Financial Plan

Financial planning
Financial planning is defined as a document that has records of a business
owner or firm's financial situation along with planning on the spending of
money to achieve a certain goal by working by a well-devised plan. Financial
planning may be made independently or by an experienced planner.

It is basically a financial budget plan, which helps organize the business and
includes a set of goals that are supposed to be followed by the firm or business
owner to save and spend accordingly. It helps distribute various monetary
expenses such as rent, while at the same time saving some amount of money as
short-term or long-term savings. 
 Financial Planning in Financial Management
 A financial plan is an overall evaluation of current pay and future financial state by using
the current known variables to predict the future income, asset values, and withdrawal
plans.

 Financial Planning includes the budget which organizes the business and the individual
finances and at times includes a series of steps or specific goals for spending and saving
for the future.

 This plan distributes the future income to various types of expenses such as rent or
utilities and also reserves some income for the short-term and long-term savings as well.

 A financial plan is sometimes referred to as an investment plan, while personal financing

focuses on specific areas like risk management, estates, colleges, or retirement. 
 Objectives
There two main objectives of financial planning which are given below:
•Ensuring Availability of Funds When Required: The foremost and most
important objective of financial planning is to keep in check that funds are
available in cases of emergency or whenever it is required for use. Sufficient
funds should be available with the firms for various purposes.

•Check Unnecessary Fundraising by the Firms: Insufficient funds are just as

bad as surplus funds. Idle money will only result in a loss for a firm as against
investment. Therefore, proper allocation of funds is a very important part of
financial planning.
 Features
There are a number of features of financial planning that are important for firms and individuals. These
are listed below:
•Foresight: A plan made without foresight will only result in a disaster. Foresight is needed in planning
for estimating risks and the need for liquid and other assets. It may not be 100% accurate but it should
be able to give an estimate of the future risks.
•Flexibility: A plan made should be flexible as it will help in the future to make adjustments according
to the needs. 
•Optimal Usage of Funds: A financial plan should be able to utilize idle money and assets so that they
can prove to be fruitful in the future. It does not involve funds kept aside for unforeseen circumstances
but the assets that could be otherwise utilized.
•Simplicity: Financial planning should be simple in terms of structure and should be able to provide a
sound allocation of resources that can be easily understood even by a layman.
•Liquidity: It is also a very important aspect of financial planning which involves keeping current
assets in the form of money. This will help in easy allocation and payment of various kinds like salary,
fees, and other kinds.
 How to Write a Financial Plan for Business?
Business planning or forecasting is the view of your business starting today
and going into the future. You don’t do the financials in a business plan the
same way you calculate the details in your accounting reports.
There are two main purposes of the financial section of your business plan.
 First, this information is needed by potential investors, venture capitalists,
angel investors and anyone else with a financial stake in your business.

 The second, and arguably, the most important purpose of the financial
section of your business plan is for your own benefit, so you understand
how to project how your business will do.
 Steps for Making financial Plan
Step 1: Make A Sales Forecast
Step 2: Create A Budget for Your Expenses
Step 3: Develop Cash Flow Statement
Step 4: Project Net Profit
Step 5: Deal with Your Assets and Liabilities
Step 6: Find the Breakeven Point
 Techniques of Financial Projection
The main techniques of financial projection fall into three categories:
Pro forma financial statements.
Pro forma statements are projected financial statements embodying a set of assumptions
about a company’s future performance and funding requirements.
Cash budgets.
Cash budgets are detailed projections of the specific incidence of cash moving in and out of
the business.
Operating budgets.
Operating budgets are detailed projections of company-wide or departmental revenue and/or
expense patterns, and they are subsidiary to both pro forma statements and cash flow
statements.
 Financial plan - Basics
 5 year time horizon
• First two help set cash flow expectations
• Last three help define opportunity
 Income Statement
 Balance Sheet
 Cash Flow
 High-level summary of the growth
What is a Budget?
 What is a Budget?

A budget is a financial plan of expected cash inflows and outflows

that a business generates. A sound budget guides the business
managers regarding the funds at hand and effective spending of the
same.

