Unit 3: Financial Planning Tools and Concepts

Lesson 3.1
Financial Planning Process
Contents
Introduction 1

Learning Objectives 2

Quick Look 3

Learn the Basics 4

Financial Planning 4
Tools Used in Financial Planning 6
Business plans 6
Budgets and Cost Projections 7
Break-Even Analysis 7
Financial statements 8
Financial Planning Process 8
Financial Plans 9
Steps in Creating a Financial Plan 9

Keep in Mind 13

Try This 14

Practice Your Skills 15

Challenge Yourself 17

Bibliography 18
Unit 3: Financial Planning Tools and Concepts

Lesson 3.1

Financial Planning Process

Introduction

When you receive money, what is the first thing that you do? Do you immediately think of
things you want to buy? Or do you plan how and when to spend it? Some people make a list
of their expenses, allocate a budget, and save the excess amount. Other people
immediately set aside their savings and spend the remaining money.

Money has different uses to different people. For most people, it is simply a means to put
food on the table—something meant to be spent. For others, it is the most liquid asset that
could increase one’s wealth—something meant to be grown. For people who consider
money as a tool to reach their financial goals, a money management plan is necessary.

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In the same way, businesses create long- and short-term plans in sourcing and allocating
their funds so they can achieve their financial objectives. This aspect of the money
management process is known as financial planning. In this lesson, you will learn how
corporations plan their finances. You will also explore its importance and apply it in your
own practice.

Learning Objectives DepEd Competency

● Identify the steps in the financial planning

In this lesson, you should be able to do the
process (ABM_BF12-IIIc-d-10).
following:
● Discuss the financial planning process.

● Differentiate the various tools used in

financial planning.
● Provide the different steps of the
financial planning process.
● Analyze the importance of corporate
financial planning in simple business
situations.

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Quick Look

Money Management
The concept of money is already embedded in our society. It is a scarce resource; thus, the
need for its circulation within the economy. With money circulating in the system,
businesses thrive and stay afloat. Without it, firms would not be able to produce products
and services. At this time, many consider money as a necessity for their survival. Hence, one
must give focus on managing funds to uplift his or her standard of living.

Money management refers to the process of keeping track of one’s funds using different
tools like budgets and financial plans. Simply put, it is a key to determine the activities that
concern fund allocation like spending, saving, investing, and even paying off debts. Just
imagine how you create a budget to be able to fit up the money for the time being and to
settle your debts as soon as possible. With the use of financial tools, one can identify
strategies to achieve one’s financial goals.

Money management is not only applied in personal finance but in corporate finance as well.
Companies prepare business plans, budgets, and forecasted financial statements to decide
on the different tactics and strategies they must implement to obtain greater profit and
maximize their wealth. Firms prepare these tools regularly to find and maintain their strong
points and improve their weak areas.

Questions to Ponder
1. Why is money management important to you as a student?
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2. How relevant is financial planning to organizations and businesses?

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3. Is financial planning about controlling one’s finances? Explain your answer.

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Learn the Basics

Planning is one of the basic management functions in any organization. Generally, this
function involves (1) identifying the current situation of the organization, (2) formulating
organizational objectives, (3) determining the available resources and their appropriate
allocation, and (4) deciding on the tasks needed to achieve these objectives (Norman 2019).

In the previous lessons, you have learned how financial ratios and analyses help determine
the financial health, performance, and position of a business firm. You also know that it can
be used in comparing and forecasting financial performance. Analyzing accounting
information are essential skills in financial planning.

In corporate financial planning, financial managers prepare budgets and forecasted

financial reports to help them decide the most effective ways to achieve wealth maximization
given all the internal and external factors in the business environment.

Essential Question

How essential is financial planning in attaining business goals?

Financial Planning
Financial planning is an important aspect of business operations because it guides,
coordinates, and controls the firm's actions and decisions. The primary goal of financial
planning is to attain the goals and objectives set by the business organization. Business
organizations are interested in planning two major aspects of business operations: cash flow
and profit (Gitman and Zutter 2015).

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Cash is an important asset needed in day-to-day operations. It is crucial for businesses to

ensure that there is sufficient cash to pay for its expenses and obligations. In cash planning,
the history of inflow and outflow of funds are analyzed and cash requirements are set based
on the business plan. It also involves targeting surplus cash and contingency in case of cash
shortage. The output of cash planning is the cash budget.

