Financial Control The phase in which financial plans are implemented, control deals with the feedback and adjustment process required to ensure adherence to plans and modification of plans because of unforeseen changes. Financial Planning: The projection of sales, income, and assets based on alternative production and marketing strategies, as well as the determination of the resources needed to achieve these projections

1. Chapter L-17
Financial Planning
and Control
Developed by Dr IKRAM UL HAQ CHOUDHARY CPA,
Ph.D.
07/05/18 Developed by Dr IKRAM UL HAQ CHOUDHARY CPA, Ph.D. 1

2. 2
Financial Planning and Control
Definition of Financial Planning
Financial Planning is the process of estimating the capital required
and determining it’s competition. It is the process of framing
financial policies in relation to procurement, investment and
administration of funds of an enterprise.
Objectives of Financial Planning
Financial Planning has got many objectives to look forward to:
Determining capital requirements- This will depend upon factors
like cost of current and fixed assets, promotional expenses and
long- range planning. Capital requirements have to be looked with
both aspects: short- term and long- term requirements.
07/05/18 Developed by Dr IKRAM UL HAQ
CHOUDHARY CPA, Ph.D.

3. 3
Financial Planning and Control
Determining capital structure- The capital structure is the
composition of capital, i.e., the relative kind and proportion of
capital required in the business. This includes decisions of debt-
equity ratio- both short-term and long- term.
Framing financial policies with regards to cash control, lending,
borrowings, etc.
A finance manager ensures that the scarce financial resources are
maximally utilized in the best possible manner at least cost in order
to get maximum returns on investment.
Importance of Financial Planning
Financial Planning is process of framing objectives, policies,
procedures, programes and budgets regarding the financial activities
of a concern. This ensures effective and adequate financial and
investment policies.07/05/18 Developed by Dr IKRAM UL HAQ CHOUDHARY CPA, Ph.D.

4. 4
Financial Planning and
Control
The importance can be outlined as-
Adequate funds have to be ensured.
Financial Planning helps in ensuring a reasonable balance between outflow and
inflow of funds so that stability is maintained.
Financial Planning ensures that the suppliers of funds are easily investing in
companies which exercise financial planning.
Financial Planning helps in making growth and expansion programmes which helps
in long-run survival of the company.
Financial Planning reduces uncertainties with regards to changing market trends
which can be faced easily through enough funds.
Financial Planning helps in reducing the uncertainties which can be a hindrance to
growth of the company. This helps in ensuring stability an d profitability in concern.
07/05/18 Developed by Dr IKRAM UL HAQ
CHOUDHARY CPA, Ph.D.

5. 5
Financial Planning and Control
Financial Control
The phase in which financial plans are implemented,
control deals with the feedback and adjustment process
required to ensure adherence to plans and modification of
plans because of unforeseen changes.
Financial Planning:
The projection of sales, income, and assets based on
alternative production and marketing strategies, as well as
the determination of the resources needed to achieve these
projections
07/05/18 Developed by Dr IKRAM UL HAQ
CHOUDHARY CPA, Ph.D.

6. 6
Financial Planning: The Sales Forecast
A forecast of a firm’s unit and dollar sales for
some future period, generally based on recent
sales trends plus forecasts of the economic
prospects for the nation, region, industry, etc.
07/05/18 Developed by Dr IKRAM UL HAQ
CHOUDHARY CPA, Ph.D.

7. 7
Projected (Pro Forma)
Financial Statements
A method of forecasting financial
requirements based on forecasted financial
statements
AFN = additional funds needed to support
the level of forecasted operations
Additional funds needed (AFN)
07/05/18 Developed by Dr IKRAM UL HAQ
CHOUDHARY CPA, Ph.D.

8. 8
Projected Financial Statements
 Determine how much money the firm will need in
a given period.
 Determine how much money the firm will
generate internally during the same period.
 Subtract the funds generated internally from the
funds required to determine the external financial
requirements.
07/05/18 Developed by Dr IKRAM UL HAQ
CHOUDHARY CPA, Ph.D.

9. 9
Step 1. Forecast the 2016 Income Statement
Assumptions:
Unilate operated at full capacity in 2015.
Sales are expected to grow by 10%.
Variable cost ratio is 82% (same as 2015).
2010 dividend per share is the same as 2015.
AFN is raised by 60% short-term debt with 10% cost
and 40% long-term debts with 12% cost.
07/05/18 Developed by Dr IKRAM UL HAQ
CHOUDHARY CPA, Ph.D.

