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SENIOR HIGH SCHOOL

BUSINESS FINANCE
Module 2 - Quarter 1
Financial Planning Tools and
Concepts

This instructional material was collaboratively developed and reviewed by

educators from public and private schools, colleges and universities. We
encourage teachers and other education stakeholders to email their
feedback, comments and recommendations to the Department of
Education at [email protected]

We value your feedback and recommendations.

Department of Education ● Republic of the Philippines

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OVERVIEW
In every organization, Financial planning is important especially the tools
and concepts that determine the best uses of the Financial resources of an
organization. It helps the business to attain its objectives and to ensure the
sufficiency of funds within the organization and reduces the uncertainties which
can be a hindrance to growth of the business to safeguard the stability and
profitability in concern.
This module emphasizes the understanding financial concepts, tools and use
of decision making that is related to the financial management of the business. It
includes 6 steps in Financial Planning process, Preparation of budgets and
Projected Financial statement and Working Capital Management. This topic is
directed towards the senior high school students to acquire skills in some basic
finance concepts and apply this not only on their personal finance but also the
chosen career in the future.

GENERAL INSTRUCTIONS
For the learners: For the teacher:
To be guided in achieving the To facilitate and ensure the students’
objectives of this module, do the learning from this module, you are
following: encouraged to do the following:

1. Read and follow instructions 1. Clearly communicate learning

carefully. competencies and objectives
2. Write all your ANSWERS in 2. Motivate through applications
your Activity Book and connections to real life.
3. Answer the pretest before 3. Give applications of the theory
going through the lessons. 4. Discuss worked-out examples
4. Take note and record points 5. Give time for hands-on
for clarification. unguided classroom work and
5. Compare your answers discovery
against the key to answers 6. Use formative assessment to
found at the end of the give feedback
module. 7. Introduce extensions or
6. Do the activities and fully generalizations of concepts
understand each lesson. 8. Engage in reflection questions
7. Answer the self-check to 9. Encourage analysis through
monitor what you learned in higher order thinking prompts
each lesson. 10. Provide alternative formats for
8. Answer the posttest after you student work
have gone over all the lessons. 11. Remind learners to write their
answers in their Philosophy
Activity Notebook

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Lesson

2 FINANCIAL PLANNING TOOLS AND CONCEPTS

What I Need to Know?

After going through this module, you are going to:

1. Illustrate the financial planning process

2. Prepare budgets such as projected collections, sales budget, production

budget, income-projected statement of comprehensive income, projected of
financial position, and projected cash flow statement

3. Describe concepts and tools in working capital management

What I Know

Let us determine how much you already know about the financial planning tools
and concepts.
Direction: Read each question carefully, choose the letter with the correct answer
and write your answer on the space before each number.

_____1. What are the two management functions reinforce each other for the
success of an organization.
A. Planning and Controlling C. Staffing and Planning
B. Controlling and Directing D. Organizing and Planning
_____2. Which of the following is not part of financial planning process?
A. Identify goal related task C. Identify resources
B. Set goals/Objectives D. Establish strong Management
_____3 A plan expresses in quantitative terms, which emphasizes the resource use
and resource allocation of an entity over a specified period of time?
A. Sales C. Sales Budget
B. Budget D. Cash Budget
_____4. Which of the process to closely monitoring of in and out of cash in the
business?
A. Cash flow statement C. Statement of financial Position
B. Income statement D. Budgeting

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_____5. It is a tool of the company to set an overall goal of what the company’s
performance and position will be for and as of the end of the year.
A. Forecasting C. Budgeting
B. Inventory D. Projected Financial Statement
_____ 6. Components of a firm’s cash conversion cycle include:
A. average collection period, average age of inventory
B. average payment, average collection period
C. average age of inventory and average payment period
D. average age of inventory, average collection period and average payment
_____7. Which of the following statements is true regarding working capital
management?
A. There is a risk and profitability tradeoff in working capital management
B. A firm’s working capital is not essential in managing its operations
C. Cash, inventory and long-term receivables are common working capital
components
D. All statements are true
_____8. Which of the following is not a common collection technique for accounts
receivables?
A. Sending letter of demands C. sending legal notices
B. making phone calls D. writing off customer’s accounts
_____9. It is a technique used in granting credit to customers.
A. Credit score C. Credit limit
B. Credit standards D. All of the above.
_____10. It represents assets of the entity that expected to be collected and thus,
converted to cash.
A. Inventory Management C. Accounts Receivable Management
B. Marketable Securities Management D. Cash Management

What’s In

Direction: Complete the elements of the financial system.

