İŞLETME FİNANSI I

The process of financial planning includes the following financial analysis and aspects:

• Cash Flows: The building block of financial planning is projected cash flows for future given the activity level of today and the forecasts of future. The cash flows convey the liquidity performance, flexibility and risk concepts to the financial planning as supported by the accounting data and financial reports,

• Departmental analysis: For large companies and conglomerates, the targets produced by financial planning for each individual department generated by taking into account its own investment finance and cash flow requirements serves as benchmarks of success.

• Scenario Analysis:Theflexibilityoffinancial planning by the use of the capabilities of information technology enables to realize scenario analysis to evaluate the effects of the possible financial and environmental changes on corporate activities in thefuture.

• Short and Long-term Time Frame: The financial plans can be prepared for short (less than 1 year) and long t(more than 1 year term. They can also be prepared as monthly, quarterly and semiannually, each of which are used for control purposes. In the short-term, the basic motivation is to determine the funding needs or surplus and the method to secure or invest the relevant amounts. In thelong run financial planning is used as a strategic tool inordertomaximize the return under different risk estimations.

the following operational and financial data is required for the financial planning process:

• Short and long term profit targets,

• Divisional financial reports,

• Transactions creating cash flow for the divisions and the company,

• Divisional proforma and realized budgets,

• Cost accounting data on product basis,

• Special financial analysis in relation with profitability by product, logistics costs and other expenditure,

• Analysis of security portfolio and subsidiaries,

• Labor productivity reports,

• Internal control reports

The first step of the short-term financial planning is sales forecast which is used to develop production plans.

The sales budget is the core of the overall budgeting efforts within an organization.

• Regression Method: It assumed that there exists a linear relation with sales volume as dependent variable and some predetermined economic factors as independent variables.

• Managerial Assessment Method: In many case it is not easy to determine the independent variables in a regression. In such cases managers who have insight about the dynamics in market place use their own assessments to forecast the future sales targets. Sometimes the managerial assessments are used as a contributor to the regression results.

• Special Purpose Methods: There exist three special purpose methods to analyze the determinants of sales to make more realistic sales forecasts. The first one is industry analysis in which the individual company sales forecast is based on total industry sales. In the product analysis method, the focus is on individual product demand. It is also possible for some special sectors such as component manufacturing to use the forecast of the clients’ demand forecasts and this method is named as latest use method. 

• Combined Methods: It is the most proper approach to combine two or more of the methods mentioned above in order to fully address the company specific factors such as size, structure, suppliers and seasonality etc.

Cash budget is a management plan for the most important factor of a company’s viability — its cash position.

The production volume has to be determined by taking into account the sales budget

The following forecasts and estimations should be made in order to prepare the proforma financial reports:

• Sales, direct materials, direct labor and manufacturing overhead budgets,

• The forecasted sales, management expenses budget,

• Existing funding structure,

• The ownership structure,

• The volume and amount of direct materials,

• The volume and amount of finished products,

• The existing amount of fixed assets,

• The receivables and payables,

• The sales and proceeds,

• Non operating and extraordinary expenses,

• Operating expenses,

• Net profit.

Although there are many different types and methodologies, an accepted router to establish a financial control infrastructure within a company involves the following steps:

1. Analysis of the Initial Situation: The first step is to conduct an exhaustive, reliable and detailed analysis of the financial situation of the firm in terms of cash, profitability, sales, etc.

2. Preparation of Forecasts and Simulations: On the basis of the initial situation analyzed above and the establishment of a set of parameters or indicators, a set of forecasts and simulations of different contexts and scenarios can be prepared. These simulations are immeasurably helpful in making appropriate decisions on such crucial aspects as investments, profitability, changes in production systems, etc.

3. Detection of Deviations in the Basic Financial Statements: The basic financial statements are balance sheet, the profit and loss account and the cash flow statement. The analyses and tests to determine the deviations from the budgeted figures are fundamental part of financial control, since they permit problems, errors and deviations from the ideal situation or initial objectives to be detected early.

4. Correction of Deviations: Financial control would have very little practical use if the proper decisions relating to corrective actions were not taken to get the company accounts on theright track as previously established in the organization’s general objectives.