Profit is generated when total revenues are greater than the total expenses. Although it is
important for businesses to avoid loss, they also want to increase their profit. Thus, profit
planning involves the projection of the company’s future income and financial position
based on the business plan. A projected income statement and projected balance sheet
are the output of profit planning.

Figure 1. Businesses plan for cash flow and profit using forecasts and projections.

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Closer Look

Importance of Budget
Budget turns goals into specific measurable targets and anticipates
problems. If the goal of a company is to increase its profits over a period
of two years, the budget outlines the specific amount expected from
sources, the intended allocation, and the desired surplus. Suppose during
implementation, cash flow was interrupted. The company can already
anticipate the effects and possible consequences on other aspects of
business operations, and make necessary adjustments.

Check Your Progress

Compare and contrast cash planning and profit planning.

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Tools Used in Financial Planning

There are several financial tools that serve as key input in financial planning. The
management needs these tools to assess the situation, set the goals, forecast performance,
and create a financial plan. The tools required may vary depending on the nature,
operations, and goals of the firm. However, the common ones used are business plans,
budget and cost projections, break-even analysis, and financial statements.

Business plans
A business plan is a comprehensive written document that summarizes the history of the
company, its vision, mission, marketing strategies, operation or production process,
organizational structure, socio-economic impacts, and financial projections. This financial
tool guides the management team in planning the best course of action, such as in financing
the firm’s expenses. It helps the key stakeholders to determine the possibility of returns on

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investments.

Budgets and Cost Projections

Budget is a financial tool that outlines the information on a firm’s income generation, cash
flow, and allocation of funds reflecting future conditions (Indeed Editorial Team 2021). On the
other hand, cost projection is a tool that shows information on past and present financial
investments focusing on the development, implementation, and maintenance of project
operations (McConnell 2010). Both of these tools are useful in forecasting wherein current
and previous financial information are analyzed to estimate whether the company is headed
towards the desired future results.

Break-Even Analysis
Break-even analysis is a financial tool that shows which conditions would make total
revenue enough to cover the total expenses of a firm. New and existing businesses conduct
periodical break-even analysis to determine the break-even point, and find opportunities to
increase income while decreasing total costs.

Figure 2. Analysis of the break-even point allows businesses to determine opportunities to

increase income.

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Financial statements
Financial statements present the effects of financial transactions and other economic
events to the business’s financial performance and position in a given period. Businesses
periodically submit financial reports that comply with financial reporting standards. It is also
used to compare the performance of entities in the same industry. Financial statements
must be accurate, objective, and transparent so that users can make sound decisions.

Closer Look

Business Planning
Start-up businesses should begin with a business plan. This becomes
their guide in every aspect of business management. One of the crucial
parts of a business plan is the financial plan. This includes assumptions
and projections for the next five years. Most investors look at this
component to examine whether there would be a high return on
investment.

Check Your Progress

Choose one of the tools used in financial planning and explain why it is
necessary in creating a cash plan or a projected financial statement.
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Financial Planning Process

Businesses design long-term and short-term strategies to achieve their goals. Thus, the
financial planning process also produces a corresponding long-term and short-term financial
plan.

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Financial Plans
A financial plan is a comprehensive document that includes the firm’s financial objectives,
available resources, courses of action to attain those objectives, and the financial tools to
support the strategies and decisions.

A long-term financial plan, also known as a strategic financial plan, outlines the financial
actions and the expected effects over two to ten years. However, the period covered by
long-term financial planning varies. Stable operations tend to have longer planning periods
compared to businesses that experience uncertainties in operations. The long-term financial
plan reflects the planned outlay of assets, sources of financing, and product development,
among others. It is the basis for the creation of a short-term financial plan.

Short-term financial plans implement the objectives of the strategic plan. It specifies the
attainable financial actions and effects over a period of one to two years. It uses sales
forecast, break-even analysis, and other financial data to produce cash budgets and
projected income statements.

Companies incorporate the financial planning process in their management processes to

ensure that quantifiable results, such as higher profits, are achieved while considering the
situations and risks they may be exposed to.

Check Your Progress

What is the relationship between long-term and short-term financial plans?

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Steps in Creating a Financial Plan

Financial planning is also connected with control. Control involves the monitoring and
evaluation of the plan to perform corrective actions when necessary. Thus, financial planning
is a continuous process.

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Although different firms may have different approaches in creating their financial plan,
planning generally involve six stages (Lowe 2010):

Figure 3. Financial planning is a continuous process, typically consisting of six phases.