Financial Users of Funds
Savers
Intermediaries (Borrowers/Investors)

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What is Financial Planning process?

https://www.proprofs.com/quiz-school/story.php?title=financial-
planning-process

Planning is very much related to another management function, controlling.

These two management functions reinforce each other, and both are very important
for the success of an organization. Management planning is about setting the goals
of the organization and identifying ways to achieve them. This maybe be broken
down into long-term plans and short-term plans. Long-term plans reflected in a
company’s business strategy. In the process of planning, resources have be
identified. These resources include work force resources, production capacity, and
financial resources.

Once a plan is set, it has been quantified. A plan that is not quantified is
useless because there will be no basis for monitoring performance and hence, no
way of gauging success. Quantified plans are in form of budgets and projected
financial statements. These budgets and projected financial statements has
compared with the actual performance. This is where the controlling function
comes into play. It does not mean that if actual; performance falls short of the
budgets or of the projections, the management is not doing its function. Reasons
have be identified for the shortfall so that corrective measures has made. In
addition, the analysis will show whether the reasons for not meeting the projections
are due to management incompetence or factors outside its control.

Steps in Financial Planning?

1. Set goals or objectives. For corporations, long term and short term identify
objectives. These has shown in company’s vision and mission statements. The
vision statement states where the company wants to be while the mission
statement states the plans on how to achieve the vision.

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• Examples of a company’s Vision-Mission statements are as follows:

Jollibee Foods Corporation (JFC) Vision: To excel in providing great tasting food
that meets local preferences better than anyone; To become one of the three largest
and most profitable restaurant companies in the world by 2020.

Mission: To serve great tasting food, bringing the joy of eating to everyone.

2. Identify resources. Resources include production capacity, human resources

who will operate the operations and financial resources.

3. Identify goal-related tasks. In this step, management must figure out how to
achieve an objective. For example, if the target for this year is to increase sales by
15%, we must consider the task in achieving this goal. One task is to hire more
sales agents, if the management believes that number of sales agents is not enough
to support this 15% increase in sales.

4. Establish responsibility centers for accountability and timeline. If we

identified the task to achieve goals, the next important step to do is to identify
which department held accountable for this task.

5. Establish an evaluation system for monitoring and controlling. For

corporations, the management must establish a mechanism to allow plans to
monitor. This has been done, through quantified plans such as budgets and
projected financial statements. The management will then compare the actual
results to the planned budgets and projected financial statements. Any deviations
from the budgets will undergo investigations.

6. Determine contingency plans. In planning contingencies or unforeseen events

must be considered as well. Budgets and projected financial statements anchored
on assumptions.

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What’s New

Direction: Supply the missing amount of the receipts from sales.

Jan Feb Mar Apr May Total

Units 2,000 2,200 2,500 2,800 3,000 ________
Sales in Pesos 200,000 220,000 250,000 280,000 300,000 1,250,000
Collection from 40,000 44,000 56,000 60,000 250,000
monthly sales (Sales
in Pesos x 20%) __________
Collection from None ________ 110,000 125,000 140,000 150,000
previous monthly
sales (Sales in Pesos
x 50%)

Collection from two None None 60,000 75,000 84,000

months prior sales
(Sales in Pesos x _________
30%)

Total Collections 40,000 144,000 220,000 247,000 275,000 926,000

from sales

What is it?

Read and understand the information very well then find out how
much you can remember and how much you learned by doing the activity and
assessment.

Preparation of Budgets and Projected financial statement

What is budget?
Budget is a description in quantitative usually monetary terms of desired
future result. The process of preparing the budget requires management at all level
to focus on the future of the business entity.

Examples of Budgets:

Sales Budget - is a prediction of the firm’s sales over a specific period, based
on external and internal information. The sales budget has constructed by
multiplying budgeted unit sales by the selling price. See illustration below.

