Financial Planning and Analysis Report: Tools, Techniques, and Ratios

This report delves into the significance of financial planning, outlining essential tools like business plans, budgets, and break-even analysis. It explores the application of Activity-Based Costing (ABC) and its organizational characteristics, along with potential challenges in its implementation. The report further details the components of a master budget and highlights the importance of financial planning and controls. It differentiates between capital structure and financial structure, and presents a balance sheet and income statement for Steve & Mary Jo. Finally, it provides a comprehensive ratio analysis of their business, offering insights into current ratio, quick assets, savings ratio, net profit to turnover ratio, and debt-equity ratio. The analysis is supported by relevant references.

Running Head: Importance of Financial Planning
FINANCIAL PLANNING

Importance of Financial Planning 1
Table of Contents
Answer 1................................................................................................................................................2
Main Tools of financial planning...................................................................................................2
Answer 2................................................................................................................................................2
Organisation’s characteristics which makes ABC useful................................................................2
Problems that may cause an organisation abandon ABC..............................................................3
Answer 3................................................................................................................................................3
Components of Master Budget......................................................................................................3
Importance of financial planning and controls..............................................................................4
Answer 4................................................................................................................................................4
Differences between Capital Structure and Financial Structure....................................................4
Answer 5................................................................................................................................................5
Balance sheet of Steve & Mary Jo..................................................................................................5
Answer 6................................................................................................................................................8
Income Statement of Steve & Mary Jo..........................................................................................8
Answer 7................................................................................................................................................9
Ratio Analysis of Business of Steve & Mary...................................................................................9
References...........................................................................................................................................12

Importance of Financial Planning 2
Answer 1
Main Tools of financial planning
 Business Plan: it is important as it covers all the important aspects of business like
SWOT analysis of business as well as it summarises the entire business idea to be
undertake.
 Budgets and forecasts: Budgets enables the managers to identify the key areas where
it will have to invest money and in how much quantum so as to operate successfully.
Budgets are prepared to anticipate the revenues and expenditures of any business.
 Break-even Analysis: This helps in determining the level of output firm must produce
to cover the overall cost of business so that it would not have to suffer any financial
losses.
 Financial statements: financial planning involves the consideration of every important
aspect of any business like its assets, liabilities, profits, losses. Financial statements
includes all the aspects and hence can be used for future analysis (Higgins, 2012).
Answer 2
Organisation’s characteristics which makes ABC useful
 Cost structure: ABC technique is used in the organisation where the overheads holds
the major portion of the total costs of the business.
 Product range and diversity: if the firm is producing a large range of products use of
ABC technique is important as with higher number of products the cost analysis gets
complicated. If the customer base of an organisation is wide enough ABC must be
used as it offers the customer profitability analysis.
 Environment in which the organisation operates: organisations which operate in the
highly competitive environment have higher need of accurate cost information which
is provided by the ABC techniques (Briciu & Capusneanu, 2010).

Importance of Financial Planning 3
Problems that may cause an organisation abandon ABC
 High cost of implementation and time consuming: The managers using the ABC may
require adequate amount of training to understand the technique. As ABC involves
identification and classification of cost among different cost drivers it gets time
consuming.
 Employee Resistance: As ABC is an advanced and new technique of cost
management, the employees may resist the change in the methods of cost
management.
 Complex implementation: As identification of cost drivers for each and every activity
is difficult the managers may find implementation of ABC cumbersome.
Answer 3
Components of Master Budget
 Sales budget: It is the basic component of master budget. It shows the expected
number of units to be sold and the expected selling price per unit (Bloch, Blumberg &
Laartz, 2012).
 Production budget: It determines the number of units that must be manufactured by
the firm after considering the demand forecast and the available inventory of finished
goods.
 Revenue and Expense Budget: These budgets shows the anticipated incomes a firm
can have during the budgeted periods and the possible expenses it will have to incur
in its operations.
 Materials Budget: It represents the material that is required to be purchased so as to
fulfil the production budget’s requirement.
 Cash budget: It anticipates the amount of cash to be received and disbursed during the
budget period.

Importance of Financial Planning 4
 Capital expenditure Budget: It estimates the amount of long term investments to be
made by the firm in arranging for the new plant and machineries or for repairs and
renovation thereupon (Cox, 2010).
Importance of financial planning and controls
 Management of optimum funds: Financial planning facilitates the proper
management of funds thereby avoiding the wastage of excessive funds and to prevent
the situations of over capitalisation (Fridson & Alvarez, 2011).
 Deciding the capital structure of business: Financial planning enables a firm in
selecting the appropriate sources of funds so as to avoid heavy cost of raising the
funds.
 Effective and efficient utilisation of funds: Finance is the most important part in
business and financial planning helps in arranging the right amount of funds at the
right time.
 Avoidance of sudden business shocks: Financial planning involves the anticipation of
financial requirements as it considers the potential risk and uncertainties involved in
the business.
 Selection of right projects for investment: Financial planning helps the managers in
analysing the projects and its alternative plans by examining the risk and rewards of
all the potential investments in order to enable them to select the best suitable
investment option (Alviniussen & Jankensgard, 2015).
Answer 4
Differences between Capital Structure and Financial Structure
Basis Capital Structure Financial Structure
Meaning Capital structure comprises
of Long term finance
sources.
Financial structure
comprises not only long
term sources of finance but