1. Setting Goals. As there are long-term and short-term plans, there are also long-term
and short-term financial goals. Some companies, especially those with longer
planning cycles also specify their medium-term goals. Goals are formulated at the
start to guide the other phases of the planning process. Setting goals also involve the
consideration of the business’s current financial situation to ensure that these two are
aligned.
2. Assessing Resources. The firm checks on its income, savings, and other financial
resources. Manpower, materials, machinery, and methods are also assessed as these
are crucial in attaining the financial goals of the firm.
3. Planning the course of action. Based on the goals and resources available, financial
managers have to work out a plan and identify ways to achieve corporate goals. The
strategies will depend on the quantifiable data provided by financial tools. The plan
also includes identifying the persons in charge or persons accountable for the tasks.

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By determining who are responsible for the tasks, the flow of responsibility and
implementation will be easier and faster.
4. Testing for stress. In this phase, the plan will be tested based on possible changes or
scenarios which might happen. Possible alternatives are considered based on
economic factors, risks, inflation, and other situations. Firms must prepare alternative
plans in case things do not happen as expected. The financial tools used are anchored
with assumptions that, in times when original plans do not occur, there are
contingencies that can achieve the goals.
5. Executing the plan. Once the risks are identified, the firm executes the plan. The
financial manager monitors the financial actions and its effects, constantly checking if
the plans are being followed.
6. Reviewing and Evaluating. Review and evaluation systems must be created to
assess the effectiveness of the plan and its implementation. The financial managers
can recommend adjustments or amendments if necessary.

One of the functions of financial planning is to provide accurate financial information to help
managers of companies create decisions beneficial to the firm’s success (Martinelli 2016). In
fact, following the flow of the financial planning process supports a business in ensuring that
its target deliverables are attained and, in times of funds insufficiency, financial planning
shows the possible alternatives that the business might want to take. In addition, financial
planning enhances the managerial capabilities and decision-making skills of the top
management. With these, performing financial planning can be concluded as a key to an
organization’s success.

Check Your Progress

Why is it necessary for financial plans to be evaluated?

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Case Study

One Platform for All Financial Planning & Analysis Data

Financial planning and analysis (FP&A) uses tools such as business plans,
budget and cost projections, financial statements, and break-even
analysis. Traditionally, finance teams gather data from tons of
spreadsheets from different departments just to perform their task.

In April 2020, Abacum started with the aim of simplifying the FP&A
process of companies. According to its founder and CEO, the ultimate
goal is to provide finance teams of companies with a smarter and more
intuitive solution in handling financial planning and processes that can
adapt and grow with the company.

If companies will use it, they will be able to synchronize and manage their
financial and other data from a central database to generate insights,
produce charts and graphs, and collaborate with other systems used in
the financial planning process.

Abacum is still new to the industry and trying to establish networks with
other companies. However, according to the latest report, because its
vision is to be the leading solution provider to more companies, it was
able to raise funds of $25 million led by one of the largest European
ventures.

Collaborative Financial Planning and Analysis Platform

Abacum Raises $25M
Paul Sawers, “Collaborative Financial Planning and Analysis
Platform Abacum Raises $25M,” VentureBeat (November 30,
2021),
https://venturebeat.com/2021/11/30/collaborative-financial-p
lanning-and-analysis-platform-abacum-raises-25m/, last
accessed on December 1, 2021.

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Keep in Mind

● Financial planning is key to reaching personal and business goals. It is especially vital to
business operations as it guides, coordinates, and controls the firm’s financial actions
and decisions.
● Financial planning involves cash planning and profit planning. Cash planning produces a
cash budget that reflects the target inflows and outflows of cash, taking into account
possible surplus or shortages. Profit planning produces projected income statements
and balance sheets which present the company’s future income and financial position.

● Financial planning requires input from several financial tools such as business plans,
budget and cost projections, break-even analysis, and financial statements. The
information contained in these tools are necessary in analyzing the current situation
and projecting and forecasting future performance.
● Companies create long-term and short-term financial plans. The continuous process
involves setting up goals, assessing resources, planning the course of action, testing for
stress, executing the plan, and reviewing and evaluating the performance vis-a-vis the
plan.
● The financial planning process helps companies turn goals into targets and control
business activities to attain them. In times of funds insufficiency, financial planning
shows the possible alternatives that businesses might want to take.

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Try This

Short-Answer Response (Identification). Write the correct answer on the provided space
before each number.

_________________ 1. It refers to the business’s process of creating targeted quantifiable

results while considering the different situations and risks they
may be exposed to.