Having a tight budgetary policy is indispensable for any organization

that wants to succeed. Without one, a business might as well be
shooting in the dark. It is what sets the boundaries for any
organization. It represents the maximum financial resources at their
disposal using which they must achieve all business targets.
“Failing to plan is planning to fail,” is very apt here. A business with great products,
dynamic management, or a dominating client base may still fail if it does not mind its
margins. Without a budget, a company is directionless. With a budgetary policy in hand, the
firm will always be aware of the cash on hand and save itself from running into debt. Also, a
realistic budget goes a long way in setting out the long-term financial requirements of the
firm, enabling a firm to prepare in advance for contingencies.
 A fundamental budget representation a list of very basic items. It
gives a list of budgeted income and expenditure and compares
them with the actual.
 Deviations in such figures are undesirable and must be reported to
the management for corrective action.
 Overspending indicates gross negligence and a lack of control
over expenditure.
 On the other hand, under-spending may mean that the company is
not utilizing its resources to the fullest extent and thus remains
unable to achieve its true potential.
 Suggestive budget template:
CATEGORY BUDGET AMOUNT ACTUAL AMOUNT DEVIATION
Sales Revenue      
Other Income      
TOTAL INCOME      
EXPENSES      
Accounting Services      
Advertising      
Estimated Taxes      
Installation / Repair of Equipment      
Interest on Debt      
Inventory Purchases      
Loan Payments      
Payroll      
Professional Fees      
Rent/Lease Payments      
Utilities and Telephone      
Vehicle Expenses      
TOTAL EXPENSES      
TOTAL INCOME MINUS TOTAL EXPENSES    
The budgeted figures derived may be based on several assumptions. The
expected turnover, forecasted growth, current demand, and the scale of
operations are factors that influence the budgetary figures. A very simple and
effective approach is to build upon the number of previous years to arrive at the
current year’s forecasts. Along the way, some tweaks are made to adjust for
factor-specific changes that have occurred in the current year.

Below mentioned is a derivation of a single line item :

Previous Year Purchase
(+/-) Adjustment for orders
(+/-) Adjustment for change in prices
(+/-) Adjustment for applicable taxes
= Budgeted Purchases
Types of Budget
 Types of Budget

The budget forecasts the future activity of the company and

helps in allocating the funds/resources to the different areas
or departments of the business. The budgets help measure
past performance and predict future performance in different
areas.
In budgeting, there are different types of budgets that help the
business maximize the utilization of its resources and
increase its revenue.
 Types of Budgets
Master Budget
The master budget is the sum total of the company’s budget that
includes the allocation of funds to different activities of the business.
It evaluates the cost centers within the organization and allocates
funds by having different factors. The master budget includes
different factors like sales, working capital, operating expenses,
income sources, etc. This budget ensures that the managers are
working in line with the goals and objectives of the business.
 Operating Budget
The operating budget of the business involves costs related to operational
activities. The costs include production cost, overhead cost, manufacturing
cost, labor cost, administrative cost, working capital, etc. The income flow
includes the sales of the business.

This budget can be on a weekly, monthly, quarterly, or even yearly basis.

The operating budget ensures that the managers know their scope of work in
proportion to the number of funds allocated to the department. On this basis,
the evaluation of a manager’s performance is possible.
 Financial Budget
A business is always in need of short-term, medium-term, and long-term funds.
The financial budget ensures that the right types of funds are available
whenever they need them. This budget aims to manage the outflows with the
inflows. The outflow is in the form of expenses, and the inflow is in the form
of sales. Decisions like mergers and acquisitions depend on the financial
budgets of the organizations. If the business desires to take over any company,
its financial budget shall determine the value up to which the business can
quote for acquiring another organization. In simple words, the financial budget
describes the business’s financial health.
Cash Flow Budget
A cash flow budget is more about managing the cash of the business. The cash
flow budget determines whether the accounts payable and accounts receivable
are dealt with timely. It ensures that the inflow of cash is regular and timely.
This budget is important as it helps the managers determine the cash shortage
period. And accordingly, take necessary action towards it. A cash flow budget
also enables the business to know whether it would be able to handle new
projects efficiently or not.
Program Budget
It is a budget prepared for a specific program or project. And therefore, it is
also known as a project budget. Since a business has many ongoing projects
together simultaneously, it helps in controlling each project efficiently. It
determines the allocation of funds on a particular project that facilitates strong
decision-making.

Performance Budget
A performance budget measures the productivity of operations by analyzing the
purpose of spending money. It focuses more on the operations that contribute
more to profitability. It helps in periodic evaluation easier and thus controls any
inefficiency on time. An example of performance budgeting is comparing the
change in the production of two periods, before and after providing training.
Rolling Budget
It is a type of budget that the company prepares in the continuity of the existing
budget. The business organization keeps on adding more periods to the existing
budget, making it quite easy to prepare. It keeps changing with the addition of
a new period. And thus, it has up-to-date data, which makes it more relevant
for the purpose of analysis.

Comprehensive Budget
It is a budget prepared on the basis of recurring incomes and expenses and non-
recurring expenses. It follows the concept of conservatism, and hence, it does
not consider non-recurring incomes. This budget is just another name for the
master budget.
Fixed Budget
A fixed budget is a budget for a particular level of activity. It does not consider any
changes and has a rigid approach. For example, the company forecasts the sales to be
Rs. 200,000 and hence fixes the incentive for the salesperson of Rs. 20,000. Now, if the
actual sales differ from the forecasted sales, a fixed budget does not provide the
opportunity to modify the same.
Flexible Budget
In contrast to a fixed budget, a flexible budget provides freedom of modification as per
the change in the level of activity.