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Sales budget of ABC Company
For the year ended December 31, 2019
Series no. Particulars Quarter 1 Quarter 2
1 Sales unit (Forecasted) 6,000 5,000
2 X Price per unit 100 150
Sales Revenue Php 600,000 Php 750,000

Production Budget- is a financial planning related to the units of

production that the management think that the business should produce in the
upcoming period to match the estimated sales quantity, based on the
management’s judgement related to the competition in the market, economic
conditions, production capacity, consumer prevailing market demands and past
trends. See illustration below.

Production Budget of XYZ Company

For the year ended December 31, 2019
Series no. Particulars Quarter 1 Quarter 2
1 Sales unit (Forecasted) 8,000 9,000
Add: Finished goods Inventory 2,000 3,000
Total Productions 10,000 11,000
Less: Beginning inventory of 2,500 2,000
finished goods
Units to be Produced Php 7,500 Php 9,000

Cash budget- is a statement of the firm that has planned inflows and outflows of
cash. It forecasts the timing of theses cash outflows and matches them with cash
inflows from sales and other receipts. The cash budget is also a control tool to
monitor the way the company handles cash. See illustration below.
Example: Assume selling price is Php 100/unit sales for each month that has
expected to be collected as follows:
Month of sales: 20%
A month after sales: 50%
2 months after sales: 30

How much is the total receipts from sales?

Jan Feb Mar Apr May Total
Units 2,000 2,200 2,500 2,800 3,000 12,500
Sales in Pesos 200,000 220,000 250,000 280,000 300,000 1,250,000
Collection from 40,000 44,000 50,000 56,000 60,000 250,000
monthly sales (Sales
in Pesos x 20%)

Collection from 100,000 110,000 125,000 140,000 150,000

previous monthly
sales (Sales in Pesos
x 50%)

Collection from two 60,000 66,000 75,000 84,000

months prior sales
(Sales in Pesos x
30%)

Total Collections 40,000 144,000 220,000 247,000 275,000 926,000

from sales

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Projected financial statements is a tool of the company to set an overall
goal of what the company’s performance and position will be for and as of the end
of the year. It sets targets to control and monitor the activities of the company.
Forecast or calculate the following reports:

‣ Projected Income Statement

‣ Projected Statement of Financial Position

Application of the Projected Financial Statements Approach

be
Step 1. Forecast the Income Statement
a. Establish a sales projection
b. Project the cost of sales
c. Prepare the production schedule and project the corresponding production
costs, direct materials, direct labor and overhead for manufacturing
companies)
d. Estimate selling and administrative expenses.
e. Consider financial expenses if any
f. Determine the net profit

Step 2. Forecast the Statement of Financial Position.

a. Project the assets needed to support projected sales.
b. Project funds generated (through accounts payable and accruals) and by
retained earnings through profits generated.
c. Project liability and stockholder’s equity accounts that will not rise
spontaneously with sales (e.g., notes payable, long-term bonds, preferred
stock, and ordinary shares) but may change due to financing decisions made
later.
d. Determine if additional funds needed by using the following formula.

Additional Funds Needed (AFN) = Required Increase in Assets - Spontaneous

Increase in Liabilities - Increase in Retained earnings

The additional financing needed raised by borrowing from the banks as

notes payable, by issuing long-term bonds by selling new ordinary shares or by
some combination of these actions.

Step 3. Raising the Additional funds needed.

The financing decision will consider the following factors:
a. Target capital structure:
b. Effect of short-term borrowing on its current ratio;
c. Conditions in the debt and equity markets; or
d. Restrictions imposed by existing debt agreements.

Step 4. Consider financing feedbacks.

Depending on whether additional funds borrowed or has raised through
ordinary shares, consideration has given on additional interest in the income
statement or dividends, thus decreasing the retained earnings.

Illustrative Case: Financial Forecasting (Percent of Sales Method)

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The Mellinial Company has the following statements representative of the
company’s historical average.

