2. PRESENTERS
John Paulo Bernardino, CPA
Accountant - I
DepEd -SDO I
Pangasinan
Zenaida Bautista
School Administrator
Bautista Educational Skills
Training and Assessment
Center, Inc.
Janny Dimaunahan, CPA
Marwan Rusdi
Bookkeeping NC III, Trainer
Bautista Educational Skills
Training and Assessment
Center, Inc.
Faculty
PHINMA- University
of Pangasinan
3. KEY CONCEPTS AND SKILLS
● Understand the financial planning process and how decisions are
interrelated
● Be able to develop a financial plan using the percentage of sales
approach
● Understand the four major decision areas involved in long-term
financial planning
● Understand how capital structure policy and dividend policy
affect a firm’s ability to grow
4. CHAPTER OUTLINE
● What is Financial Planning?
● Financial Planning Models: A First
Look
● The Percentage of Sales Approach
● External Financing and Growth
● Some Caveats Regarding Financial
Planning Models
8. In TV series Friends: What annoys Monica
the most?
a. Cheesy garlic bread
b. Microwave popcorn
c. Chandler
d. Animals dressed as Humans
Question No. 2
10. In TV Series The Big Bang Theory: Sheldon
hosts a YouTube show during the series and
is called?
a. Sheldon Cooper Presents: Fun with Flags
b. Rains of Castamere
c. Vlad and Niki
d. Shelly and the Chickens
Question No. 3
18. 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
19. ● Investment in new assets
● Degree of financial
leverage
● Cash paid to
shareholders
● Liquidity requirements
ELEMENTS OF
FINANCIAL
PLANNING
20. combine capital budgeting
decisions into one big project
AGGREGATION
divide decisions into
short-run decisions
(usually next 12 months)
and long-run decisions
(usually 2 – 5 years)
PLANNING
HORIZON
● Make realistic assumptions
about important variables
● Run several scenarios where
you vary the assumptions
by reasonable amounts
● Determine at least a worst
case, normal case and best
case scenario
ASSUMPTIONS
AND
SCENARIOS
FINANCIAL PLANNING PROCESS
21. ROLE OF FINANCIAL PLANNING
helps management see the
interactions between decisions
gives management a systematic
framework for exploring its
opportunities
helps management identify
possible outcomes and plan
accordingly
Examining interactions Exploring options
Avoiding surprises
helps management determine if goals
can be accomplished and if the various
stated (and unstated) goals of the firm
are consistent with one another
Ensuring Feasibility and
Internal Consistency
22. FINANCIAL PLANNING MODEL
INGREDIENTS
many cash flows depend
directly on the level of sales
(often estimated using a
growth rate in sales)
Sales Forecast
setting up the plan as projected
financial statements allows for
consistency and ease of
interpretation
Pro Forma Statements
how much additional fixed
assets will be required to
meet sales projections
Asset Requirements
how much financing will we
need to pay for the
required assets
Financial Requirements
management decision about what
type of financing will be used
(makes the balance sheet balance)
Plug Variable
explicit assumptions about
the coming economic
environment
Economic Assumptions
23. Example: Historical Financial Statements
Gourmet Coffee Inc.
Balance Sheet
December 31, 2021
Assets 1000
Debt 400
Equity
600
Total 1000
Total 1000
Gourmet Coffee Inc.
Income Statement
For Year Ended December 31, 2021
Revenues
2000
Costs
1600
Net Income
400
24. Example of Pro Forma Income Statement
Initial Assumptions
-Revenues will grow at 15%
(2000*1.15)
-All items are tied directly to
sales and the current
relationships are optimal
-Consequently, all other items
will also grow at 15%
Gourmet Coffee Inc.
Pro Forma Income Statement
For Year Ended 2022
Revenues 2,300
Costs 1,840
Net Income 460
25. Example of Pro Forma Balance Sheet
Case I
Dividends are the plug variable,
so equity increases at 15%
Dividends = 460 NI – 90
increase in equity = 370
Gourmet Coffee Inc.