Budgets form an integral part of any organization. The different types of budgets
ensure that the right amount of funds are allocated to different departments or activities.
Ignoring or making wrong budgets can prove to be fatal for the business as it can lead
to efficient use of monetary resources. A business must prepare different types of
budgets on the basis of its requirements for the smooth running of the organization.
 What is Master Budget?
All the functional divisions of the organization prepare the budget for the
particular division. The master budget is the sum total of all the divisional
budgets that all the divisions prepare. Further, it also includes the financial
planning, cash-flow forecast, budgeted profit and loss account, and the
organization’s balance sheet. It is the goal of the organization to reach a level in
a particular period. Normally the master budget is prepared for a year.

Sometimes, it may be misunderstood that the master budget is one large budget
of the organization. However, it is not the case. Master Budget is the summary
of the divisional budget. It is a continuous financial plan.
 Steps to Prepare Master Budget
A master budget is divided into two parts:
•Operating budgets
•Financial budgets
Sales Budget Operating Budget

The sales budget is the foundation of the master budget. All the procurements, staff
requirements, and administration costs are based on sales. First and foremost, the number of
units to be sold and the price per unit is derived. On the basis of that, the value of sales is
calculated.
The sales budget is prepared based on considering the following factors:
•Market demand estimation
•Production capacity or an infrastructure facility
•Current supply facility
•Industry analysis
Market demand and production capacity are determined with the help of the Marketing
division and production division, respectively.
 Production
The production budget is mainly based onBudget
the sales budget. However, the
following factors shall be considered;
•Inventory at the beginning of the year
•Inventory to be maintained at the end of the year
•Number of units manufactured
•Buffer stock to be maintained throughout the year
The production budget is divided into further three parts:
•Direct material budget
•Direct labor budget
•Manufacturing overhead budget
If the company is not having a manufacturing unit, we require a number of
units to purchase instead of the production budget.
 Cash Budget
For all the divisional budgets, the organization requires cash. It needs to ensure
that it does not run out of cash during the year due to poor planning in
preparation for the budget.
On the basis of the sales and production budget, it is derived what is the
expected receipts and what are the expected payment. The receipt and payment
cycle of the customer and supplier need to be analyzed. At this stage, the
organization decides whether external borrowing is required or not.
All the administration expenses, such as interest on borrowing, staff costs,
office rent, legal expenses, office supplies, etc., are to be considered while
preparing the cash budget. Some factors also are dependent on the sales budget,
such as the CEO’s salary based on performance or the performance bonus to
sales staff.
 Financial Budget

A budget helps an organization allocate the resources of the

company to different departments and activities and manage
the cash flows of the business in an effective way. There are
many types of budgets. One of them is a financial budget.
 What is a Financial Budget?
A financial budget (a type of master budget) in budgeting means predicting the
income and expenses of the business on a long-term and short-term basis.
Accurate cash flow projections help the business achieve its targets in the right
way.
Financial budget preparation includes a detailed budget balance sheet, cash
flow budget, the sources of income and expenses of the business, etc. The
evaluation of incomes and expenses is done on a monthly, quarterly, half-
yearly, or annual basis, depending on the organization’s suitability. It is a very
powerful tool to achieve the long-term goals of any business. Importantly, it
also keeps the shareholders and other members of the organization updated
about the functioning of the business.
Why Prepare a Financial Budget?
Organizations prepare a financial budget to manage the cash flows
better. This budget gives the business better control and provides a
more efficient planning mechanism to manage the inflows and
outflows. To prepare such a budget, it is important to prepare the
operating budget first. With the help of the operating budget, the
organization can predict the sales and production expenses.
Therefore, the organization prepares this budget only after planning
the different financing activities in the operating budget .
Different Sections of a Financial Budget
Capital Expenditure Budget
As the name suggests, the capital expenditure budget relates to expenses related to plant and
machinery or any capital asset of the business. This budget determines the expenses that
would be incurred if an existing plant is replaced or any new machinery is bought. Factors
like depreciation, cost of the plant, life of the machinery, etc., are taken into account when
preparing the capital expenditure budget.

Budget Income Statement

The budgeted income statement contains comparative information of actual and budgeted
data.