Mellinial Company
Income Statement
For the year ended Dec. 31, 2019

Sales P 2,000,000
Cost of Sales (1,200,000)
Gross profit 800,000
Operating expenses (380,000)
Earnings before interest and taxes 420,000
Interest expense 70,000
Earnings before taxes 350,000
Taxes (35%) (122,500)
Net Income/Earnings after taxes P 227,500

Dividends P 136,500

Mellinial Company
Statement of Financial Position
For the year ended Dec. 31, 2019

Assets
Cash P 50,000
Accounts receivable 400,000
Inventory 750,000
Total Current Assets P 1,200,000
Fixed Assets (net) 800,000

Total Assets P 2,000,000

Liabilities and Stockholder’s equity

Accounts payable P 250,000

Accrued Expenses 10,000
Accrued Taxes 20,000
Total Current Liabilities P 280,000
Notes Payable-bank 70,000
Long-term debt 150,000
Total Liabilities P 500,000
Ordinary shares 1,200,000
Retained Earnings 300,000
Total Shareholder’s equity 1,500,000
Total liabilities and equity P 200,000

The firm is expecting a 20% increase in sales next year, and management is
concerned about the company’s need for external funds. The increase in sales
expected to carry out without any expansion of fixed assets, but rather through
more efficient asset utilization in the existing store. Among liabilities, only current
liabilities vary directly with sales.

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Using the percent-of-sales method, determine whether the company has external
financing needs or a surplus of funds.

Solution:

Step 1. Forecast the Income Statement.

The projected income statement will show the following:

Sales (P2M x 120%) P 2,400,000

Cost of Sales (P2.4M x 60%) (1,440,000)
Gross Profit 960,000
Operating expenses (P2.4M x 19%) 456,000
Earnings before interest and taxes 504,000
Interest expense (70,000)
Earnings before taxes 434,000
Taxes (35%) (151,900)
Earnings after taxes P 282,100_

Dividends (36% payment) P 101,600

Step 2. Forecast the Statement of Financial Position

The projected statement of financial position will show the following:

Assets

Cash (1) P 60,000

Accounts receivable (2) 480,000
Inventory (3) 900,000
Total current assets P1, 440,000

Fixed assets (net) (4) 800,000

Total Assets P2, 240,000

Liabilities and Equity

Accounts Payable (5) P 300,000

Accrued Wages (6) 12,000
Accrued taxes (7) 24,000
Total Current liabilities P 336,000
Notes payable-bank (4) 70,000
Long-term debt (4) 150,000
Ordinary shares (4) 1,200,000
Retained Earnings (8) 480,000
Total P2, 236,500
Additional Financing required 3,500
Total P2, 240,000

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Supporting computations:

(1) Cash = 2.5% x P 2.4M sales

(2) Accounts receivable = 20% of 2.4M
(3) Inventory = 37.5% x P 2.4 M
(4) No percentages computed for fixed assets, notes payable, long-term debt, ordinary
shares and retained earnings because they are not assumed to maintain a direct
relationship with sales volume. For simplicity, depreciation is not explicitly
considered.
(5) Accounts payable = 12.5% of 2.4M
(6) Accrued expenses = 0.5% of P 2.4M
(7) Accrued taxes = 1% of P 2.4M
(8) Retained earnings = P 300,000 + P 282,100 – P 101,600

Formula Method * Additional Financing needed (AFN) may also be computed as

follows:

Additional funds needed = required increase in assets – Spontaneous

increase in liabilities – Increase in retained earnings

Where:

Required increase in assets = Change in Sales x Current Assets (present)

Sales (present)

Spontaneous increase = Change in Sales x Current Liabilities (present)

in liabilities Sales (present)

Increase in retained earnings = Earnings after taxes - Dividend

Applied to Millenial Co., AFN computed as follows:

AFN = 400,000 x 1,200,000 _ 400,000 x 1,200,000 _ 282,100 -101,600

2,000,000 2,000,000

= 240,000 – 56,000 -180,500

= P 3,500

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What is Cash Flow Statement?

It is a process of closely monitoring of in and out of cash in the business.

