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FINANCIAL PLANNING AND BUDGETING

Presentation · January 2016

DOI: 10.13140/RG.2.2.12113.74089

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Olena Hrechyshkina
POLESSKY STATE UNIVERSITY
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FINANCIAL PLANNING
AND BUDGETING

FINANCE

Olena Hrechyshkina
 Failing to plan

FINANCE
Structure is planning to fail

 Definition of Financing Planning

 Objectives of Financial Planning
 Importance of Financial Planning
 The Planning Pyramid
 Steps in Financial Planning
 Characteristics of Financial Planning
 Limitation of Financial Planning
 Definition of Budget
 Types of Budget
 Budgeting Techniques
3
 4

Benefits of Financial Planning

 it allows the company to  it supports analyzing the
identify what funds it can impact of alternative
use to implement its activities on the financial
plans in the material result of the company,
sphere and provides so it makes decision
information on the taking processes
expected cost of these dependent on financial
operations. criteria.
 5

What is Financial Planning?

Planning?
• Planning is a decision-making process in which a vision of
the company’s state is predicted and the methods of
achieving it are defined.
• Involves analyzing the financial flows of a company,
forecasting the consequences of various investment,
financing and dividend decisions and weighing the effects
of various alternatives.
• It helps to avoid waste by providing policies and
procedures, which make possible a closer coordination
between various functions of the business enterprise.
 6
Financial Planning Should
Should::
FINANCE • Determine the financial resources required in
meeting the company's operating program.
• Forecast the extent to which these requirements
will be met by internal generation of funds and to
what extent they will be met from external
sources.
• Develop the best plans to obtain the required
external funds.
• Establish and maintain a system of financial
control governing the allocation and use of funds.
• Formulate programs to provide the most effective
cost - volume - profit relationship. Analyze the
financial results of operation.
• Report the facts to the top management and make
recommendations on future operations of the firm.
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Objectives of Financial Planning

Determining capital requirements (short-term and

long- term requirements).
Determining capital structure.
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.
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Importance of Financial Planning
FINANCE 1. Adequate funds have to be ensured.
2. Financial Planning helps in ensuring a reasonable
balance between outflow and inflow of funds so that
stability is maintained.
3. Financial Planning ensures that the suppliers of
funds are easily investing in companies which
exercise financial planning.
4. Financial Planning helps in making growth and
expansion programs which helps in long-run
survival of the company.
5. Financial Planning reduces uncertainties with
regards to changing market trends which can be
faced easily through enough funds.
6. Financial Planning helps in reducing the
uncertainties which can be a hindrance to growth of
the company. This helps in ensuring stability and
profitability in concern.
 10
Corporate Planning Cycle
Identifying
company Projections
market position Expectations Available
resources

Analysis and control Objectives

Standards

Programs

Impact
Adjustment Plans
of random
factors
Market EXECUTION
 11

The Planning Pyramid

Mission

Vision

Objectives

Strategies

Activity Plans
12
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Objectives and Strategies

give focus to the
Objectives organization’s work and
(Goals or state in clear terms what it
Strategic Objectives) is that the organization
hopes to achieve over a
given period of time.

course of action, including

Strategies
the specification of
(Specific Objectives) resources required, to
achieve a specific objective

Short-term Long-term
strategy strategy
 15
Financial Strategy
FINANCE is the identification of the possible strategies
capable of maximizing an organization’s net
present value, the allocation of scarce capital
resources among the competing opportunities
and the implementation and monitoring of the
chosen strategy so as to achieve stated
objectives’.
 16
Three Ways in Which Companies Formulate
Strategy
17
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Annual Planning Schedule

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Five--Year Operating Plan Outline

Five
 20

SMART Goals
 21

Steps in Financial Planning

Policy
Formulation

Establishing Forecasting
Objectives

Formulation of
Procedures
 22

The financial objective of any business enterprise

is to employ capital in whatever proportion
necessary and to increase the productivity of the
remaining factors of production over the long run.
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Categories of Innovative Companies

• Product Innovator (improve their product and service

attributes)
– Value Drivers:
• Product development
• The name
• Distribution channels
• Value Network Architect (seek to enhance shareholder
value by utilizing resources of the entire business
network to their advantage)
• Relationship Owner ( focus on increasing shareholder
value by establishing and improving relationships with
various network players)
 25

Financial Policies
• Policies governing the amount of capital required for
firms to achieve their financial objective.
• Policies which determine the control by the parties who
furnish the capital.
• Policies which act as a guide in the use of debt or equity
capital.
• Policies which guide management in the selection of
sources of funds.
• Policies which govern credit and collection activities of
the enterprise.
Financial policies are guides to all actions, which deal with
procuring, administering and disbursing the funds of
business firms.
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Forecasting
27
 3

Characteristics of Financial Planning

Simplicity of Financial
Intensive Use
Purpose Contingency

Objectivity Comparisons Flexibility

Profitability Maneuverability Risks

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Limitation of Financial Planning

The welfare of employees

The welfare of management

The provision of a service

The fulfillment of responsibilities towards customers

The fulfillment of responsibilities towards suppliers

The welfare of society as a whole

 30

Budget
“A budget tells your
money where to go;
otherwise you wonder
where it went.”
J. Edgar Hoover
 31

Functions of Budget

Planning

Fundraising

Project implementation

Monitoring and
evaluation
 32

Types of Budget

The Income and

The Capital Budget
Expenditure Budget

The Cashflow
Forecast
 33

The Income and Expenditure Budget

 34

The Capital Budget

 35
Cash Flow
FINANCE
 36

Cash Flow Forecast

• shows the expected receipts and payments during

a forecast period and are a vital management
control tool/
• is a detailed forecast of cash inflows and outflows
incorporating both revenue and capital items.
• is thus a statement in which
estimated future cash
receipts and payments are
tabulated in such a way as to
show the forecast cash balance
of a business at defined intervals.
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Cash Flow Forecast
FINANCE
 38
Importance of Cash Flow Forecast
• It helps managers identify those times when cash levels
become critical.
• This helps to identify likely cash shortages and allows
avoiding action to be taken such as:
– requesting donor grants early;
– delaying payment of certain invoices;
– delaying some activities; or
– negotiating a temporary loan facility at your bank.
• It shows the cash effect of all plans made within the flow
forecastary process.
• It can also give management an indication of potential
problems.
 39

Cash Positions
Cash position Appropriate management action
Short-term Pay accounts payable early to obtain discount
surplus Attempt to increase sales by increasing accounts
receivable and inventories
Make short-term investments
Short-term Increase accounts payable
deficit Reduce accounts receivable
Arrange an overdraft
Long-term Make long-term investments
surplus Expand
Diversify
Replace/update non-current assets
Long-term Raise long-term finance (such as via issue of share
deficit capital)
Consider shutdown/disinvestment opportunities
 40
Master Budget
FINANCE
 41

Budgeting Techniques

Incremental budgeting Zero-based budgeting

This approach bases Zero-base budgeting (or

any year's budget on the ZBB) ignores previous
previous year's actual, experience and starts
or sometimes budgeted, with next year's targets
figures with an and activities. ZBB
allowance for inflation requires the writer of the
and known changes in budget to justify all the
activity levels. resource requirements.
42
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Top Down vs. Bottom up Budgeting

FINANCE
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