Budgeted Balance Sheet

The budgeted balance sheet comprises many other budgets. The major component of this
budget includes the production budget and its associated budgets.
Financial Budget Plan
The financial budget plan comprises the following steps:
•Calculate the expected inflow
•Calculate the expected outflow
•Set the targets
•Divide the expenses into different categories
•Keep track of components in the budget
•Set up the ledger
The above points give some idea of how a financial budget plan is set.
Different organizations may take different factors into consideration while
preparing the budget. However, the above points will form part of any budget
plan.
 The financial budget provides a blueprint for the business to
move forward. It addresses the financial aspects of the business
and checks operational efficiency. The extra expenses are cut by
emphasizing cost reduction and improving the market share. The
organization is well prepared to meet the long-term and short-
term expenses in terms of financial budgets. A good budget helps
achieve the business’s goals and objectives in the shortest
possible span of time.
Applications of Master Budget
Important Planning Tool
The master budget is considered one of the most important planning tools for
an organization. While planning, top-level management discusses the overall
profitability and the asset and liability position of the company. For which the
master budget is being used.
Measures Performance
The master budget measures the performance of the organization as a whole.  It
helps in departmental control and setting in departmental accountability. It
helps in improving efficiency.
Interdivision Coordination:
The master budget is used for interdivisional coordination amongst the
divisions of the organization. It helps and ensures that coordination with the
other divisions is properly made.
The following information about R & S Ltd has been made available from the accounting records of payment of Precision Tools
Ltd. for the six months (and of only sales for January ). 
(i) The units to be sold in different months are:
• July: 2,200
• August: 2,200
• September: 3,400
• October: 3,800
• November: 5,000
• December: 4,600
• January 2020: 4,000
(ii) There will be no work-in-progress at the end of any month
(iii) Finished units equal to half the sales for the next month will be in stock at the end of every month (including June )
(iv) Budgeted production and production costs for the year ending December are as thus:

•Production units: 44,000

•Direct materials per unit: Rs.10.00
•Direct Wages per unit: Rs. 4.00
•Total factory overheads apportioned to the product: Rs. 88,000

Prepare:
(a) Production budget for the six months July to December
(b) Production cost budget for the same period
 Advantages of Master Budget

 Motivation to Staff
 Summary of the Divisional Budget
 Planning in Advance
 Helps in the Achievement of Goal
 Continuous Improvement
Disadvantages of Master Budget

 Rigidity
 Difficult to Update
Question 1
Tulsian Ltd. provides you the following figures for the year 20X1:

Required: Formulate a budget to ascertain the sales of each product in each area during each quarter.
Q2 ABC Company plans to produce an array of plastic pails during the upcoming budget year, all of which
fall into a single product category. Its sales forecast is outlined as follows:

  Quarter 1 Quarter 2 Quarter 3 Quarter 4

Forecasted unit sales 5,500 6,000 7,000 8,000
Price per unit Rs. 10 Rs. 10 Rs. 11 Rs. 11

Sales discounts & allowances Rs. 1,100 Rs. 1,200 Rs. 1,540 Rs. 1,760

Increase 30 % in Sales units and 25 % decrease in sale price.

Prepare Sales Budget.

The following data relate to the four raw materials used in the manufacturing of three
product by Lumex Automotive Systems Ltd.

A) The usage and opening stock of raw material at the beginning of the budget period
is as follows:

Raw Material Usage (Kg) Opening (kg)

M1 395600 50000
M2 229000 20000
M3 333200 10000
M4 280200 20000

B) The quantity of raw material of closing stock at the end is to be reduced by 10%.
C) Cost per kg is: 5,4,3 and 2 respectively.

Prepare the raw material purchase budget.

 Flexible Budget (Question )
• Prepare flexible budget for the overheads of ABC Co. from the following data and
ascertain the overhead rate based on direct labour hours at 70%, 80% and 90% capacity.
Q: Draft a flexible budget for overhead expenses on the basis of following information and determine the
overhead rates at 70% 80% and 90% plant capacity.

Particulars 70 % Capacity 80 % Capacity 90 % Capacity

Variable Overheads
Indirect Labour ---- 24,000 ----
Stores including spares ----- 8,000 ----
Semi- variable overheads
Power (30% fixed, 70% variable) ---- 40,000 ----
Repairs and maintenance
80% fixed, 20% variable ---- 4,000 ----
Fixed overheads
Depreciation ---- 22,000 ----
Insurance ---- 6,000 ----
Salaries ---- 20,000 ----
Total Overheads - 1,24,000 -
Cash Budget
S. K. Brothers wish to approach the bankers for temporary overdraft facility for the
period from October to December 20XX. During the period of this period of these three
months, the firm will be manufacturing mostly for stock. You are required to prepare a
cash budget for the above period.

Month Sales Purchase Wages

August 3,60,000 2,49,600 24,000
September 3,84,000 2,88,000 28,000
October 2,16,000 4,86,000 22,000
November 3,48,000 4,92,000 20,000
December 2,52,000 5,36,000 30,000

(a)50% of credit sales are realized in the month following the sales and
remaining 50% in the second following.
(b)Creditors are paid in the month following the month of purchase
(c)Estimated Opening cash balance is Rs.50,000
 Budgeted Income Statement
On the basis of the all budgets, the budgeted income statement is prepared. The budgeted
Income statement includes the following;

Particulars Amount

Budgeted Income –

Less: Budgeted Expenses –

Budgeted profitability –
 Budgeted Income Statement Meaning
The Budgeted Income statement, also known as Pro Forma Income
Statement, presents the forecasted financial performance of the entity
for future years of operations. It assists the management in setting
the financial target for future years, designing and implementing new
strategies to achieve the set financial goals, and tracking the actual
periodic performance with the forecasted numbers.
 Budgeted Income Statement-
Purpose

