Working Capital

BUDGET

A budget is an estimate of costs,

revenues, and resources over a
specified period, reflecting a reading
of future financial conditions and
goals.
BUDGET

Sales budget, production

budget, operating budget and
cash budget are the budgets
that need to be prepared.
SALES BUDGET

❏It provides the estimated amount

of money based on the volume of
products that a company proposes
to sell in the future.
SALES BUDGET
❏In forecasting the financial statements, the
most important statement account is sales
because almost all of the accounts in the
financial statements are affected by it.
❏Cost of sales and gross profit are examples
of accounts that are affected by sales.
SALES BUDGET

❏ Sales Revenue=Units to be sold x

Unit Selling Price
❏ The finance manager must consider
the internal and external factors in
preparing the sales budget
SALES BUDGET
External Factors Internal Factors
● Gross Domestic Product (GDP)
growth rate ● pricing
● income tax rates ● promotional activities
● Inflation ● distribution
● interest rate ● production capacity
● foreign exchange rate ● management styles
● developments in the industry ● financial capability/resources
● competition of the company
● economic crisis
● reputation
● regulatory environment
● political crisis
Sales Budget

Example: The required production of ABC

Corporation in the first quarter is 200,000
units. The units increased by 10% per quarter.
The selling price per unit is Php 5.00
Sales Budget
Example: The required production of ABC Corporation in the
first quarter is 200,000 units. The units increased by 10% per
quarter. The selling price per unit is Php 5.00
PRODUCTION BUDGET

• It provides information with respect to

the number of units that should be
produced over a given accounting period
based on expected sales and targeted
level of ending inventories.
PRODUCTION BUDGET
Required Production in Units

=Expected Sales + Target Ending

Inventories-Beginning Inventories
PRODUCTION BUDGET
Required Production in Units
=Expected Sales + Target Ending Inventories-Beg. Inventories
OPERATING BUDGET

It is made to estimate how much their revenue

and expenses would be within a year. It is
composed of the variable and fixed costs
needed to run the operations of the business
like wages and salaries of personnel, tax
payments, interest payments, and rent
payments.
OPERATING BUDGET
Cash Budget

• It
displays the expected cash receipts
and disbursements for an accounting
period. It is prepared on a monthly or
quarterly basis for a year.
OPERATING BUDGET
Cash Budget
• The cash budget is divided into three parts:
 cash receipts,
 cash disbursements,
 excess cash balance, or required total
financing.
Parts of the cash budget are as follows:
1. Cash receipts- These compose
of collections from receivables,
proceeds from loans, issuance of
new shares of stocks, and advances
from the stockholders.
Parts of the cash budget are as follows:

2. Cash disbursements- These

include payments to suppliers
and other service providers,
loans, and cash dividends.
Parts of the cash budget are as follows:
3. Excess cash balance or required total
financing- This part of the cash budget shows
possible funding requirements. If the company has
excess cash, it is a good indicator that it can pay an
existing loan or put it in an investment. If there is no
excess cash, the company must make a plan where
to get funds.
Example: The
president of
ABC
Corporation
wants to find
out if the
company has
enough cash to
pay the
company’s loan
worth Php
300,000.00 by
the end of
2020.
To compute for the cash budget, follow these steps:
1. Compute the cash receipts. Identify how much will be collected from
the sales.
a. Multiply the projected sales per quarter by the percentages of sales
collection.
b. Multiply the projected sales per quarter by the remaining percentages
of sales collection. Use the last quarter sales of last year for the first
quarter. Then use Quarter 1 to Quarter 3 sales for year 2020.
c. Add the Quarter of Sale and the Quarter after Sale.
1. Compute for the cash The fourth quarter
receipts. Identify how much will
sales in 2019 were
be collected from the sales.
Php 900,000.00.
a. Multiply the projected sales
Quarter 1- 1,010,000
Eighty-five
per quarter by the percentages
percent (85%) of Quarter 2- 1,110,000
of sales collection.
the sales are
b. Multiply the projected sales collected in the
per quarter by the remaining
Quarter 3- 1,210,000
Quarter 1 of the
percentages of sales collection.
Use the last quarter sales of
sales. Quarter 4 - 1,310,000
last year for the first quarter.
The remaining
Then use Quarter 1 to Quarter 3
sales for year 2020.
fifteen percent
(15%) is collected
c. Add the Quarter of Sale and
in the following
the Quarter after Sale. quarter.
2. Compute for b. Assume that
the cash the operating Operating Income Tax Projected Sales
expenses for Expenses
disbursements. Q1-30,000 Q1-1,010,000
each quarter is
Identify all the as follows. Q1-101,000
payments to be Q2-45,000 Q2-1,110,000
c. Cost of sales Q2-111,000
made and add Q3-50,000 Q3-1,210,000
is 75% of sales.
all expenses Q3-121,000
d. Interest Q4-55,000 Q4-1,310,000
expenses paid Q4-131,000
every quarter is
Php 15,000.00. The president of ABC Corporation wants to
e. Income tax find out if the company has enough cash to
rate is 30%.
pay the company’s loan worth Php
300,000.00 by the end of 2020.
 Operating Income Tax Projected Sales
Expenses
Q1-30,000 Q1-1,010,000
Q1-101,000
Q2-45,000 Q2-1,110,000
Q2-111,000
Q3-50,000 Q3-1,210,000
Q3-121,000
Q4-55,000 Q4-1,310,000
Q4-131,000