Example: Ms. Amelia Enriquez engaged in a laundry shop. It was already her 2 nd
year of operation and all the in and out of cash for the month as follows:

Date Particulars Debit Credit balance

Feb.1 Initial Investment P 350,000
3 Withdrawal P 5,000
4 Purchase of Laundry P 25,000
Equipment
6 Purchase of Laundry P 25,000
Supplies
8 Laundry Revenue P 30,000
9 Payments of Utilities P 6,000
Expenses
12 Payments of Laundry P 50,000
Equipment
15 Payments of Rent P 4,000
Expense
18 Collection P 10,000
28 Salaries expense P 8,000
28 Payment Telephone P 4,000
Expense
28 Advance payment P 15,000
Total P405,000 P 127,000 P 278,000

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Amelia Laundry Shop

Statement of Cash Flow Statement
For the month of February 28, 2019

Cash flow from operating Activities:

Cash received from customers (dated Feb. 8, 18, 28) P 55,000
Payment for purchase of Supplies (25,000)
Payments for Utilities ( 6,000)
Payments for Rent ( 4,000)
Payments for Salaries ( 8,000)
Payments for Laundry Equipment (50,000)
Payments for Repair & Maintenance ( 4,000)
Net Cash used from operating activities P (42,000)

Cash flow from investing activities:

Purchase of Laundry Equipment (25,000)
Net Cash used from Investing Equipment (25,000)

Cash flow from Financing Activities:

Investment by Owner 350,000
Owner’s Withdrawal (5,000)
Net Cash used from financing activities 345,000
Net Increase in Cash 278,000
Add: Beginning Balance -0-___
Ending Cash Balance P 278,000

Let us assume that Amelia laundry shop projected 3 months of cash flow for
planning an expansion of her business. Let us say that there is an increase of
collection of 25% and all expenses will stay the same. By month of May, Amelia
granted a loan amounted Php 150,000. How much is the cash flow ending balance
of Amelia for the month of May?

Projected Cash Flow statement

March April May
Beginning Cash 278,000 249,750 221,500
Balance
Cash coming in
Cash received from 68,750 68,750 68,750
customers (Sales)
Loan transfer 150,000
Total cash in P 346,750 P318,500 P 440,250
Cash out
Supplies 25,000 25,000 25,000
Utilities 6,000 6,000 6,000
Rent 4,000 4,000 4,000
Salaries 8,000 8,000 8,000
Laundry Equipment 50,000 50,000 50,000
Repair and Maintenance 4,000 4,000 4,000
Total P 97,000 P 97,000 P 97,000
Ending Cash balance 249,750 221,500 343,250

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Amelia has P343, 250 of cash used for expansion of the business. If
cash is flowing out of your business significantly faster than it is coming in, you
need to examine three aspects of your cash flow:

 how and when cash comes into your business

 how and when it goes out again, and
 Where it has tied up in the meantime (in inventory and equipment, for
example).
To fix your cash flow, you need more money coming into your business (increase
sales, collect past-due accounts receivable), less money going out of your business
(reduce costs of goods and labor), and less money tied up in your business (reduce
inventory and leased equipment).

WORKING CAPITAL MANAGEMENT?

Businesses require adequate capital to succeed in business environment.

There are two types of capital required by business: fixed capital and working
capital. Businesses require investment in asset, which has utilized over a longer
period. These long-term investments considered as fixed capital, e.g. plant,
machinery, etc.

Working capital refers to company’s investment in short term asset such as cash,
inventory, short-term marketable securities, and account receivable.

Net Working capital refers to the difference between the firm’s current assets and
current liabilities. If the firm’s current assets exceed its current liabilities, the firm
has a positive working capital. On the other hand, if current liabilities exceed
current assets, the firm has a negative working capital.

Working Capital Management specifically refers to the efficient management of

the firm’s current assets (cash, receivables, and inventory) and current liabilities
(short-term payables). Through working capital management, managers have given
the challenge to balance risk and profitability that comes along each current asset
and liability to contribute positively to the firm’s value.

Cash Management System

The cash management involves the maintenance of a cash and marketable

securities investment level, which will enable the company to meet its cash
requirements and at the same time optimize the income on idle funds.

A financial officer has the following specific objectives in monitoring cash balances:

 To meet the ash disbursement needs (payments schedule)

 To minimize the funds committed to transactions and precautionary cash
balances; and
 To avoid misappropriation and handling losses in the normal course of
business

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Reasons for Holding Cash

Although cash has generally considered a non-earning asset, business firms must
hold cash for the following reasons:

1. Transaction Motive - cash needed to facilitate the normal transactions of the

business, that is, to carry out its purchases and sales activities.

