FINANCIAL FORECASTING

- is an essential component of planning. It serves as a basis for budgeting and for estimating future financing requirements.

INTERNAL FINANCING –

- refers to cash flow generated by the business enterprise’s normal operating business.

EXTERNAL FINANCING –

- refers to capital provided by parties outside the business enterprise, such as investors and banks.

Steps in projecting a business enterprise’s financing needs are:

1. Project the business enterprise’s sales.

2. Project additional variables, such as expenses.

3. Estimate the level of investment in current and plant assets

4. Calculate the business enterprise’s financing needs.

PERCENT-OF-SALES METHOD

- The most widely used method for projecting the business enterprise’s financing needs.

- This methods requires financial planners to estimate future expenses, assets, and liabilities as a percent of sales for that period.

Present year retained earnings

= previous year retained earnings plus projected net income less cash dividends paid.

External financing needed

= projected total assets less the sum of projected total liabilities and projected equity

External funds needed

= required increase in assets less spontaneous increase in liabilities less increase in retained earnings.

BUDGET -Represents a business enterprise’s annual financial plan.

- A comprehensive (master) budget is a formal statement of management’s expectation for sales, expenses, volume, and other financial transactions for the coming period

TYPES OF BUDGET 1. OPERATING BUDGET 1.1 SALES BUDGET 1.2 PRODUCTION BUDGET 1.3 DIRECT MATERIAL BUDGET 1.4 DIRECT LABOR BUDGET 1.5 FACTORY OVERHEAD BUDGET 1.6 SELLING AND ADMINISTRATIVE EXPENSE BUDGET 1.7 PRO FORMA INCOME STATEMENT 2. FINANCIAL BUDGET 2.1 CASH BUDGET 2.2 PRO FORMA STATEMENT OF FINANCIAL POSITION

SALES BUDGET

- is the starting point in preparing the master budget, since estimated sales volume influences nearly all other items in the master budget

- Ordinarily indicates the quantity in units of each product the business enterprise expect to sell.

Formula:

Total Sale = Expected sales in units times the unit sales price

PRODUCTION BUDGET

- After sales are budgeted, the production budget is developed by determining the number of units expected to be manufactured in order to meet budgeted sales and inventory requirements.

FORMULA:

Expected Production Volume = Planned sales+ Desired Ending Inventory – Beginning inventory

DIRECT MATERIAL BUDGET

• It is constructed to show how much material will be required and how much be purchased to meet production requirements

Purchase in units = Usage + desired ending material inventory units – Beginning inventory units.

DIRECT LABOR BUDGET

The production requirements in the production budget provide the starting point for the preparation of the direct labor budget.

To compute direct labor requirements, multiply expected production volume for each period by number of direct labor hours required to produce a single unit. The result is then multiplied by the direct labor cost per hour to obtain budgeted total direct labor costs.

THE FACTORY OVERHEAD BUDGET

- It provides a schedule of all manufacturing costs other than direct materials and direct labor, such as depreciation, property taxes, and factory rent.

THE ENDING INVENTORY BUDGET

- It provides the information required for the construction of budgeted financial statements.

- It help compute the cost of good sold on the budgeted income statement and the peso value of the ending materials and finished goods inventory that appears on the budgeted statement of financial position.

THE SELLING AND ADMINISTRATIVE EXPENSE BUDGET

- It lists the operating expenses incurred in selling the products and in managing the business.

THE CASH BUDGET

- It helps managers anticipate the expected cash inflow and outflow for a designated time period, keep cash balances in reasonable relationship to needs, and avoid both unnecessarily idle cash and possible cash shortages

4 Major Sections of Cash Budget 1. Receipts Section – including the beginning cash

balance, cash collections from customers, and other receipts

2. Disbursement section – comprising all cash payments that are planned during the budget period.

3. Cash Surplus or deficit section – which shows the difference between the cash receipts section and the cash disbursements section

4. The financing portion – which provides a detailed account of the of the borrowings and repayments expected during the budgeting period.

THE BUDGETED INCOME STATEMENT

- It summarizes projections for the various components of revenue and expenses for the budgeting period.

Formula:

Sales less variable costs less fixed costs.