Cost of sales is 75% of sales.

Interest expenses paid every quarter is

Php 15,000.00.
 Operating Income Tax Projected Sales
Expenses
Q1-30,000 Q1-1,010,000
Q1-101,000
Q2-45,000 Q2-1,110,000
Q2-111,000
Q3-50,000 Q3-1,210,000
Q3-121,000
Q4-55,000 Q4-1,310,000
Q4-131,000

Cost of sales is 75% of sales.

Interest expenses paid every quarter is

Php 15,000.00.
 Operating Income Tax Projected Sales
Expenses
Q1-30,000 Q1-1,010,000
Q1-101,000
Q2-45,000 Q2-1,110,000
Q2-111,000
Q3-50,000 Q3-1,210,000
Q3-121,000
Q4-55,000 Q4-1,310,000
Q4-131,000

Cost of sales is 75% of sales.

Interest expenses paid every quarter is

Php 15,000.00.
 Operating Income Tax Projected Sales
Expenses
Q1-30,000 Q1-1,010,000
Q1-101,000
Q2-45,000 Q2-1,110,000
Q2-111,000
Q3-50,000 Q3-1,210,000
Q3-121,000
Q4-55,000 Q4-1,310,000
Q4-131,000

Cost of sales is 75% of sales.

Interest expenses paid every quarter is

Php 15,000.00.
 Operating Income Tax Projected Sales
Expenses
Q1-30,000 Q1-1,010,000
Q1-101,000
Q2-45,000 Q2-1,110,000
Q2-111,000
Q3-50,000 Q3-1,210,000
Q3-121,000
Q4-55,000 Q4-1,310,000
Q4-131,000

Cost of sales is 75% of sales.

Interest expenses paid every quarter is

Php 15,000.00.
3. Subtract the cash 4. Add the beginning cash Expected cash balance at the end
disbursement from balance and then subtract the of 2019 is about Php 40,000.00.
the cash receipts to minimum cash balance. If the For 2020, target cash is raised to
get the net cash minimum cash balance is less Php 100,000.00 because of
flow. than the ending cash balance, expected increase in sales..
the firm has excess cash. If the
minimum cash balance is
greater than the ending cash
balance, the firm requires
financing.
 Expected cash balance at the end
of 2019 is about Php 40,000.00.
For 2020, target cash is raised to
Php 100,000.00 because of
expected increase in sales..
3. Subtract the cash 4. Add the beginning cash
disbursement from balance and then subtract the
the cash receipts to minimum cash balance. If the
get the net cash minimum cash balance is less
flow. than the ending cash balance,
the firm has excess cash. If the
minimum cash balance is
greater than the ending cash
balance, the firm requires
financing.
Expected cash balance at the end
of 2019 is about Php 40,000.00.
For 2020, target cash is raised to
Php 100,000.00 because of
expected increase in sales..
Projected Financial Statement
The projected financial statement is important in
planning to forecast the outcome of the organization in
future periods, assess the standing of the business,
and budget preparation. It will help in evaluating the
additional assets/funds needed in the business. It will
also serve as a basis for the business if it can pay its
financial obligations.
Projected Financial Statement
The following are the steps to be followed in projecting financial statements:

1. Forecast the Statement of Comprehensive Income (Income Statement).

● Forecast sales.
● Forecast cost of sales and operating expenses.