Assist Management

Designing and Implementing

New Strategies

Track the Actual Periodic

Performance
Format of Budgeted Income Statement
How to Prepare?
The Budgeted Income statement can be prepared quarterly or yearly. However,
it is advisable to prepare the current year’s financial projections at quarterly
intervals to monitor the actual performance compared to budgeted numbers at
the end of every quarter. It is merely the combination of the Sales/Revenue
Budget, Cost of Goods Sold Budget, Operating expense budget, and cash
budget.
For example, ABC Inc. is in the business of manufacturing and selling LED
monitors. During the year, the company sold 100000 units of LED monitors.
The company also generated income from interest on bank deposits. Here, the
income generated from the sale of the LED monitor will be considered
the operating revenue. It is the core business activity of the entity,
and interest income on deposit will be regarded as non-operating income.
The total operating revenues are derived from the sales budget.
 Budgeted Income Statement- Factors
•The cost of goods sold is derived from the budget of goods sold. The cost of goods sold
comprises all the expenses directly related to manufacturing or procurement, such as
material, labor, factory overheads, and direct expenses.
•The value of operating expenses is calculated with the help of the Operating Expense
Budget. Operating Expense includes office administration expenses such as rent, insurance,
salaries, and selling and marketing expenses
•Similar to Non-operating income, Non-operating expenses are the expenses that are not
related to the operating activity of the business. Examples of such expenses are litigation
claim payments, business restructuring expenses, a loss incurred on the sale of assets, etc.
•Earnings before Interest and Taxes (EBIT) is the total profit of the entity before deducting
interest expenses and statutory taxes.
•The amount of statutory taxes can be calculated at the current corporate tax rates.
•The value of interest expenses can be derived from the cash budget. A cash budget is the
projection of future cash inflows and outflows.
 Advantages
•It helps in planning and coordinating the activities of the various departments
and functions as the budgeted income statement is the combination of sales,
cost, and expense budgets.
•Provide a long-term vision about the investing and financing decisions of the
entity to the management.
•Play a vital role in designing, implementing, and executing various financial
strategies to accomplish target projections.
•Provide constant vigilance on the entity’s financial performance by comparing
the actual reported data with forecasted data.
•Serves the base for the investors willing to invest their money in the entity.
 Limitations
•Based on Assumptions – The budgeted income statement is prepared using various assumptions
and estimates. Generally, these assumptions are based on historical trends and market scenarios
prevailing when projecting the statement. Inaccurate assumptions and estimates can significantly
vary between actual and forecasted data. Also, negligence of the effect of changes in economic
conditions and policies can create a question on the accuracy of the forecasted data.
•Time-Consuming – Forecasting isn’t a one-day job, and the preparation of budgeted income
statements requires a lot of time and managerial expertise to forecast the underlying assumptions
accurately.
•Execution generally does not occur automatically – Although the budgeted income statement
provides a basis for financial planning and setting departmental and functional goals, the success
of it to a large extent depends on effective execution at all levels. If the departments do not perform
to match their financial targets and co-ordinates well with other departments, it won’t be easy to
realise the forecasted performance.
•Inflexibility – The budgeted Income statement can be viewed as inflexible as it is a combination
of information from various other budgets. Incorporating any change requires a change in
supporting budgets (such as sales budget, cost budget, cash budget, and operating expense budget).
 Budgeted Balance Sheet
A budgeted Balance Sheet is similar to a regular balance sheet and
has the same line items as well. The only difference between the two
is that the budgeted BS is for a future period. In other words, we can
say it is the projection of the balance sheet for a future period. It is a
type of financial budget.

One generally prepares it at the beginning of a financial year. The

company uses the balance sheet of the last year as the base for the
budgeted BS and then makes relevant adjustments. Along with the
previous year’s balance sheet, a company also uses different budgets
and budgeted income statements for its preparation.
Budgeted Balance Sheet
The budgeted balance sheet is prepared once the Budgeted Income Statement is prepared.
The budgeted balance sheet indicates the following:

