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Financial Management I BBAP3103

Chapter 9 Financial Planning


Financial plan should have the following criteria: Objective, strategy & operational plan must be clear Assumption that are used in the preparation of financial plans Budgets that are classified according to the type and time period Projects financing that are classified according to the type and time period Pro forma financial statement throughout the financial period

Cash Budget

Summary of receiving and payment of cash that is expected for a short period such as 6 months and 1 year Can assist the company to know the cash status to ensure that the cash level is strong and stimulating

Cash Flow (Cont.)

Several terms that are often used in cash budget:-

Receiving of cash (cash inflow) : Cash sales, cash collection from debtors Payment of cash (cash outflow) : Purchase of equipments, wages, rental etc. Change in net cash : Differences between cash inflow and cash outflow Cash surplus @ additional financing requirement : To ensure either the company need to make loan or not Cash inflow > Cash outflow Surplus Cash inflow < Cash outflow Need loan

Example 9.1 :Prepare the cash budget for Nuri Company based on the following information

Actual sales for January and February Sales forecast for the months of March, April and May Cash sales are 25% and credit sales are 75%. 80% of credit sales will be collected in the next month and 20% will be collected in two months after sales The raw materials is predicted at 60% of sales and the payment will be made a month later Office and warehouse rental are RM4,500 per month

Cash Flow (Cont.)

Nuri Company information (cont.)

Payment of wages are RM5,000 per month Premium insurance RM2,800 paid on March Purchase of new asset at RM25,000 on March Opening cash balance for March is RM15,000 The cash balance need to hold every month is RM10,000

Cash Flow (Cont.)

Nuri Company information (cont.)

Sales for month of January - May
Month January Sales (RM) 45,000

February March April Mei

65,000 60,000 90,000 85,000

Cash Flow (Cont.)

Step 1 : Prepare cash received for January May
Jan Total sales Feb Mac Apr Mei

45,000 65,000 60,000 90,000 85,000

Credit sales (75%)

Collection : Cash sales (25%) 80% from last month credit sales 20% from last two months credit sales Total Cash Inflom

33,750 48,750 45,000 67,500 63,750

11,250 16,250 15,000 22,500 21,250 (Feb) (Mac) (Apr) 39,000 22,500 21,250 (Jan) 6,750 (Feb) 9,750 (Mac) 9,000

11,250 16,250 60,750 68,250 84,250

Cash Flow (Cont.)

Step 2 : Prepare cash payment for January - May
Jan Total purchase of raw materials Credit purchase of raw materials Payment : Payment of raw materials Rental Wages Insurance premium Purchase of new asset Total cash outflow 4,500 5,000 9,500 27,000 4,500 5,000 36,500 39,000 4,500 5,000 2,800 25,000 76,300 36,000 4,500 5,000 45,500 54,000 4,500 5,000 63,500 27,000 27,000 Feb 39,000 39,000 Mac 36,000 36,000 Apr 54,000 54,000 Mei 51,000 51,000

Cash Flow (Cont.)

Step 3 : Prepare cash budget Mac Total receiving of cash (a) Total payment of cash (b) Change in cash flow (c) = (a) (b) Opening balance (d) Closing cash balance without loans (c) (d) Cummulative cash flow Minimum cash required Financing requirement (repayment) 60,750 76,300 (15,550) 15,000 (550) (550) 10,000 10,550 Apr 68,250 45,500 22,750 10,000 32,750 32,750 10,000 (10,550) Mei 84,250 63,500 20,750 22,200 42,950 42,950 10,000 -

Closing Cash Balance




Pro Forma Income Statement

Provide to forecast net profit that can be obtain at a specific period of time. There are 2 step in preparing a pro forma financial statement
Step 1 : Preparing Sales Forecast

Sales forecast refer to unit sales and amount sales forecasted in the future Several sources are needed to make sales forecasting
Any sales trend expected based on previous trend. If the sales increase 10% in every month, the sales forecast must increase 10% for every month Any factors that effect on the sales trend such as economic situation, inflation, product introduction and change in marketing strategy

Pro Forma Income Statement (Cont.)

Step 2 : Forecasting Financial Variables

Financial variable refer to expenditure, current assets, fixed assets, liabilities and equity Then, company must determine the effect of this increase in sales on theses financial variable For example, the labor wages will increase when the company want to increase the production level to ensure that the sales will increase

Pro Forma Income Statement (Cont.)

There are several processes to prepare pro forma financial statement

Step 1 : Prepare the sales forecast Step 2 : Determine the production schedule and requirement for materials, labor and expenditure (overhead)

Determine the total unit that will be produces Production Requirement = Expected Unit Sales + Closing Inventory Beginning Inventory Determine the production cost per unit Cost per unit = Material + Labor + Overhead Total Cost = Unit Produce x Cost Per Unit Cost of Good Sold = Sales Unit x Cost Per Unit

Pro Forma Income Statement (Cont.)

Calculate the closing inventory Closing Inventory = Beginning Inventory + Total Production Cost - Cost of Good Sold Admin and general expenses Interest espenses

Step 3 : Calculate other expenditure

Step 4 : Prepare pro forma financial statement

RM Sales revenue xxx

(-) Cost of good sold

Gross profit (-) Expenses Depreciation Admin and general expenses Operating Profit (Profit Before Interest and Tax) (-) Interest expenses Profit Before Tax (-) Tax Nep Profit (Loss) / Earning After Tax (-) Dividend of Ordinary Share

xxxx xxx xxx xxxx xxx xxx xxx xxx xxx

Increase (decrease) in retained earning


Pro Forma Income Statement (Cont.)

Example 9.2 : Based on Nuri Company information, prepare pro forma financial statement based on the following additional information
Total fixed asset = Depreciation = Inventory at 30 April = Inventory at 31 May = Tax rate = RM300,000 10% RM20,000 RM40,000 30%

Nuri Company Pro Forma Income Statement for the month of May RM RM

Sales revenue
(-) Cost of good sold Opening inventory Purchases (60% x 85,000) Losing inventory Cost of good sold Gross Profit (-) Operating expenses 20,000 51,000 71,000 (40,000)


(31,000) 54,000

Depreciation (10% x RM300,000 12)

Office and warehouse rental Wages Total operating expenses

4,500 5,000 (12,000)

Profit Before Interest and Tax

(-) Tax (30% x 42,000) Profit After Tax

(12,600) 29,400