10. 10
Step 1. Forecast the 2010 Income Statement ($ millions)
Unilate Textiles
2015 Forecast 2016 Initial
Results Basis Forecast
Net Sales 1,500.0$ x1.10 1,650.0$
Cost of Goods Sold (1,230.0) x1.10 (1,353.0)
Gross Profit 270.0 297.0
Fixed operating Costs (90.0) x1.10 (99.0)
Depreciation (50.0) x1.10 (55.0)
EBIT 130.0 143.0
Less Interest (40.0) (40.0)
EBT 90.0 103.0
Taxes (40%) (36.0) (41.2)
Net Income 54.0$ 61.8$
Common Dividends (29.0) (29.0)
Addition to Retained Earnings 25.0$ 32.8$
Earnings per Share 2.16$ 2.47$
Dividends per Share 1.16$ 1.16$
Number Common Shares
(millions) 25.0 25.0
07/05/18
.

11. 11
Step 2. Forecast the 2010 Balance Sheet ($ millions)
Unilate Textiles
2016
2015 Forecast Initial
Balances Basis Forecast
Cash 15.0$ x 1.10 16.5$
Accounts Receivable 180.0 x 1.10 198.0
Inventory 270.0 x 1.10 297.0
Total Current Assets 465.5 511.5
Net Plant & Equipment 380.0 x 1.10 418.0
Total Assets 845.0$ 929.5$
Accounts Payable 30.0 x 1.10 33.0
Accruals 60.0 x 1.10 66.0
Notes Payable 40.0 40.0
Total Current Liabilities 130.0 139.0
Long-Term Bonds 300.0 300.0
Total Liabilities 430.0$ 439.0$
Common Stock 130.0 130.0
Retained Earnings 285.0 +$32.8 317.8
Owner's Equity 415.0$ 447.8$
Total Liabilites & Equity 845.0$ 886.8$
Additional Funds Needed 42.7$
07/05/18 Developed by Dr IKRAM UL HAQ
CHOUDHARY CPA, Ph.D.

12. 12
Unilate has decided that any additional funds
needed to support future operations will be
raised mainly by issuing new common stock.
Step 3.Raising the Additional Funds Needed
Higher sales must be supported by higher assets.
Asset increase can be financed by spontaneous increases in
accounts payable and accruals and by retained earnings.
Any short fall must be financed from external sources--by
borrowing or by selling new stock.
07/05/18 Developed by Dr IKRAM UL HAQ
CHOUDHARY CPA, Ph.D.

13. 13
The effects on the income statement and balance
sheet of actions taken to finance forecasted increases
in assets
Step 4. Financing Feedbacks
07/05/18 Developed by Dr IKRAM UL HAQ
CHOUDHARY CPA, Ph.D.

14. 14
Full Capacity Sales
Actual sal
=
es
% of capacity
= =
$1,
.
$1, million.
500
0 80
875
Other Considerations in
Forecasting: Excess Capacity
Suppose in 2009 fixed assets had been operated
at only 80% of capacity:
07/05/18 Developed by Dr IKRAM UL HAQ
CHOUDHARY CPA, Ph.D.

15. 15
Changes in variable cost ratio affect the addition
to retained earnings which affects the amount of
AFN.
Other Considerations in Forecasting:
Economies of Scale
Unilate’s variable cost ratio is 82% of
sales.
Ratio might decrease to 80% if operations
increase significantly.
07/05/18 Developed by Dr IKRAM UL HAQ
CHOUDHARY CPA, Ph.D.

16. 16
Other Considerations in
Forecasting: Lumpy Assets
Assets that cannot be acquired in small
increments, but must be obtained in large,
discrete amounts
07/05/18 Developed by Dr IKRAM UL HAQ
CHOUDHARY CPA, Ph.D.

17. 17
Summary: How different factors affect the
AFN forecast.
Dividend payout ratio changes.
If reduced, more RE, reduce AFN.
Profit margin changes.
If increases, total and retained earnings increase, reduce
AFN.
Plant capacity changes.
Less capacity used, less need for AFN.
Payment terms increased to 60 days.
Accts. payable would double, increasing liabilities,
reduce AFN.
07/05/18 Developed by Dr IKRAM UL HAQ
CHOUDHARY CPA, Ph.D.

18. 18
Financial Control -
Budgeting and Leverage
 The phase in which financial plans are
implemented; control deals with the feedback
and adjustment processes required to
ensure the firm is following the right financial
path to accomplish its goals, and, if not, to
make necessary corrections.
07/05/18 Developed by Dr IKRAM UL HAQ
CHOUDHARY CPA, Ph.D.

19. 19
Operating Breakeven Analysis
 An analytical technique for studying the
relationship between sales revenues, operating
costs, and profits
 Operating breakeven analysis deals only with the
upper portion of the income statement - the
portion from sales to NOI
07/05/18 Developed by Dr IKRAM UL HAQ
CHOUDHARY CPA, Ph.D.