The sales should contain the following information derived from the market research and sales expectations:

• The alternatives of sale on account credit terms including term and interest and the collection policy ,

• The specific market for each product and service,

• The after sales service and the service providers’ responsibility,

• In the case of new market penetration and product development, the relevant strategies containing the targeted sales volume and its’ effects on the prices,

• The expenditures required to apply the sales budget and funding sources,

• The inflation expectations and pricing policy

The flexibility of financial planning by the use of the capabilities of information technology enables to realize scenario analysis to evaluate the effects of the possible financial and environmental changes on corporate activities in the future. Therefore, the correct option is C.

The financial plans should be realistic but also flexible in order to give future direction to the corporate and serve as benchmark. However, in order to prepare financial plans, some assumptions should be made in relation with the variables including, but not limited to inflation, economic growth, sales growth, foreign exchange rates etc. It is a fact that during the planning horizon those assumptions may fail. The planning process should be designed to be revised periodically to reflect the effects of those changes to the financial plans. The assumptions used may be:

• The effectiveness and length of cash conversion cycle
• The sales and collection policies,
• Capital budgeting techniques,
• The cost of capital and its revisions depending on the financial circumstances,
• Target capital structure,
• The cash dividend policy,
• The tendency to finance the working capital needs by short-term borrowings

Therefore, the correct option is D.

The operational peculiarities of a company and the cost accounting structure determine the coverage and reliability of a financial planning system. The required data mainly includes Breakeven Analysis, Ratio Analysis and the Investment Projects Evaluations. Therefore, the correct option is B

The first dimension of financial planning is the time horizon. There exist two time horizons. Shortterm is specified as maximum 12 months and the long-term which is more critical in the context of planning is said to be 5 years on average. Therefore, the correct option is A.

Long-term (Strategic) Financial Plans: These plans contain the envisaged long term financial activities and they figure out the effects of these activities on the financial position of the company. Although the time frame covered is 2-5 years, 5 year strategic plans which are revised as the new data arrives are used generally. Typically the companies that have higher operational risk and short production cycles prefer shorter term planning horizons. Longer term plans are generally used by the purposes of Research and Development, marketing and new product development, fixed investments and basic financing. These plans are supported by annual budgets and profit plans. Therefore, the correct option is C.

Short-term (Operational) Financial Plans: They consist of the envisaged financial activities and the projected effects of these activities on the financial position of the company. Short term financial plans cover generally 1-2 years and uses the sales forecasts, operational and financial data as inputs. The basic outputs, the operational budgets for divisions, cash budget and proforma financial reports. Therefore, the correct option is C.

There exist three special purpose methods to analyze the determinants of sales to make more realistic sales forecasts. The first one is industry analysis in which the individual company sales forecast is based on total industry sales. In the product analysis method, the focus is on individual product demand. It is also possible for some special sectors such as component manufacturing to use the forecast of the clients’ demand forecasts and this method is named as latest use method. Therefore, the correct option is C.

The production budgets should be prepared in terms of volume of production as paralel to sales budget and in details of product types. It should address the following aspects of production:

• The term of production budget,
• The volume of production to substantiate the sales budget, as well as the required level of inventory,
• The timing of production of each product type,
• The location of production,
• The mandatory activities within the production process,
• The tools to measure the productivity of the production process,
• The plans for labor, machinery and equipments and service requirements,
• The cost figures to determine the cost per unit

Therefore, the correct option is E.

The cash budgets ensure the availability of cash in the required time and in the required amount to with the most favorable funding costs. Additionally, it helps to utilize the cash in the most effective manner. In order to serve for those purposes, the cash budgets should be prepared in short periods, even daily when the cash management is critical. The basic aims to prepare the cash budgets are: 

• To make available the required amount of cash for the realization of planned activities,
• To determine the cash shortfall and/or excess,
• To coordinate the cash management for working capital, sales, liabilities and procurements,
• To define the funding sources when necessary,
• To plan an effective collection policy,
• To stipulate the availability of cash for investments,
• To define the minimum acceptable cash amount,
• To enable the control of cash inflows and outflows.

Therefore, the correct option is A.

In order to prepare the proforma financial reports, the existing financial reports are used as starting point. The following forecasts and estimations should be made in order to prepare the proforma financial reports:

• Sales, direct materials, direct labor and manufacturing overhead budgets,
• The forecasted sales, management expenses budget,
• Existing funding structure,
• The ownership structure,
• The volume and amount of direct materials,
• The volume and amount of finished products,
• The existing amount of fixed assets,
• The receivables and payables,
• The sales and proceeds,
• Non operating and extraordinary expenses,
• Operating expenses,
• Net profit.

Therefore, the correct option is E.