INTRODUCTION: Good morning again everyone.

So before we start our discussion of our first

topic, let us first define and familiarize ourselves with the terms that we may encounter along the
way.

So now that you are already familiar with these terms, I hope that you are all ready to delve in
today’s topic.

1st slide
Financial success doesn't happen by chance—it happens by choice, through careful planning and
informed decision-making. so, financial planning is about designing a roadmap for the future and
ensuring that every financial decision aligns with the organization’s goals.
As Benjamin Franklin once said, 'If you fail to plan, you are planning to fail.' This quote serves as a
reminder that in financial management, preparation is everything.
"Without a well-thought-out plan, even the best strategies can lead nowhere

2nd slide
There’s a question, “why do you think companies encounter financial distress or failure?”
• One of the most common reasons why companies encounter financial distress or failure is the
lack of effective short and long-range financial planning.

3rd slide
In order for a business entity to thrive in a highly competitive environment, it is essential that a
financial manager must be able to plan ahead. Management must be flexible and make adjustments
in the company before relevant events (inflation, deflation, recession, or new competition) arises.

4th slide
MEANING:
Financial planning is the process of estimation of capital necessary for accomplishing the
organization’s business activities. It acts as a guiding beacon for company operations,
providing a control mechanism to measure performance and a basis for taking corrective
actions.

Financial planning covers the process of

• setting the primary objective,
• identifying the alternative courses of action, and
• choosing the best alternative to achieve the objective.

5th slide

• It also involves systematically thinking about the possible barriers a company has
to confront. Although there is no exact answer to what a company must look for, preparing
the best logical and fundamentally stable plan will help the company cope with the risks it will
face in the future.
 • A system that guides the top management to direct the actions of the different
units of the organization in accomplishing its objectives.
So in other words, Financial planning is not the sole responsibility of the top management or
the finance manager but it involves the whole company.

Let’s say that the overall objective of a company is set by the top management, and it is carried
down to the lowest level of the organization. With the information properly handed down, the
different units can develop their own plans that would lead to achieving the overall goals of their
company.

With ILLUSTRATION:

Imagine a company that wants to increase its sales by 20% this year. The top management sets
this goal, then shares it with all departments.

• The marketing team creates a plan to promote new products and attract customers.
• The operations team ensures enough products are made to meet demand.
• The finance team forecasts the costs and revenue, making sure the budget aligns with the
plan.

Each department creates its own plan to support the main goal. By working together, they help the
company reach its sales target.

6th slide
• The main function of the finance department in this process is to integrate the different plans
and develop a forecast. So when we say forecast, it is a prediction or estimate of
company’s future financial outcomes.
• The forecast that leads to the preparation of the budget also becomes the motivating and
controlling factor for the managers of the different departments of a company to perform
well.
• It serves as a guide in determining if the departments are at par 'with what they have set out
to do before the budget is implemented.
At par" means being at the expected or standard level. So in this context, it means that the
departments are performing up to the level they had planned or expected before the budget
was implemented. This is important because it ensures that departments are using their
resources effectively and meeting their goals as planned. By checking if they are "at par,"
organizations can track progress, make adjustments if needed, and avoid wasting time and
money.

So always remember that A well-prepared financial plans help companies manage risks
and achieve their goals.

7th slide

Now, lets move to the:

Dimensions of Financial Planning

Planning entails the creation of both short-range and long-range objectives as well as seasonal
financial targets. These financial targets or objectives are the bases for developing the company's
financial plans.
For planning purposes, it is always better to think about the future in terms of short and long-range
plans. These dimensions of plans differ not only in the period covered but also in purpose,
orientation, financial strength, and degree of detail.

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Short-range Plan

• Usually covers the next twelve months

• Focuses on the goals needed to be achieved in the coming year
• Companies look at the volatility of the market, the stability of their operations, and the rate of
change in technology in the coming year that would affect their product lines and production
process.
• Requires forecasting all activities of the firm (affecting its balance sheet, income statement,
and cash flow)
• At the start of the year of the accounting period, it serves as a guide to determine what to
achieve.
• At the end of the year, it serves as a control or measuring device
• Helps the company analyze the differences in the action plan and the actual performance so
that future performance is improved