Importance of Financial Planning 5
also short term sources.
Base The base for the capital
structure is the financial
structure.
Financial structure of a
company is based on its
nature & size of business,
type of business, firm’s
ability to generate cash etc.
Components Share capital: Equity and
Preference,
Long term Debt:
Debentures and other long
term borrowings
retained earnings etc.
All the components of
capital structure along with
short term borrowings,
accounts payables etc.
Scope Scope of capital structure is
narrower than the financial
structure.
Financial structure of a
company includes its capital
structure. Hence, it has a
wider scope.
Answer 5
Balance sheet of Steve & Mary Jo
Balance Sheet of Steve & Mary Jo
As on The Date...
Assets $ $ $
Current Assets
Cash & Bank Balance 17440.00
Monetary Assets 5000.00

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Total Current Assets 22440.00
Non-Current Assets
House Property 150000.00
Vehicles – Cars 20000.00
Furniture 10000.00
Total Non-Current Assets 180000.00
(i) Total Assets 202440.00
Liabilities
Current Liabilities
Credit Card Bills 1000.00
Trade Payables 150.00 1150.00
Non-Current Liabilities
Car Loan 10000.00
Education Loan 20000.00
House Property Loan 100000.00
Total Non-Current Liabilities 130000.00
(ii) Total Liabilities 131150.00
Net Assets (A) 71290.00
Equity
Capital 71290.00
Total Equity (B) 71290.00
Note : Due to lack of information the opening capital is to be treated as balancing figure for
calculation of net worth and income during the year is taken as Cash & Bank balance for the
year
Steve & Mary Jo's Capital A/c
Particulars Amount Particulars Amount
Drawings A/c 5000.00 By Balance B/F 55,750.00
To Balance C/F 71,290.00 By Profit for the Year 20,540.00

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76,290.00 76,290.00

Importance of Financial Planning 8
Answer 6
Income Statement of Steve & Mary Jo
Income Statement of Steve & Mary Jo
For the Year End…
Particular
s Amount ($)
Operating Revenue
Revenue from Business 50000.00
Other Operating Revenue 0.00
Total Revenue 50000.00
Cost of Sales 0.00
Gross profit 50000.00
Less Expenses
Charity 6000.00
Utility & Property Tax 2270.00
Food Expenses 6000.00
Insurance Charges 1500.00
Other Expenses 5430.00
Earnings before Interest & Tax 28800.00
Financing Cost (Interest)
4,63
0.00
Earnings after Interest before Tax 24170.00
Less Income Tax Expense 3630.00
Earnings after Tax 20540.00
Working Note:
Computation of Finance Cost
Particulars Amount ($)
By Interest on 6%
Mortgage 3,730.00
By Interest on 7%
Auto Loan 740.00
By Interest on 3%
Education Loan 160.00
Total 4,630.00

Importance of Financial Planning 9
Answer 7
Ratio Analysis of Business of Steve & Mary
 CURRENT RATIO:
Current Ratio is the ratio which shows whether the company would be able to meet its short
term liabilities normally within one year with its current assets. The current ratio of Steve &
Mary clearly tells that it’s much above the acceptable level but a better current ratio cannot
assure of a safer financial condition but other financial indications should also be considered.
This ratio indicates the how quickly and smoothly a company can pay off its current
liabilities using the cash or near cash items such as marketable securities and receivables of
accounts. The quick ratio of Steve & Mary which is greater than 1 which is considered as
ideal ratio but the same should not be considered as sole indicator but several other factors
should also be considered.
Quick Ratio = Liquid Assets $17440
Current Liabilities $1150
=15.17 Times
Current Ratio = Current Assets $22440
Current Liabilities $1150
=19.51 Times
 QUICK ASSETS:

Importance of Financial Planning 10
 SAVINGS RATIO
This ratio implies the dollar saved to earnings after tax. As in the current case the ratio is 40% it implies
business managers have saved 40% of profit after tax.
SAVINGS RATIO Annual Savings $8216
Earnings After Tax $20540
=40%
Assumption:
It is assumed that 40% of the total profit after tax have been saved by Steve and Mary and the
remaining profit have been used by them for business purpose.
 NET PROFIT TO TURNOVER RATIO
In order to comment on the overall profitability of the Steve & Mary it is important to make
some comparisons with either previous years or industry norms or what percentages have
been decided in the pre budgets at the beginning of the year. Therefore, it is prima facie that
Steve & Mary are doing well but it’s very difficult to interpret the overall profitability of the
business without proper comparisons.
Net Profit To
Turnover Ratio
Net Profit $20540
Turnover $50000
=41.08%
 DEBT EQUITY RATIO:
The firm’s financial leverage is measured through Debt Equity Ratio. It shows how much
debt is used by Steve and Mary to finance its debt in ratio of the value in firm's total equity
which also includes debt. It is quiet visible that the Steve & Mary have satisfactory debt

Importance of Financial Planning 11
equity ratio which means they have relied more on external sources of finance than the
internal sources such as retained earnings and equity capital.
Debt Equity Ratio Total Debt $131150
Equity $71290
=1.84 Times

Importance of Financial Planning 12
References
Alviniussen, A. and Jankensgard, H., 2015. Enterprise risk budgeting: bringing risk
management into the financial planning process.
Briciu, S. and Capusneanu, S., 2010. Effective cost analysis tools of the Activity-Based
Costing (ABC) method. Annales Universitatis Apulensis: Series Oeconomica, 12(1), p.25.
Bloch, M., Blumberg, S. and Laartz, J., 2012. Delivering large-scale IT projects on time, on
budget, and on value. Harvard Business Review.
Cox, P., 2010. The Master Budget project: detailed analysis. Strategic Finance, 92(4), pp.62-
64.
Higgins, R.C., 2012. Analysis for financial management. McGraw-Hill/Irwin.
Fridson, M.S. and Alvarez, F., 2011. Financial statement analysis: a practitioner's
guide (Vol. 597). John Wiley & Sons.

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