Particulars Amount
Budgeted Assets  
Plants & Machinery –
Equipment –
Accounts receivables –
Inventory –
Total Assets —
Budgeted Liabilities  
Share Capital –
Retained Earnings –
Accounts payable –
Income tax payable –
Short term loans –
Long-term loans –
Total Liabilities —
 Need or Importance of Budgeted Balance Sheet
The following are the reasons why management will want to prepare a
budgeted BS:
•It helps identify any unfavorable financial transactions that a company may
want to get rid of.
•It also ensures the mathematical accuracy of other schedules or inputs.
•A company can use it to calculate different ratios.
•For deciding future activities and actions, it becomes a guiding document.
•It can also trigger the areas where the company needs to work or change its
strategies.
•It becomes the base for revisions or enhancements in the working capital
limits.
 Steps to Prepare Budgeted Balance Sheet
Following are the steps to prepare a budgeted BS:
Use Real Balance Sheet as Base
The first step is to take all the line items from the last year’s real balance sheet.
Collect the Data of All Budgets
The next step is to collect all the budgets that a company prepares at the start of the year. These budgets
could be production budget, sales budget, cash budget, raw materials budget, salaries and wages budget,
operating and financial expenses budget, etc.
Making Adjustments to Real Balance Sheet
Once we have all the data, including all the budgets and last year’s balance sheet, we start to make
adjustments. These adjustments are made to the real balance sheet using data from different budgets. For
instance, we adjust last year’s sales based on the sales and production budget for the current year.
Apart from the above three steps, a company may also need to prepare schedules to overcome the
complexities in preparing the budgets and budgeted BS and income statements. These schedules help with
the calculation of accounts receivable, inventories, income tax, and more. Additionally, a company also
needs to consider several policies such as tax, Credit, dividend, inventory, and more while finalizing the
budgeted BS.
Adjustments
Cash in Hand/Bank 

Sundry Debtors 

Sundry Creditors 

Finished stock 

Raw Material Stock

Fixed Assets

Loan or Debt

Accumulated Depreciation

Paid-in-Capital

Retained Earnings

General Reserve

Taxation
 Adjustments
Under the steps to prepare the budgeted BS, the last step was to make adjustments. But,
what adjustments does one needs to make to the line items? Detailed below are some of the
adjustments that a company needs to make to arrive at the budgeted BS:
Cash in Hand/Bank – for this, we take the closing figure of Cash from the last year’s real
balance sheet and then use the cash budget to make the necessary adjustments.
Sundry Debtors – for this, we use the closing balance and the data from the sales and cash
budget. To get the balance we need – Opening Debtors Balance plus New Credit
Sale less Cash Received.
Sundry Creditors – for this, we use their closing balance and the purchase budget, and the
cash budget. We use the following formula – Opening Creditors plus New Credit
Purchases less New Payments Made.
Finished stock – for calculating an estimate of the finished stock, we use last years’ closing
balance and the Production, Sales, and Cash Budgets. The adjustment we make is – Opening
Finished Stock plus New Production less New total Sales (Cash+ Credit).
Raw Material Stock – for this, we use last years’ closing balance, as well as
material, production, and Cash Budgets. The adjustment we make is – Opening
Raw Material Stock plus New Purchases (both Cash + Credit) less New
Consumption.
Fixed Assets – for this, we use last years’ closing balance, as well as Cash
Budget, Projected Plan Report, and Plant Utilization budget. The adjustment
we make is – Last Years’ Closing Balance plus New Purchase less New Sale
(Cost price).
Loan or Debt – for this, we use last years’ aclosing balance, as well as inputs
from the cash budget. The adjustment we make is – Last Years’ Closing
Balance plus New Loan less Repayments.
Accumulated Depreciation – for this, we use last years’ closing balance of
accumulated depreciation, as well as the overhead budget. The adjustment we
make is – Last Years’ Closing Balance plus New Depreciation.
Paid-in-Capital – for this, we use last years’ closing balance of paid-in-capital,
as well as the cash budget. The adjustment we make is – Last Years’ Closing
Balance plus Additional Paid-in-Capital.
Retained Earnings – for this, we use last years’ closing balance of retained
earnings, as well as cash budget and budgeted income statement. The
adjustment we make is – Last Years’ Closing Balance plus Estimate of
Profit less the Estimate of Dividend Paid.
General Reserve – for this, we make an adjustment to last years’ closing
balance of general reserve for any change in the law regarding reserve
requirements.
Taxation – for this, we use last years’ closing balance of tax, as well as tax
returns, cash budget, and any regulatory change in tax rate or requirements.
The adjustment we make is – Last Years’ Closing Balance plus New Payable
Tax less (Advance tax paid plus TDS deducted).
What Is A Budgeted Balance Sheet And How To Prepare it

The budgeted balance sheet is just like a balance sheet, i.e., it contains all the assets, liabilities, payables,
capital depreciation, amortization, etc. exactly like a balance sheet, but there is one big difference and that
is that the budgeted balance sheet, unlike the balance sheet, presents the future balance sheet.
In contrast, a balance sheet shows the present value of assets, liabilities, and all the other things that are in
a balance sheet.
Three main parts of a budgeted balance sheet