To get the cost of sales, use the average cost of sales over the historical data
analyzed.
Find out which are variable expenses and fixed expenses.
● Forecast net income and retained earnings.

(There should be information on income taxes and how much financing cost a
company will have to forecast net income.)
2.Forecast the Statement of Financial Position and Statement of Cash
Flows.
● Determine SFP accounts that will be affected or associated with
sales. (Cash, AR, inventories, AP, and accrued expenses payable)
● Determine the external funds needed. The projected statement of
financial position has to be balanced so EFN is computed.
EFN=Change in Total Assets-(Change in Total Liabilities + Total Change in
Stockholder’s Equity)
+ EFN, means that the company needs more funds
- EFN, means that the company has excess cash.
3.Find out how to finance EFN.
● After computing the EFN, the management must
determine how to finance the company. They can
raise the funds through debt (borrowing from the
bank as notes payable) or equity (through stocks
and bonds) or it can be the combination of the
instruments.
a. Sales are
expected to
increase by
10% in 2020
from the 2019
sales level.
The sales of
the company
increased by
10% annually
from 2015 to
2019.
 Computation:
A.Projected Net Sales in 2020
= Net Sales in 2019 x
(1+Expected increase in Sales
Percentage)

= Php 54,705, 675 x 1.10

= Php 60,176,243.00

a. Sales are expected to increase by 10% in 2020 from the 2019 sales
level. The sales of the company increased by 10% annually from 2015
to 2019.
 Computation:Projected
Cost of Sales

A.Projected Net Sales in 2020 = = Php

60,176,243.00
b. The cost of sales, cash, receivables,
inventories, other current assets, and
trade payable are expected to change
with sales based on the financial
statements in 2019.
Computation:
Projected Cost of Sales

= (41,954,730/54,705,675)x
60,176,243.00

= 46,150,203
b. The cost of sales, cash, receivables,
inventories, other current assets, and
trade payable are expected to change
with sales based on the financial
statements in 2019.
The variable operating expense is
8% of sales. The depreciation
A.Projected Net Sales in 2020
expense is 10% of the gross = Php 60,176,243.00
beginning balance of property, plant,
and equipment. The gross balance Variable Operating Expense
of PPE was Php 30,000,000.00 = % X Projected net sales in 2020
(December 31, 2019). The new PPE
Fixed Operating Expense
for 2020 is Php 6,000,000.00. The (depreciation)
PPE acquired in the first half of the = PPE x 10%
year will depreciate for one full year.
The variable operating expense is 8% of sales. The depreciation expense is 10% of
the gross beginning balance of property, plant, and equipment. The gross balance
of PPE was Php 30,000,000.00 (December 31, 2019). The new PPE for 2020 is Php
6,000,000.00. The PPE acquired in the first half of the year will depreciate for one
full year.

A.Projected Net Sales in 2020

= Php 60,176,243.00
c. There are two-long term loans as of December 31, 2019.
Both have an annual interest rate of 10%. The first loan will
mature on June 30, 2020. Thus, the loan amounting to Php
1,250,000.00 has to be paid on or before June 30, 2020. The
second loan amounting to Php 3,000,000.00 which was
incurred on December 31, 2019, is paid at the rate of Php
500,000.00 principal balance every June 30 and December 31.
New loans of Php 3,000,000.00 will be incurred on December
31, 2020, payable at the rate of Php 500,000.00 every June 30
and December 31. Annual interest rate is expected at 10%.

.
First Loan 1,250,000
Second Loan 3,000,000
New Loan 2,500,000
d. The income tax rate is 30%. 75% of the
income tax payable will be paid in 2020 while
the balance will be paid in 2021
Taxes
= Income Before Tax in 2020 x
30%
= Php 5,443,191 x 30%
= Php 1,623,597.00