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Long-range Plan

• Has a time frame of 2 to 5, or more, years

• Does not require a great amount of details
• Serves as a guide for long-term goals
• Contents of the financial statements have to be identified as part of long-term financial
management (although the financial statements are to be presented in terms of years and not
months)
• It helps to see how far a firm has gone in terms of what has been planned in the past
• Subject to changes and usually revised every year to incorporate perceptions about the future
• Compared to a short-term plan, this is more difficult and more prone to errors (because of the
time involved)

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In summary, short-range and long-range plans are interconnected through their focus on goal
setting, budgeting, financial analysis, strategic planning, monitoring, resource allocation, risk
management, and performance evaluation. It helps you control your income, expenses, and
investments so that you can manage your money and accordingly plan your goals. Both are essential
for ensuring a company's financial health and achieving its overall objectives.
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Next let us know the:

Approaches to Financial Planning

There are two approaches to financial planning:

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1. Zero-based approach.
From the name itself, "zero" means the budget's baseline is zero. The previous year's budget is
irrelevant in allocating financial resources for the current year. Managers preparing a zero-based
budget are required to present and justify all the required expenses included in the budget.
One common disadvantage of this approach is that it requires a lot of documentation. Aside from the
schedules required in the normal structure of the budget, it should identify all activities and
operations in decision packages ranked in accordance with relative importance (Garrison, Noreen, &
Brewer, 2006). Other disadvantages of zero-based budgeting are its execution typically takes a long
period of time and its cost is too expensive to justify on a yearly basis.

2. Incremental-based approach.
This is the traditional approach to budgeting. The budget starts with the previous year's budget, and
an amount is added or subtracted according to the anticipated needs. In this type of approach, an
increment is always subject to justification.

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To further understand, we have here an example
Example: ZERO-BASED
The previous year's budget for the company's advertising expense was 15,000 which is 10% of the
budgeted sales of 150,000. Using the zero-based approach, a percentage of the budgeted sales will
not be applied. That is, if the current year's budgeted sales are P250,000, the advertising expense
will not follow the supposedly 25,000 budgeted expense; rather, the company has to come up with a
figure based on certain conditions and assumptions.

It must provide a detailed justification for the entire budget, including the rationale for each expense
item, rather than just assuming it needs the same budget as last year.

So in this approach, every expense must be justified and approved each year, ensuring that only
necessary and efficient spending is included.

Example: INCREMENTAL-BASED
Using the example from the zero-based approach, the advertising expense for the current year, using
the incremental-based approach will be 25,000. The increase by P10,000 in the budgeted advertising
expense has to be justified in order to be approved.
This approach assumes that the previous year's budget was appropriate and that minor adjustments
(increases or decreases) are sufficient for the new period.

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Lastly, let us know the:

Objectives of Financial Planning

Financial planning serves the following purposes:

1. Planning. Financial planning helps a company determine its objectives and courses of
action. With 1 a clear set of objectives, a company can look forward to placing itself as one of the
major players in the industry.

2. Coordination. Financial planning creates a harmonious relationship between the

different units of a company. Although departments ents are are created c with different
functions and distinct sets of objectives, departments may learn to coordinate, communicate, and
work with each other through financial planning.

3. Control. A financial plan becomes an important tool in enhancing and measuring the
performance of a company. With the diligent preparation of summarized reports containing
comparisons with the planned objectives, differences are analyzed for improvements. It is also used
as a basis to evaluate individual performances.

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3 QUESTIONS
Dimensions - short and long range
Approaches – zero-based and incremental-based
Objectives- planning, coordination, control

Now that we are done in financial planning, we’re ready to dive into the next important topic:
budgeting. Budgeting helps us see how we will use our money to reach our goals. To guide us
through this part of the journey, let’s welcome Ms. Tavaro, who will explain how budgeting works
and why it is essential for turning our financial plans into action.
MASTER BUDGET
A master budget is the central financial planning document that includes how a company will spend
and how much it expects to earn in a fiscal year.
A master budget is a financial document that includes how much an organization plans to make and
how much it plans to spend over a fiscal year. This document typically reports financial information in
quarters or months. It may also include text explanations of how the budget can help the company
reach its strategic goals.

