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Chapter 4 Financial Planning (Budgeting) (Critical Subject (Budget…
Chapter 4 Financial Planning (Budgeting)
budget
1)targets for the next year(s) are decided and “things” necessary to achieve them are planned accodrding to budget.
2)aware of the future opportunities and threats and thus helps management in managing the company.
3)a road map showing things to be done in achieving desired results.
4)derived and expressed in basically
3 financial tables: Balance Sheet, Income Statement and CashFlow Statement
.
5)the matching opreational plans also have to be prepared to let budget to be a road map to achieve results.
Budget Outputs
Income Statement
1)shows whether a company is in profit or not for the budget period.
2)states whether the targeted operations create economic value or not
3)observe targets for sales, cost of such sales, operational expenses and financial expenses.
Balance Sheet
1)states the value of assets of a company and how these assets are financed.
2)Left side of a BS shows assets of a company and right side shows the liabilities ( liabilities + shareholders’ equity).
3)Under assets, we observe cash and cash equivalents, receivables, inventory and fixed assets.
4)Under liabilities, we observe payables, financial debt and shareholders’ equity.
Cash Flow
1)In a CF Statement, all cash inflows and outflows of a company are stated : operational, shareholders, investments and financing
2)CF is a “flow”, all cash inflows and outflows that are transferred from previous term and due in budget term are also stated.
Detailed Budgets
a full budget of 3 statements, all detail budgets also have to be prepared
Sales Budget
; As detailed as possible : domestic-export; direct-distributors; product groups; sales managers; etc
Cost of Goods Sold
: on a product basis, all raw material, labor, other production etc.
Operational Expenses
: Sales and distribution expenses, marketing expenses, hr, IT, other administrative expenses
Budget for Working Capital Need//Investments//Financing
Budget Assumptions
Growth rate expected for the economy
Growth rate expected for the industry we are in
Inflation rate
Several fx rates
Market share
Distribution of sales among various channels
Gross profitabilities
Increases in operational expenses based on related variables
Cash Cycle : receivables, inventory and payable days
Interest rate
Etc.
Critical Subject
Budget
Working Capital Need
Investment Capital Need
Shareholders
Financial Creditors
short & long term financing
Critical Questions ….
Will the company be able to finance the planned (if) growth?
Are the outer players willing to lend the company for short-term working capital and long-term investment capital ? Are such sources available? What about the costs?
Is the company ready/willing for borrowing?
Math for the Resulting Short & Long Term Financing Need
basic aim
behind a budget is to
estimate the resulting NET PROFIT.
in order to achive this figure,
the financing need on the right-side of the balance sheet must also be estimated.
financing need is
the result of increasing sales-related-assets
Such asset increase is 2fold:
Increase in working capital
Fixed-asset investment need for newly required capacity increase
Assets are assumed to increase in relation to sales, but
only trade debt, out of the right-side of the balance sheet, increases in relation to sales
2 Points to Mention
Asset increase in relation to sales may not be true in every case
The profit expected to occur during the year is an addition to equity which lowers the financing need
Timing
12-18 months
Shortterm Planning
Easy to estimate
Less unknown
Deailed assumptions
Certain
5-10 years
Longterm Planning
Difficult to estimate
Too much unknown
General assumptions
Vauge
12-months coverage gets narrower toward the end, it is a better custom to prepare 18 months budgets and toward the end of the period, roll the process for another 12 months to have an 18 month planning all the time.
Bottom – Up / Top-Down
Bottom Up
Starting from basic level assumptions to reach top figures..
eg.sales estimation for a hotel:
Number of Rooms
Occupancy rate = Rooms sold
Sales = Rooms Sold*
Average Room Rate*
Top-Down
Estimations of top level variables at macro assumptions
Sales estimation for the same hotel
Regional Hotel Market Size * Market Share = Sales for the Same Hotel