Liabilitie
Assets Equity
s
The three main parts of a budgeted balance sheet are assets, liabilities, and equity. All of these are explained below:
1) Assets
Assets can be land, product, trademark, or intellectual property owned by a company. The assets can be classified into current and non-
current assets.
Current assets can be monetized quickly, ideally within a year, whereas non-current assets are classified as fixed assets.
These may contain equipment and machinery.
2) Liabilities
Liabilities are what a company owes to others. These may be interest or loan payments, bonds, or utility charges.
Liabilities are also current and non-current liabilities. Current liabilities are those due within a year, whereas non-current liabilities are
those due in more than a year.
3) Equity
Stockholder equity or equity is commonly referred to as part of the budgeted balance sheets, which show how many shares or equity a
company holds.
The more equity, the better the health of a company; it is because if any financial issue arises, the company can sell shares to raise capital.
The equity for public companies is recorded at the current share price. So, it rises and falls as the value of shares of the company rises and
falls.
How To Prepare A Budgeted Balance Sheet?
Preparing a budgeted balance sheet is very easy and simple. The same steps need to be followed as steps are followed when preparing a
balance sheet but keeping future earnings in mind.
 Steps for Preparing a Budgeted Balance Sheet

Decide On
The Timing
Balancing
Of The Stating
State The The
Period Of Liabilities Of Estimate
Company Budgeted
The The The Equity
Assets Balance
Budgeted Company
Sheet
Balance
Sheet
Below is a step-by-step guide that will help in preparing a budgeted balance
sheet:
Decide On The Timing Of The Period Of The Budgeted Balance Sheet
As stated before, the budgeted balance sheets can be between a month, a
quarter, or a year. It depends upon your requirements.
Consider if a person wants to create a budgeted balance sheet from March 1st to
April 1st that person must mention this at the start.
As this is a budgeted balance sheet, it must also mention that it is a projection,
which means it is a future balance sheet.
State The Company Assets
The company’s assets are one of the major parts of the budgeted balance
sheets. All of the assets and their market value are mentioned.
The assets in the balance sheet are divided into current and non-current assets
separately, and then both are added under assets.
The current assets can be money, short-term bonds, cash equivalents, etc. The non-current assets can be fixed machinery
and equipment, long term bonds. These must all be what the company expects to be held in the future.
Stating Liabilities Of The Company
The procedure is the same. But, instead of stating future assets, the company must mention what it expects its future
liabilities to be. Just like the assets side, the liabilities are also divided into current and non-current liabilities.
The current liabilities are short-term loans, interest, and tax payments. For the future budgeted balance sheets, this must
include any borrowing the company is planning to do to pay for its future expansion plan, or if the company is planning on
reducing its liabilities, it must also mention any reduction in liabilities of the company.
Estimate The Equity
At this step, the estimated equity must be shown. For example, if a company plans to sell to finance any future projects, the
company’s balance sheet must show that.
But, if the company does not plan on doing so, the equity should remain unchanged.
Calculating the equity for a private company can be pretty easy as a single entity would hold most shares.
Still, it becomes difficult when estimating it for a public company, as share price changes every minute, but only
projections are to be made, not an exact value.
Balancing The Budgeted Balance Sheet
It is the final step in preparing a budgeted balance sheet. This is done to make sure that the balance sheet balances.
Just add the liabilities with the equity and subtract them from the assets. If the answer is zero, then you have prepared a
correct budgeted balance sheet.
 What is A Budgeted Cash Flow Statement? and how To
prepare it
Companies use financial statements to present their activities and finances to their
stakeholders. Usually, these include four reports that are crucial in reporting different areas.
They consist of the balance sheet, income statements, cash flow statements, and statement of
changes in equity. Companies prepare these statements for a specific period. With these
statements, stakeholders can understand how the company operated in that timeframe.
Each financial statement has its use and purpose. Usually, most stakeholders prefer the balance
sheet and income statement. These show a company’s financial position and performance,
respectively. For most stakeholders, these statements present a picture of operations during a
period. However, they follow the accruals principle in accounting. They do not relate the cash
transactions during the timeframe.
The accruals principle is crucial in presenting an accurate picture of a company’s transaction.
However, it neglects a vital aspect of business and operations, cash. Cash transactions occur
regularly for most companies. However, the balance sheet and income statement do not reflect
those. Therefore, investors also consider the cash flow statement. This statement uses a cash
flow basis instead of the accruals principle.
 What Is The Cash Flow Statement?
A cash flow statement is a financial statement used by companies to present
their cash performance. It is similar to the income statement. However, it does
not report revenues, expenses, or profits. Instead, it focuses on the cash aspects
of the business. In the end, it presents whether a company has had net cash
inflows or outflows. This presentation comes in three sections, which represent
different areas of operations.
The cash flow statement includes three categories, namely operating, investing,
and financing activities. The first, operating activities, represents cash flows
from operations. Usually, these include cash transactions from sales, purchases
and other daily activities. This category is crucial for investors to understand
how companies generated or spent cash on operations.
The investing activities category in the cash flow statement includes a company’s
investments. It considers the cash flows generated and spent on those investments. Usually,
these include money put into and out of securities and assets. For example, investing
activities may involve acquiring fixed assets or selling them. Similarly, investments in
subsidiaries, bonds, or other instruments also fall under these activities.