This is important in financial management because it serves as a roadmap for the organization, that
ensures financial stability, aligns activities with strategic goals, and prepares for uncertainties that
may arrive.
BUDGETING VS. MASTER BUDGET
Budgeting
Budgeting is the process of creating a plan for how a company will spend and manage its money over
a specific period. It involves estimating income and expenses to ensure that resources are used
effectively. This can be done for various aspects of an organization, such as departments, projects, or
specific activities. It is also the general process of planning and managing finances.
Master Budget
The master budget is a comprehensive overview that combines all individual budgets into one
complete financial plan for the entire organization. It includes the company's overall financial goals
and forecasts for income, expenses, cash flow, and capital expenditures. The master budget
aggregates the budgets of different departments and projects, providing a big-picture view of the
company’s financial plan for a specific period, usually a year. In other words, it is a detailed and
consolidated plan that brings together all individual budgets to provide an overall financial picture of
the organization

Components of the Master Budget

As mentioned earlier, the different functional areas or sub-units of the firm have their own budgets,
these budgets are then fused to form one company-wide budget referred to as master budget. Figure
5-1 presents the components of a master budget and its movement as they go through the
budgetary process. A typical master budget should contain the following:
1. Operations Budget/Profit Plan.
Composed of a detailed presentation of revenues, expenses and net profit. This takes the form of the
pro-forma or budgeted income statement. The formation of this budgeted income statement came
about by the infusion of the different budgets on: a. Sales b. Production volume C. Cost of raw
materials d. No. of raw materials units to be purchased e. Cost of direct labor f. Factory overhead g.
Inventory levels h. Cost of goods sold i. Selling expenses j. Administrative expenses k. Financing
charges
 2. Financial Resources Budget. This is mainly made up of: a. Cash budget b. Pro-forma or budgeted
Statement of Financial Position (SFP) C. Projected funds flow statement (presented financial
management part 2)
3. Capital Expenditures Budget. This involves plans on material modification, acquisition and disposal
of property plant and equipment or material modification, acquisition or renewal of a firm's
computerized accounting information system.
4. Budgeted Financial Ratios. The ratios are taken from the pro-forma or budgeted financial
statements prepared. These are similar to the ones discussed in Chapter 3 and 4. The only difference
is that the figures here are estimated and budgeted.

Process in Preparing the Master Budget

The process can be seen in Figure 5-1. There are various ways by which a budget may be prepared.
Below are the general guidelines on how to prepare the master budget:
1. Formulation of the corporate objectives, plans, policies and assumptions, which will give direction
in the formulation of the budget estimates. This is done by top management.
2. Establish or estimate sales projection or targeted sales. This will serve as a basis in determining
the targeted number of units (volume) to be sold.
3. Individual budgets from the different functional areas as well as sub-units or responsibility centers
(example production, marketing, research, finance department, etc.) of the company are prepared
based on the planned volume of units to be sold. Heads or supervisors from each of these areas
are responsible for the preparation of their individual budgets. Under this process, the production
schedule and the associated use of new raw materials, direct labor and overhead are done to
compute cost of goods sold. (Refer to components of master budget components number 1.a, b, c,
d, e etc.).
4. Consolidation of the individual budgets is done to create a draft master budget. The corporate
planning department of a firm can do this.
5. Revision of the preliminary drafted master budget is done to come up with the final draft subject
to approval of top management.
6. Approval and dissemination of final master budget to department heads or supervisors.

Construction of the Pro-forma Statements

In constructing the pro-forma statements we shall be following the budgetary process mentioned
above. One of the most thorough ways of preparing a budget or doing financial forecasting is by
creating a series of pro forma or projected or budgeted financial statements. We shall focus on the
pro-forma income statement, cash budget and statement of financial position. Inventory, receivables,
payable levels and other accounts including desired profit and borrowing or financing requirements
can be derived from these pro-forma statements.

Consider figure 5-1 for the preparation of the pro-forma statements

Figure 5-1 presents the following steps in the preparation of the pro-forma statements. Be reminded
that these steps are in reference to the components of the master budget and budgetary process
topics mentioned. The procedure is as follows: 1. Establish or estimate sales projection or targeted
sales. This will serve as a basis in determining the targeted number of units (volume) to be sold. The
sales budget is considered as the cornerstone of budgeting. 2. Create the production budget
schedule, which includes the raw materials costs, direct labor costs, and overhead. This will help you
in determining the gross profit. 3. Create the schedule for selling, administrative, and other expenses.
4. Compute for the net income by preparing the pro-forma income statement 5. Create the pro-forma
cash budget schedule where the estimated cash receipts and estimated cash disbursements are
presented. 6. From the pro-forma income statement and cash budget schedule you can now cre- ate
the pro-forma statement of financial position.