2. Precautionary Motive - Cash may held beyond its normal operating requirement
level in order to provide for a buffer against contingencies such as unexpected
slow-down in accounts receivable collection, strike or increase in cash needs
beyond management’s original projections.

3. Speculative Motive- cash held ready for profit making or investment

opportunities that may come up such as a block of raw materials inventory offered
at discounted prices or a merger proposal.

4. Contractual Motive-A company may be required by a bank to maintain a certain

compensating balance in its demand deposit account as a condition of a loan
extended to it.

Cash Conversion Cycle - A firm operating cycle begins from the time goods for sale
manufactured to the eventual collection of cash from the sale of these goods. The
operating cycle of a firm is mainly composed of two current asset categories:
inventories and accounts receivable. It measures as the sum of the Average Age of
Inventory and Average Collection Period. The average age of inventory refers to the
time that lapsed when a good manufactured and eventually sold. The average
collection period on the other hand refers to the time when the sale made and
collected. Both measured in days.

Operating cycle= Average Age of Inventory + Average Collection Period

Firms would generally want to speed up their operating cycle. The faster their
operating cycle is, the faster they can convert other forms of current assets to cash,
which has used to pay current obligations.

However, in the process of producing and selling goods, firms would incur
obligations for purchases of raw materials or finished goods on account which
results in accounts payable. An account payable reduces the number of days a
firm’s resource has tied up to its operating cycle. Thus, including accounts payable
in our earlier equation, gives us the firm’s cash conversion cycle.

Cash Conversion Cycle = Operating Cycle – Average Payment Period

The average payment period is the time it takes for the firm to pay its accounts
payable expressed in number of days. The operating cycle less average payment
period provides us the firm’s cash conversion cycle. Carefully analyzing the
equations provided above, a firm’s cash conversion cycle re expressed as follows.

Cash conversion cycle = Average Age of Inventory + Average Collection Period –

Average payment period.

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Illustration:

Bloom Manufacturing had an average age of inventory of 18.5 days, an

average collection period of 48.5 days and an average payment period of 53.5 days.
Bloom is operating and cash conversion cycle obtained as follows:

Operating Cycle = Average Age of Inventory + Average Collection Period

= 18.5 days + 48.5 days

= 67days

Cash Conversion Cycle = Operating Cycle – Average Payment period

= 67days - 53.5 days

= 13.5 days

Inventory Management- The objective in managing inventory is to convert it as

quickly as possible to cash without losing sales due to stock outs. Therefore, the
financial manager plays a crucial role in overseeing that the firm maintains an
appropriate quantity of inventory – not too much and not too little. Maintaining too
much inventory implies that the firm incurs more costs associated with carrying
these inventories. However, carrying too little inventory quantities might lead to
possible stock outs that could further lead to lost sales, and worst, lost customers.

Inventory in A Manufacturing Company - In a manufacturing company, there

are three types of inventory:

a. Raw materials – these are purchased materials not yet put into
production
b. Work in process – these are goods and labor put into production but
not finished.
c. Finished goods – these are goods put into production and finished.
These are ready to be sold.

One of the common techniques in inventory is the ABC Inventory system/ABC

Analysis. Inventories classified as “A” are high valued items, which should
safeguarded the most. • B items, on the other hand, are average-cost items that
should be safeguarded more than C items but not as much as A items. • While C
items have low cost and is the least safeguarded.
Accounts Receivable Management - represents assets of the entity that expected
to be collected and thus converted to cash. A firm would generally want to collect
its receivables as quickly as possible without losing customers due to imposing very
tight collection procedures. Thus, sound accounts receivable management practices
would form three parts: credit selection, credit terms and credit monitoring.

