budget 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. It is computed as follows:

Jan Feb Mar Apr May

Units 2,000 2,200 2,500 2,800 3,000

Required production in units = Expected Sales +

Target Ending Inventories - Beginning Inventories

Let us have the following examples:

Company A forecasts sales in units for January to May as follows:
Note: Ending inventory of current period is beginning inventory of next period
Moreover, Company A 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 Company A produce in order to fulfill the expected sales of the company?
The answer is here:
MONTH

Jan Feb Mar Apr May Total

Projected Sales 2,000 2,200 2,500 2,800 3,000 12,500

Target level of 100 100 100 100 100 100

ending
inventories

Total 2,100 2,300 2,600 2,900 3,100 12,600

 Less: beginning 50 100 100 100 100 50
inventories
Required 2,050 2,200 2,500 2,800 3,000 12,500

production

PROJECTED FINANCIAL STATEMENTS

Projected financial statements is a 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.
This lesson has been extensively discussed in your Fundamentals of
Accounting 1 and 2. A historical financial statement is provided for you to make your
forecast.
Here are the following reports that may be forecasted:
 Projected Income Statement
 Projected Financial Position
 Projected Cash Flows
Financial forecasts assist businesses in the attainment of their goals. They are the future
predictions of finances which provide details of actual the results or progress of performances.
Predicting the financial future of a business needs a lot of considerations especially if the business
has not yet been established and has none financial history. The forecasting and making
adjustments will enable a business to become more precise and accurate in numbers in the future.
What Is Projected Income?
Wood, C. (2020) said the projected income is an estimate of the financial results you'll see from
your business in a future period of time. It is often presented in the form of an income statement,
although it doesn't have to be. The chart above represents a projected income of Company A.
What is balance sheet?
The balance sheet shows a business's actual, historical financial positions, while a
projected balance sheet communicates expected changes in future asset investments, outstanding
liabilities and equity financing. Businesses may consider a projection of a balance sheet as to
facilitate long-term, strategic planning which often concern future asset growth and how it may be
supported by increased financing through both debt and equity. It provides the most relevant
financial information needed in the business planning process. The chart above represents a projected
Financial Position for 5 years (Jay, W. 2019).
What is cash flow?
If you want to predict your business’s cash flow, create a cash flow projection. A cash flow
projection estimates the money you expect to flow in and out of your business, including all of your
income and expenses. The chart above is an example of projected cash flows (Kappel, M. 2019).
Evaluation: Put your answer on a sheet of paper.
Directions: Calculate the production budget (Php) of Company X, given the following data:

YEAR 1 YEAR 2 YEAR 3

Sales (in units) 5,000 10,000 15,000
Beginning Inventory 1,500 2,500 4,000
Ending Inventory 3,000 5,000 7,000
Production budget Php Php Php
MATCHING TYPE . Directions. Match column A to Column B.
COLUMN A COLUMN B
1. This financial statement reports a A. Forecasting
Operations’ sales, expenses, profits B. Budget
Or losses for a period of time. C. Income Statement
2. An integral part of the planning D. Production Bud
Process that makes future predictions E. Sales Budget
regarding sales trends.
3. It is a detailed schedule showing the
expected sales for the budget period.
4. It is a plan that indicates an
operation’s financial objectives.
5. It calculates the number of units of
products financial objectives.
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