Financial Planning

Lecture was elaborated with the help of grant project of Ministry of Education, Youth and Sports, FRVŠ n. 2005 „Innovation of Subject Financing of Building Order“ Financial Planning

Financial Planning and Budgets of the Company • Policy of the company forms strategic aims of the company and the planning specifies the tactics, how to achieve them • Assessment of the plan of the company in the frame of specific aim expresses natural volume of production process • Budgeting follows the specific plan and transforms its natural volume into financial form System of budgets in the company: • Financial budgeting of management (financial/company budget) • Includes budgetary profit/loss report, budgetary balance sheet and budget of cash flows • Budget of particular accounting centers – departments (budget of accounting centre) • Includes budget of revenues and budget of costs, partial budgets of costs (e.g. the budget of minimal overhead costs) • Budget of particular orders (price budget – offer budget) • Is created by price items of materials and works necessary for specific order Financing of Building Order

Financial Planning • Decision making about the way of financing (obtaining of capital), about investing of capital and financial economy (e.g. the assurance of liquidity of the company) • Focused on the prediction of possible financial situations of the company Phases of financial planning: • Planning of objectives • Objectives of the whole company and its parts • Planning of operations • Operations necessary for achieving of defined objectives Financing of Building Order

Objectives of the Company, Principles of Financial Plan General objective of the company • Assurance of its sustainable existence with achieving of good economic results • Maximization of profit • Maximization of the market value of the company The product of the financial planning the financial plan Financial plan: • Simplified model of future situations and flows in the financial system of the company • It defines the type, amount and moment of operations leading to filling of the model • It creates the set of operations for decision making, whose impacts are expected in future Financing of Building Order

Structure and the Form of Financial Plan • The financial plan is realized for the long-time horizon (operations defined by financial plan bring results during 3 – 5 years) • The part of the long-term financial plan is created by detailed annual financial plan • Structure of the financial plan corresponds with the structure and the form of financial (accounting) statements (balance sheet, profit/lost account and cash-flow report) • Financial plan in the form of annual accounting statements is valuated by tools of financial analysis • Financial plan is completed by three planning documents: • Building orders prediction • Budget of the investment costs (expenditures) • Budget of external financing Financing of Building Order

Long-term Financial Planning • Main objective of the long-term financial planning is the creation of the profit • The profit creation from the long-term aspect is determined by: • The realization of long-term operations in the investment and technical area • The financial planning must be based on the financial analysis of previous periods respecting: • External conditions (development of demand, prices, interest rates, tax rates) • Internal influences (analyses of differences between plan and reality, development of financial indexes in last years) • The main criteria for planning it is the plan of revenues Financing of Building Order

Plan of Revenues • Assurance of building orders is the main supposition for keeping of certain number of employees and good financial situation of the company • The plan of returns is based on the prediction of market conditions and on the plan of orders • The subject of the prediction it is the total amount of goods (in financial of measure units) and market prices (dependence on development of consumption) • Planned returns are the basic inputs into the financial plan Financing of Building Order

Methods for Financial Plan Creation Method of the percentage rate on returns • Suitable method for creation of the frame of the financial plan • Based on the plan of returns and expected dependence of some kind of costs (material, wages) or amount property (long-term tangible property, working capital) on returns • It is created the profit/lost report and then the planned balance sheet and the plan of cash-flows • This frame of the financial plan is next completed by planned investment projects for possibility to analyze the impact of particular investment projects on the total company's economy • This financial plan is only the proposal, which it is necessary in next phase of its preparation to optimize Financing of Building Order

Short-term Financial Planning • Short-term financial plan arises by specification of intentions for specific year • It follows the expected situation in the current year, it is based on the long-term financial plan • External conditions it is possible to predict only for short time, for the one year prediction the risk of mistake is quite low • Annual financial planning it is possible to do in following steps: • Creation of planned profit/lost account (based on the plan of returns, costs and profit) • Creation of the plan of cash-flows (follows P/L account in current activity, budget of investment expenditures in the investment activity, and plan of financing in the financial activity) • Creation of planned balance sheet (reacts on the increasing and decreasing of property and sources) • The fulfilling of the plan (for month or for quarter) is checked with the help of information from the accounting system Financing of Building Order

Plan of Revenues, Costs and Profit • The objective of the annual financial plan is the reliable estimation of returns • The development of returns is influenced by changes in structure of building orders, changes of prices, expected development of demand etc. • For the planning of returns it is necessary to define changes that will be taken into account • For the planning of costs it is possible to divide them into: • Variable costs (they depend on returns) • Fixed costs (their amount do not depend on returns, usually do not change with the change of returns – usually overhead costs) Financing of Building Order

PRICE BUDGET 1 - n costs revenues BUDGET OF ACCOUNTING CENTRE – accounting centre 001 – n material Production Budget of costs wages overhead sub-supplies Budget of revenues Sale FINANCIAL BUDGET OF COMPANY Budgetary P/L report Budgetary balance sheet Budget of cash-flows

Budgetary Profit/Loss Report • Profit/loss report includes information data about the economic result – the profit of the loss, basis for the economic result assessment is the budget of revenues and costs • Those budgets are derived from lower level of various kinds of budgets • Revenues come from the budget of the sales • Costs are the result of budgets of costs next classified as the buget of unit costs, the budget of direct production costs and the budget of overhead costs • Contrary of the P/L report – part of final accounts – the budgetary P/L report differs in purpose classification of costs • Budgetary P/L report is created with partial budgets of costs and revenues of particular departments, those budgets are filled with particular items of costs (budget of costs) • Separate budgetary part coming from the budgetary P/L report is usually area of the profit division Financing of Building Order

Budgetary Balance Sheet • Classification of budgetary balance sheet comes from the balance sheet – part of the final accounts, but it is not so detailed • Information from budgetary balance sheet are based on particular groups of assets and liabilities: • Fixed and current assets • Equity and other sources • The most controlled groups are current property and short-term liabilities, where individual budgets are connected with the budget of cash-flow • Monitoring of cash-flow leads to finding out of the amount of working capital or net working capital • Sources for covering of the current property by long-term liabilities Financing of Building Order

Budget of Cash-flow Budget of cash-flow it is possible to express from two aspects: • View of ability to pay and liquidity of the company • View of co-ordination of activities of the company, which fulfills the function of cash flows, its aim is the assurance of the fluent cash flow in the company • Budget of cash flow is connected with two areas: • Is elaborated from the reason of permanent need to finance – necessary to take into account the activity of particular parts as inventory, receivables and liabilities • Is elaborated for the purpose of transparent budget of cash-flows from the main business activity of the company – is based on following four parts: • Budget of revenues, budget of expenditures connected with purchasing of material, budget of wages and budget of overhead costs • Above mentioned budgets are created usually in big companies, in the case is the purpose of budget fully used Financing of Building Order

Financial Planning