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One popular credit selection technique is the use of the 5 C’s of credit:

a. Character: The applicant’s record of meeting its past obligations has judged.
However, if the applicant does not have any credit history, he or she may be
required to have a co-maker. A co-maker is another person who signs the loan and
assumes equal responsibility for repayment.
b. Capacity: This emphasizes the customer’s ability to repay its obligations in
reference to its current financial position or standing. It determines whether the
customer has sufficient resources or sources of funds that it can use to settle
obligation

c. Capital: The applicant’s net worth which can be arrived at by deducting total
liabilities from total assets.
d. Collateral: The amount of assets the customer has that could serve as a security
in the event that the obligation is not paid.

e. Condition: This includes current economic and industry conditions that might
affect the customer’s ability to repay its obligations.

The use of the 5C’s of credit will allow the firm to carefully assess the
customer’s ability to repay its obligations along with the level of risk that the firm
will be subjected to once it decides to grant credit to the customer. It requires
experience to fully assess and review the credit worthiness of customers and
subsequently decide.
Credit Scoring- Another used in granting credit to customers is through credit
scoring. Credit scoring applies statistically derived weights to a credit applicant’s
scores on key financial and credit characteristics to predict whether he or she will
pay the requested credit on time. In this procedure, a credit score obtained that
reflects the customer’s creditworthiness, reflecting its overall credit strength. The
score obtained has compared to a pre-determined standard in order to arrive at a
decision of whether accepting or rejecting the customer’s credit. This method is an
inexpensive way to obtain credit ratings for customers.

What’s more?

Direction: Compute the Net Working Capital of ABC Company. See table below and
answer directly.

ABC Company
Balance Sheet
Cash P 60,000 Account Payable P 30,000
Marketable Securities 10,000 Accrued Expense 20,000
Accounts receivable 40,000 Notes Payable 5,000
Inventory 50,000 Current Portion-Long term 10,000
debt
Total Current Assets 160,000 Total Current Liabilities 65,000

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Required:

1. How much is the net working capital of ABC Company?

2. Is it positive or negative? Explain briefly.

What I Have Learned?

Activity 2.4
Direction: Read and understand the case below and continue to fill in the sales
budget table.
1. XYZ Merchandising, which is engaged in the reselling of branded bags, is in the
process of preparing its budgets for the calendar year 2016. Last year, XYZ was
able to sell 1,500 bags with a selling price of 2,500 per bag. For the current year,
the basis of both external and internal information. First quarter sales expected to
be 400 bags. The firm also expects that unit sales per quarter would increase by
10%. Selling price is also expected to increase by 5% for 2016.

XYZ Merchandising
Sales Budget
For the year ended December 31, 2016
1st quarter 2nd quarter 3rd quarter 4th quarter Total
Expected Ex. 400
Sales in Units
Unit Sales 2,625
price
Total Sales 1,050,000

Required:
1. Complete the projected sales budget for each quarter.
2. How much is the total projected sales budget?

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What I Can Do?

Direction: Answer the problem below and forecast the Income statement using
percent of Sales Method.
The Gospel Company has the following statements, which are representative
of the company’s historical average.

Gospel Company
Income Statement
For the year ended Dec. 31, 2018

Sales P 2,500,000
Cost of Sales (1,500,000)
Gross profit 1,000,000
Operating expenses (380,000)
Earnings before interest and taxes 620,000
Interest expense 80,000
Earnings before taxes 540,000
Taxes (35%) (189,500)
Net Income/Earnings after taxes P 350,500

Dividends P 140,200

Additional Information:
1. The firm is expecting a 25% increase in sales next year.
2. The company expecting to declare 30% of dividend

Required:
1. Prepare the projected income statement of Gospel Company.
2. How much is the net income?
3. How much is the dividend?

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Assessment

Directions: Identify the term is being describe by each statement

____________________ 1. Shows the planned inflows and outflows of cash in the
entity for a given period.
____________________ 2. It refers to company’s investment in short term asset such
as cash, inventory, short-term marketable securities, and
account receivable
_____________________3. The applicant’s record of meeting its past obligations has
judged.

____________________4. Firms operating cycle begin from the time goods for sale has
manufactured to the eventual collection of cash from the
sale of these goods.
____________________5. Cash needed to facilitate the normal transactions of the
business, that is, to carry out its purchases and sales
activities.

Additional Activities

Direction: Write and explain the 6 steps in Financial Planning process for your
own Business (Choose any business).
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