Lastly, the financing activities in the cash flow statement include cash generated from
investors. These investors may consist of both shareholders and creditors. However, the
latter involves lenders that provide funds like financial institutions. Similarly, financing
activities include any cash outflows to compensate those financers. In most cases, it consists
of dividends and interest payments.
Overall, the cash flow statement is a crucial financial statement. It includes a calculation of
a company’s net cash inflows or outflows for a specific period. This statement also
reconciles the opening cash and cash equivalent to the closing amount. This way, investors
can understand the transactions that contributed to the movements in those balances. It does
not consider any transactions based on the accruals principle.
 What Is The Budgeted Cash Flow Statement?
The budgeted cash flow statement is similar to a typical cash flow statement. However, it
does not reflect a company’s cash performance in the past. Instead, it estimates those cash
flows for the future. In other words, it applies budgeting principles to the preparation of the
cash flow statement. With the budgeted cash flow statement, companies can predict their
future cash flows in various areas.

The budgeted cash flow statement falls under a cash budget that companies prepare. This
budget involves estimating all cash inflows and outflows for a company. On top of that, the
cash budget allows companies to forecast their revenues and expenses for a period. With this
budget, companies can predict future cash surplus and deficit positions. By doing so, they
can take the necessary actions in each situation.
The budgeted cash flow statement also involves the same sections as the traditional version.
Companies estimate their cash flows from various areas, including operations, investments
and finances. Of these sections, the first comes from the operating budgets. On top of that,
the budgeted income statement can also contribute to it. The other two may come from
budgets or perceived future transactions.

Essentially, a budgeted cash flow statement is the same as the cash budget. However, it uses
the standard format for the cash flow statement. It arranges items from the cash budget into
that format to make it presentable to stakeholders. In some cases, companies may also use
the direct approach to the cash flow statement. For those companies, the cash budget may be
the same as the budgeted cash flow statement.
Overall, the budgeted cash flow statement presents an estimate of future cash flows. It is
similar to the cash budget but uses the standard format set by accounting standards. Some
stakeholders like creditors or lenders may request companies to prepare this statement.
Sometimes, however, companies may also need it for internal use. Either way, the budgeted
cash flow statement is critical to budgeting.
How To Prepare The Budgeted Cash Flow Statement?
The preparation of the budgeted cash flow statement differs from one company to another.
Usually, it requires all cash inflows and outflows during a period. This process falls under
the preparation of a cash budget. Therefore, the budgeted cash flow statement depends on
that budget. On top of that, companies also some figures through the budgeted income
statement.
Companies must go through several steps to prepare the budgeted cash flow statement.
These steps are crucial in reporting figures in the budgeted statement accurately. Usually, it
involves the following process.
Prepare The Budgeted Income Statement
A typical cash flow statement starts from the net profits from the income
statement. After that, it adjusts those profits for any non-cash items. Usually,
those items include depreciation, amortization, interest and tax expenses. The
budgeted cash flow statement may depend on the budgeted income statement
for that reason. Companies do not prepare the budgeted income statement first
for that reason only.
The budgeted income statement estimates the future sales and expenses that
companies might incur. It presents the picture based on the accruals concept.
Nonetheless, companies can forecast the transactions on a cash basis within
those items. Consequently, companies can prepare the cash budget and
budgeted cash flow statement.
 Projected Financial Statements
Projected Financial statement are the tools of profit
planning:-

The Projected Financial statement (PFS) of a firm may

include:-

a) Projected Income Statement

b) Projected Balance Sheet.
Q. The following is the Income Statement of POR Ltd. For the year ending Dec. 31, 2009. Prepare the
PIS for the year 2010 given that the sales have been forecasted to increase by 10 % during the Year 2010
and dividends will be maintained at the same level.
Income statement for the year 2009
Amount
Sales Rs. 3,00,000
-Cost of Goods Sold 2,15,000
Gross profit 85,000
-Depreciation 10,000
-Operating Expenses 40,000
Profit before Interest and Taxes (PBIT) 35,000
-Interest 6,000
Profit before Tax (PBT) 29,000
-Taxes @ 40% 11,600
Profit after Tax 17,600
-Dividend paid 4,000
Retained Earnings 13,400
With the help of PIS prepare Projected balance sheet. The balance sheet of PQR Ltd. As on
Dec. …. is as follows:-
Balance Sheet as on Dec. .., 20..
Liabilities Amount Assets Amount
Share Capital 40,000 Fixed Assets 75,000
Retained Earnings 35,000 Cash 18,000
Long Term Debts 60,000 Stock 21,500
Creditors 7,167 Debtors 35,000
Other current Liabilities 7,333

1,49,500 1,49,500

On the basis of past experience it is known that stock, debtors and the
creditors vary directly with the sales. Draw the projected balance sheet
on the basis of percentage of sales method.