Financial Planning- planning of inflows and outflows of cash

PURPOSE: Estimate of future financing needs

Think systematically about future requirements

COMPONENTS OF FINANCIAL PLANNING

1. Short Term Financial Plan: generally covers a period of 1 year or less

: Usually takes the form of cash budget

2. Long Term Financial Plan: generally covers a period of 3-5 years

:Serves as the basis for developing the short term financial plan

LONG TERM FINANCIAL PLAN STEPS:

1. Develop Sales Forecast

2. Pro Formats of Financial Statement
3. Estimate of financing needs

BASE CASE- The set of assumptions underlying the firms financial plan

BASE CASE PROJECTION- resulting projected financial statement

*Useful for setting internal goals

Cash Budget- tool to estimate cash flows from receipts and disbursements for a specific time

PURPOSE- So that the firm will always have cash to pay off its liabilities

*Done Quarterly, Monthly, or daily time periods

Steps in Cash Budget:

1. Sales Forecast
2. Production Cost
3. Manufacturing Cost
a. Direct Material
b. Direct Labor
c. Overhead
Cash Budget Income Balance
4. Selling and Administrative Cost
Statement Sheet

5. Capital Investment
6. Interest Payment
7. Dividend Payment

FORMULAS/FORMAT OF CASH BUDGET:

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total

1. Sales Forecast
Unit Selling Price xxx xxx xxx xxx xxx
Multiply by: Unit Sales xxx xxx xxx xxx xxx
= Total Projected Sales xxx xxx xxx xxx xxx

2. Production Forecast
Projected UNIT Sales xxx xxx xxx xxx xxx
Add: Desired Ending Inventory xxx xxx xxx xxx xxx
=Total Units required xxx xxx xxx xxx xxx
Less: Beginning Inventory xxx xxx xxx xxx xxx
=Budgeted Production xxx xxx xxx xxx xxx

3. Direct Material Budget

Raw Materials Needed xxx xxx xxx xxx xxx
Add: Desired ending inventory xxx xxx xxx xxx xxx
= Total Raw materials needed xxx xxx xxx xxx xxx
Less: Beginning Inventory xxx xxx xxx xxx xxx
= Raw Materials purchase xxx xxx xxx xxx xxx
Multiply by: Cost per unit xxx xxx xxx xxx xxx
=Cost of Raw Materials purchase xxx xxx xxx xxx xxx
 4. Direct Labor Budget 1st QTR 2nd QTR 3rd QTR 4th QTR Total
Required production in UNITS xxx xxx xxx xxx xxx
Multiply by: Direct labor xxx xxx xxx xxx xxx
hours/unit
= Total direct labor hours required xxx xxx xxx xxx xxx
Multiply by: Direct Labor cost per xxx xxx xxx xxx xxx
hour
= Total Direct Labor Cost xxx xxx xxx xxx xxx

5. Manufacturing OH Budget
Budgeted DL Hours xxx xxx xxx xxx xxx
Multiply by: Variable OH rate xxx xxx xxx xxx xxx
= Variable Manufacturing OH xxx xxx xxx xxx xxx
Add: Fixed Manufacturing OH xxx xxx xxx xxx xxx
= Total Manufacturing OH xxx xxx xxx xxx xxx
Less: Depreciation xxx xxx xxx xxx xxx
=Total Manufacturing OH cost xxx xxx xxx xxx xxx

6. Selling and Admin.

Expense Budget
Budgeted sales in UNITS xxx xxx xxx xxx xxx
Multiply by: Variable rate per unit xxx xxx xxx xxx xxx
= Variable selling and admin. Exp. xxx xxx xxx xxx xxx
Add: Fixed selling and admin. Exp. xxx xxx xxx xxx xxx
= Total selling and admin. Exp. xxx xxx xxx xxx xxx
Less: Depreciation xxx xxx xxx xxx xxx
=Total Selling and Admin. Cost xxx xxx xxx xxx xxx

7. Cash Receipts
Cash Sale xxx xxx xxx xxx xxx
Add: Collection of Receivable:
From 2 periods back xxx xxx xxx
From 1 period back xxx xxx xxx xxx
Add: Other cash Receipts xxx xxx xxx xxx xxx
=Total Cash Receipts xxx xxx xxx xxx xxx

8. Cash Disbursements
/purchases
Cash Purchases xxx xxx xxx xxx xxx
Payment of Payables
From 2 periods back xxx xxx xxx
From 1 period back xxx xxx xxx xxx
Payment of Expenses: xxx xxx xxx xxx xxx
DM Cost, DL Cost, MOH etc. xxx xxx xxx xxx xxx
Fixed Asset Outlay xxx xxx xxx xxx xxx
Total Cash Disbursement xxx xxx xxx xxx xxx
 9. Cash Budget
Cash Receipts xxx xxx xxx xxx xxx
Less: Cash Disbursements xxx xxx xxx xxx xxx
=Net Cash Flow xxx xxx xxx xxx xxx
Add: Beginning Cash xxx xxx xxx xxx xxx
= Ending Cash xxx xxx xxx xxx xxx
Less: Minimum Cash Balance xxx xxx xxx xxx xxx
= Excess/ (Shortage) xxx xxx xxx xxx xxx