20. 20
Unilate’s 2016 Forecasted
Operating Income ($ millions)
Sales (S)--(110 million units) 1,650.00$
Variable cost of goods sold (VC) (1,353.00)
Gross profit (GP) 297.00
Fixed operating costs (F) (154.00)
Net operating income (NOI = EBIT) 143.00$
07/05/18 Developed by Dr IKRAM UL HAQ
CHOUDHARY CPA, Ph.D.

21. 21
Operating Breakeven Chart
0 20 40 57 60 80 100 120
1,400
1,200
1,000
600
400
0
Units QOpBE
Revenues
& Costs
Total Fixed Costs (F)
Total Operating
Costs (F + Q x V)
Total Sales
Revenues (P x Q)
SOpBE =
200
154
856
800
Operating Breakeven
Point (EBIT = 0)
Operating Profit
(EBIT > 0)
Operating
Loss
(EBIT < 0)
07/05/18 Developed by Dr IKRAM UL HAQ
CHOUDHARY CPA, Ph.D.

22. 22
Breakeven Computation
Sales Total operating Total Total
revenues costs variable costs fixed costs
= = +
(P x Q) = TOC = (V x Q) + F
QOpBE
F
P-V
F
Contribution margin= =
QOpBE
$154.0 million
$15.00 - $12.30
= =
$154.0 million
$2.70
57.04 million units 57.0 million units≈=
07/05/18 Developed by Dr IKRAM UL HAQ
CHOUDHARY CPA, Ph.D.

23. 23
Operating Breakeven Point
For the proposal to break even, Unilate must sell
57 million units or $855,600,000 of product.
SOpBE
F F
Gross profit margin= =
1-
V
P( )
SOpBE
$154.0
$12.30
$15.00
= = $154.0
1 - 0.82
1-
= $154.0
0.18
( )
= 855.6 million
07/05/18 Developed by Dr IKRAM UL HAQ
CHOUDHARY CPA, Ph.D.

24. 24
Operating Leverage
 The existence of fixed operating costs,
such that a change in sales will produce a
larger change in operating income (EBIT)
07/05/18 Developed by Dr IKRAM UL HAQ
CHOUDHARY CPA, Ph.D.

25. 25
Degree of Operating Leverage
 The percentage change in NOI
(or EBIT) associated with a given
percentage change in sales
07/05/18 Developed by Dr IKRAM UL HAQ
CHOUDHARY CPA, Ph.D.

26. 26
DOLS =
Gross Profit
EBIT
Each 1 percent change in sales, will result in a
2.08 percent change in operating income.
Calculating the Degree of
Operating Leverage
$297
$143 2.08x= =
07/05/18 Developed by Dr IKRAM UL HAQ
CHOUDHARY CPA, Ph.D.

27. 27
Operating Income at Sales Levels of
110 and 99 Million Units
2010
Forcasted Sales Unit Percent
Operations Decrease Change Change
Sales in units 110 99 (11) -10.0%
Sales revenues 1,650.0$ 1,485.0$ (165.0)$ -10.0%
Variable cost of goods sold (1,353.0) (1,217.7) 135.3 -10.0%
Gross profit 297.0 267.3 (29.7) -10.0%
Fixed operating costs (154.0) (154.0) - 0.0%
Net operating income (EBIT) 143.0$ 113.3$ (29.7)$ -20.8%
07/05/18 Developed by Dr IKRAM UL HAQ
CHOUDHARY CPA, Ph.D.

28. 28
Financial Leverage
The existence of fixed financial costs such
as interest and preferred dividends when a
change in EBIT results in a larger change
in EPS
07/05/18 Developed by Dr IKRAM UL HAQ
CHOUDHARY CPA, Ph.D.

29. 29
Unilate Textiles:
Degree of Financial Leverage
DFL
EBIT
EBIT I
= − =
EBIT
EBIT [financial BEP]−
DFL110
$143.0
$143.0 - $41.4
= =
$143.0
$101.6
= 1.41x
07/05/18 Developed by Dr IKRAM UL HAQ
CHOUDHARY CPA, Ph.D.

30. 30
DTL
Gross profit
- [Financial BEP]
=
EBIT
Degree of Total Leverage
S - VC
- IEBIT
Q(P - V)
[Q (P - V) - F] - I
= =
$297.0
$101.6
2.92x= =
= DOL x DFL = 2.08 x 1.41 = 2.92x07/05/18 Developed by Dr IKRAM UL HAQ CHOUDHARY CPA, Ph.D.

31. 31
Importance of Forecasting and
Control Functions
 If projected operating results are not satisfactory,
management can reformulate its plans.
 If funds required to meet sales forecast cannot be
obtained, management can sale back projected levels of
operations.
 If required funds can be raised, it is best to plan for their
acquisition in advance.
 Any deviation from projections needs to be handled to
improve future forecasts.
07/05/18 Developed by Dr IKRAM UL HAQ CHOUDHARY CPA, Ph.D.