_________________ 2. It is the document that results from the cash planning process.

_________________ 3. These are the documents that result from the profit planning
process.

_________________ 4. These are the inputs required in financial planning that allows the
management to use quantifiable financial data throughout the
process.

_________________ 5. It refers to the management function of monitoring and evaluating

the implementation of a plan to perform corrective actions when
necessary.

_________________ 6. It is the first step in financial planning.

_________________ 7. It refers to a phase in financial planning wherein alternatives are

considered based on possible changes and impact of economic
factors and risks.

_________________ 8. It is a comprehensive document that includes the firm’s financial

objectives, available resources, and courses of action to attain
those objectives.

_________________ 9. It outlines the planned outlay of assets, source of financing, and

product development that will result from financial actions and
results over two to ten years.

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_________________ 10. It is a financial tool that outlines the information on a firm’s

income generation, cash flow, and allocation of funds, reflecting
future conditions.

Practice Your Skills

Corporate Financial Planning

Answer the following questions in not more than five sentences.

1. XYZ Co. is a newly established business in Quezon City. Its main operation is focused
on providing internet service to its residents and nearby cities. After months of
operating, the company experienced three consecutive net losses due to increased
variable costs. At this moment, do you think that XYZ Co. needs to integrate financial
planning into its operations? Explain how your answer would benefit the company.
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2. Relative to the previous question, what is the best financial tool to be used by the
firm in case it chooses to incorporate financial planning in its operations? Why do you
think so?
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For numbers 3-5, refer to the information given.

During the 5th year of operations of Casa Uno, its service revenue increased only by
10%. This includes revenues generated from hotel accommodations, tour packages,
and massage services. Whereas, the operating expenses increased by 30%. Included
in its operating expenses were the salaries expenses of 150 employees, supplies
expenses, building insurance expenses, communications expenses, advertising
expenses, and transportation expenses for hotel guests. However, due to the
pandemic, the management forecasted a downward trend in revenue for the next
two years due to restrictions for the hotel and tourism industry.

3. If you are the financial manager of the Casa Uno, what will be your suggested
financial goals for its 6th year of operations? Enumerate at least two financial goals.
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4. Concerning the previous question, what are the possible courses of action or
strategies that may be implemented to reach the financial goals stated?
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5. What expected factors or outcomes would determine if the strategies implemented

were successful?
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Challenge Yourself

Answer the following questions briefly and concisely.

1. As a senior high school student, how will you apply simple personal financial
planning in your everyday life?
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2. How will you explain to a new business owner the importance of incorporating
financial planning in their companies?
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3. We are already in the technological age. Are there any technological variables that
could affect the process of corporate financial planning? Enumerate if there are.
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Bibliography
Chron Contributor. “Small Business - Chron.com. “Key Tools for Planning Finances.” Last
modified July 19, 2021.
https://smallbusiness.chron.com/key-tools-planning-finances-25423.html.

Corporate Finance Institute. “FP&A.” Last modified January 24, 2022.

https://corporatefinanceinstitute.com/resources/careers/jobs/financial-planning-and-an
alysis-fpa/.

FPA of Minnesota. “What Is Financial Planning? Last accessed March 8, 2022.

https://fpamn.org/consumers/what-is-financial-planning/.

FPSB. “Financial Planning Process.” Last accessed March 8, 2022.

https://www.fpsb.org/about-financial-planning/financial-planning-process/.

Gitman, Lawrence, and Chad Zutter. Principles of Managerial Finance. 14th edition. Harlow:
Pearson Education Limited, 2015.

Lowe, Jonquit. Be Your Own Financial Adviser. Harlow: Pearson Education Limited, 2010.

Indeed Editorial Team. “What is a budget?” Last modified February 23, 2021.
https://www.indeed.com/career-advice/career-development/what's-a-budget

Martinelli, Mark. “The Importance of Having Strong Financial Planning and Analysis.” WIPFLI.
Last modified May 2, 2016.
https://www.wipfli.com/insights/articles/aa-the-importance-of-having-strong-financial-pl
anning-and-analysis.

McConnell, Eric. “Cost Projection Statement and Analysis.” Last modified November 17,
2010. https://mymanagementguide.com/cost-projection-statement-and-analysis/.

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Norman, Leyla. “What Are the Four Basic Functions That Make Up the Management
Process?” Small Business - Chron.com. Last modified January 18, 2019.
https://smallbusiness.chron.com/four-basic-functions-make-up-management-process-2
3852.html.

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