Financial Planning and Control

Financial Planning is an important corporate finance activity that touches all functional groups in a firm.
It encompasses a wide array of activities such as setting the long-run strategic goals, preparing
quarterly and annual budgets, and managing day-to-day fluctuations in cash balances.

Strategic Plan is a long course of action that usually consist of multi-year plan for the investments and
competitive initiatives that a firm’s senior managers believe will drive the future success of the
enterprise.
Tactical Plan are intermediate plan designed by middle management to satisfy the objectives of the
agreed strategy.
Operational Plan are short-term activities (even daily) functions exercised by line management required
to satisfy the specified corporate objectives in accordance with the tactical and strategic plans.

Role of Finance in Long-term Planning

1. To assess the likelihood that a given strategic objective can be achieved.
2. Finance function assesses the feasibility of a strategic plan.
3. Finance plays an important control function as firms implement their strategic plans.
4. Risk management function – the activities involved in identifying, measuring and managing the
firm’s exposure to all types of risks to maintain an optimal risk-return trade-off and therefore
maximize share value.

Steps in the Financial Planning Process

1. Prepare the projected financial statements and use these projections to analyze the effects of
the operating plan on the projected profits and key financial ratios. The projections can also be
used to monitor the plans that had been finalized and put into effect. Deviations from the plan is
essential to a good control system to achieve corporate success.
2. Determine the sources of funds needed to support the plan.
3. Forecast funds availability as stated in the strategic plan by estimating the funds that can be
internally generated as well as those that will be obtained from external source.
4. Establish and maintain a control system that will govern the allocation and use of funds within
the firm. This will ensure that the basic plan is carried out properly.
5. Develop procedures for adjusting the basic plan if forecasts do not materialize.
6. Establish a performance-based management compensation system.

Sales Forecast is a forecast of a firm’s unit and peso sales for some future period. It is generally based
on recent sales trends plus forecasts of the economic prospects for the nation, region, industry and so
forth.
Top-down Sales Forecast rely heavily on macroeconomic and industry forecasts. Senior
managers establish a firm-wide objective for increased sales. Next, individual divisions or business
units receive their targets, in aggregate, collectively achieves the firm’s overall growth target.
Bottom-up Sales Forecast begin by assessing demand in the coming year on a customer-by-
customer basis. Managers add up these figures across sales territories, product lines, and divisions to
arrive at the overall growth target.

Pro Forma Financial Statements is a forecast of what the firm expects it income statement and balance
sheet to look like a year or two ahead.

Percentage of Sales Method is a method of constructing pro forma statements by assuming all items
grow in proportion to sales.
Illustrative Sample Problem
The balance sheet and income statement of My Ulap Corporation for the year 2017 is shown
below:

My Ulap Corporation
Income Statement
For the year ended December 31, 2017

Sales P 250,000
Less: Cost of Goods Sold 162,500
Gross Profit P 87,500
Less: Operating Expenses 25,000
Depreciation Expense 10,000
Operating Income P 52,500
Less: Interest Expense 3,000
Income before Income Tax P 49,500
Less: Income Tax 14,850
Net Income P 34,650

My Ulap Corporation
Balance Sheet
December 31, 2017
Assets Liabilities and Equity
Cash P 10,000 Accounts Payable P 19,500
Accounts Receivable 21,250 Other Current Liabilities 5,000
Inventories 25,000 Notes Payable (current) 5,000
Machineries P 80,000 Loans Payable (non-current) 20,000
Accumulated Depreciation 20,000 60,000 Total Liabilities P 49,500
Total Assets P 116,250 Capital Stock P 20,200
Retained Earnings 46,550 66,750
Total Liabilities and Equity P 116,250

Use the given historical information and the following assumptions to generate the pro-forma
financial statements for 2018:
1. Increase of 30% in Sales.
2. Gross Profit Margin remains constant.
3. Operating Expense is equal to 10% of Sales.
4. The company pays 10% interest on Other Current Liabilities, Notes Payable and Loans
Payable.
5. Additional investments in Fixed Assets worth P 20,000 will increase depreciation by P 5,000.
6. Tax rate is at 30%.
7. The company intends to increase Cash holdings by 1,000 next year.
8. Accounts Receivable equal 8.5% of Sales.
9. Inventories equal 10% of Sales.
10. Accounts Payable equal 12% of Cost of Goods Sold
11. The company will repay an additional P 5,000 of its long-term debt.
12. The company will pay out 50% of its net income as cash dividends.
13. Other Current Liabilities will be use as the plug figure.
 My Ulap Corporation
Income Statement – Pro Forma
For the year ended December 31, 2018

Sales P 325,000
Less: Cost of Goods Sold 211,250
Gross Profit P 113,750
Less: Operating Expenses 32,500
Depreciation Expense 15,000
Operating Income P 66,250
Less: Interest Expense 2,500
Income before Income Tax P 63,750
Less: Income Tax 19,125
Net Income P 44,625

My Ulap Corporation
Balance Sheet – Pro Forma
December 31, 2018
Assets Liabilities and Equity
Cash P 11,000 Accounts Payable P 25,350
Accounts Receivable 27,625 Other Current Liabilities 1,712
Inventories 32,500 Notes Payable (current) 5,000
Machineries P 100,000 Loans Payable (non-current) 15,000
Accumulated Depreciation 35,000 65,000 Total Liabilities P 47,062
Total Assets P 136,125 Capital Stock P 20,200
Retained Earnings 68,863 89,063
Total Liabilities and Equity P 136,125