Pro Forma Balance Sheet
Case I
Assets 1, 150 Debt 460
Equity 690
Total 1,150 Total 1,150
26. Example of Pro Forma Balance Sheet
Case II
Debt is the plug variable and no
dividends are paid
Debt = 1,150 – (600+460) = 90
Repay 400 – 90 = 310 in debt
Gourmet Coffee Inc.
Pro Forma Balance Sheet
Case II
Assets 1, 150 Debt 90
Equity 1060
Total 1,150 Total 1,150
27. Some items tend to vary directly with sales,
while others do not
Income Statement
● Costs may vary directly with sales
● If this is the case, then the profit
margin is constant
● Dividends are a management decision
and generally do not vary directly
with sales – this affects the retained
earnings that go on the balance sheet
PERCENT OF
SALES
APPROACH
28. Balance Sheet
● Initially assume that all assets,
including fixed, vary directly with
sales
● Accounts payable will also normally
vary directly with sales
● Notes payable, long-term debt and
equity generally do not, because they
depend on management decisions
about capital structure
● The change in the retained earnings
portion of equity will come from the
dividend decision
PERCENT OF
SALES
APPROACH
29. BUDGET PROCESS
● Select a Period for the Budget
● Gather Sales Data
● Look for Industry Benchmark
● Create reliable Assumptions
● Consider any changes in the Fund Structure
● Creation of the Budget
● Continuous Budget Monitoring
30. Example: Income Statements
Tasha’s Toy Emporium
Income Statement 2021
% of Sales
Sales
5,000
Costs 3000
60%
EBT
2000
40%
Taxes (40%) 800
16%
Net Income 1,200
24%
Tasha’s Toy Emporium
Income Statement 2022
Sales
5,500
Costs
3,300
EBT
2,200
Taxes (40%)
880
Net Income
1,320
32. Example: External Financing Needed
The firm needs to come up with an
additional $200 in debt or equity to
make the balance sheet balance
TA – TL&OE = 10,450 – 10,250 = 200
Choose plug variable
● Borrow more short-term
(Notes Payable)
● Borrow more long-term (LT
Debt)
● Sell more common stock (CS
& APIC)
● Decrease dividend payout,
which increase Add. To RE
33. Example: Operating at Less than Full Capacity
Suppose that the company is currently
operating at 80% capacity.
● Full Capacity sales = 5000 / .8 = 6,250
● Estimated sales = $5,500, so would still
only be operating at 88%
● Therefore, no additional fixed assets
would be required.
● Pro forma Total Assets = 6,050 + 4,000 =
10,050
● Total Liabilities and Owners’ Equity =
10,250
Choose plug variable
● Repay some short-term debt
(decrease Notes Payable)
● Repay some long-term debt
(decrease LT Debt)
● Buy back stock (decrease CS &
APIC)
● Pay more in dividends (reduce
Add. To RE)
● Increase cash account
34. Examining the
relationship between
growth and external
financing required is a
useful tool in long-
range planning
At low growth levels,
internal financing
(retained earnings)
may exceed the
required investment in
assets
GROWTH AND EXTERNAL FINANCING
As the growth rate
increases, the internal
financing will not be
enough and the firm will
have to go to the capital
markets for money
35. INTERNAL GROWTH RATE
The internal growth rate
tells us how much the firm
can grow assets using
retained earnings as the
only source of financing.
36. SUSTAINABLE GROWTH RATE
The sustainable growth
rate tells us how much the
firm can grow by using
internally generated funds
and issuing debt to
maintain a constant debt
ratio.
37. DETERMINANTS OF GROWTH
choice of optimal
debt ratio
Financial leverage
choice of how much to pay
to shareholders versus
reinvesting in the firm
Dividend policy
asset use efficiency
Total asset turnover
operating efficiency
Profit margin
