Chapter 6
FINANCIAL PRE PLANNING
Under certain conditions, especially to begin approximations to financial planning it is practical and convenient to first make an estimation of the projected financial states. It is something like a perfectibility analysis to see if we can expect positive or negative results in order to begin our financial planning.
1. GENERAL PROCEDURE
NET SALES
COST OF SOLD MERCHANDISE
GROSS UTILITY
MANAGEMENT EXPENSES
SALES EXPENSES
UAII (profit before taxes)
I (interest)
UAI _____________
NET PROFIT
Knowing the projected state of results of the exercise, concentrate on the new structure of the passive which the same as the best alternative of financial leverage increase by the net utility (if it is a loss, decreased). Remember that the earnings present through a continuous process within all the areas of the company; accounting recognizes them at the close of the accounting exercise.
In accordance with the principle of financial conformity, the equity, plus the utilities projected in the exercise, plus the longterm debt constitutes the compensation of the fixed asset more than the working capital.
C W: 
work capital 
FA: 
fixed asset 
P: 
equity 
LTP: 
long term liability 
PP: 
profits of the period 
2. CALCULATING THE WORK CAPITAL
A. BOX AND BANKS: it is equal to the minimum figure of cash, fixed by managerial politics plus the quantity that is required for an operative cycle.
It is clear that that the suppliers constitute a part of the total cost, for what a proportion should settle down or equivalent in financing terms. Example: if the raw material is equal to 50% of the total cost and the supplier grants a term of 60 days, these are equal to 30 days of reduction in the operative cycle.
B. OPERATIVE CYCLE: is similar to the days of inventory plus the days of accounts to receive less the equivalent days of suppliers. It is required to calculate the daily demands of cash, with bases in the payable expenses.
C. ACCOUNTS TO RECEIVE: the figure is equal to the sale price by the daily units to sell and by the days of accounts to receive.
D. INVENTORIES: break down in raw materials, product inprocess, and finished product. In some companies, it is also required an inventory of reserves and materials.
a. Raw material: it is equal to the cost of the raw material a day of production by the days that are required (to remind practical aspects of handling of inventories).
b. Product in the process: it is equal to the days that are required to elaborate the product multiplied by the number of daily units to take place. The raw material (MP) takes to 100%, the cost of the manpower (MO), and the general expenses of production (GGF) to 50% (added value average).
PP = unit /day multiple by day of process x 100/ MP + 50% MO + 50 % GGF 
c. Finished product: is calculated according to the average of sales by day multiplied by the number of days that the company considers wise to maintain for not losing sales, multiplied by the sale price.
PT = sales/day per day /inv by sale price 
D. OTHER AVERAGE ASSETS: "mattress accounting" to manage the variable part of the average asset and to make the adjustments that are required to complete the projection.
I. Current passives:
a. Suppliers: the figure is extracted from the chosen structure when studying the financial leverage.
b. Short term passive: proceed in the same way as in the previous case.
c. Accounts to pay: it is equal to the figure "mattress", for the adjustments that they are required.
II. Calculating the fixed assets: it is equal to the figure "mattress", for the adjustments that it is required. Calculating the fixed assets, keeping in mind the basic equation of the accounting (assets = liabilities + equity). The figure is established from the difference between the total of the passive + patrimony less than the capital. We can deduce this way the maximum quantity to invest in fixed assets, which is distributed in particular of agreement with the convenience of the business.
III. Principle of financial conformity:
AF = P + Plp – C de T 
AF: 
fixed assets 
P: 
equity 
Plp: 
long terms liabilities 
C de T: 
capital of work 
Knowing the requirements of work capital, the possible investment in fixed assets, and defining the depreciation method to use; the equity, the prospective utilities, and the longterm passives, we proceed to prepare the projected general balance.
The state of results is taken from the matrix that best combines financial and operative leverage. To complete it is recommended to make a projection of flow of funds and a financial analysis under the aspects liquidity, activity, indebtedness, cover and profitability, which is good to detect any anomalous situation with the purpose of making the adjustments that are required, such and like it is illustrated in the following example.
IV. Didactic Exercise
QQQQQ.
The company sells its mixture of products to $12.000/unit ready price and grants the following discounts:
Clients 
Sales % 
Discount % 
net price 
A 
40% 
2% 
0.98 
B 
20% 
3% 
0.97 
C 
30% 
0% 
1.00 
D 
10% 
8% 
0.92 
The time limit of sales is of 90 days, with a cost of capital (debt more patrimony) to the date of 2.5%; the activity throws a rotation of inventories of 120 days. The fixed costs are $ 10´000.000 and some variable costs are handled that represent 55% of the price of ready. The capacity of the plant is of 5.000 units. The fixed costs in cash equal to 80% fixed total.
cost decomposition:
matter cousin 
50% 
labor 
30% 
general expenses 
20% 
Days of inventory: raw material 60 days, products in process 30 days, finished product 30 days.
Calculate of the sale average price: it equals to an average weight, which is obtained multiplying the participation of each type of clients by the net percentage and then affecting the price of the list by the result obtained thus:
(0.40 * 0.98) + (0.20 *0.97) + (0.30 * 1.00) + (0.10 * 0.92) = 97.8%
97.8% x $12.000 = $11.736
Calculation of reviewed sale price: as the company sells to three months, the reviewed sale price is obtained taking to the price average to a present value, with base in the capital cost. The objective is to calculate what we would receive if they paid to us of counted.
reviewed sale price = $10.898
Variable calculation of reviewed cost: variable cost = $12.000 x 55% = 6.600
The reviewed variable cost is obtained taking the variable cost previous to a future value considering the rotation of inventory and the cost of capital.
VP = $7.285 reviewed variable cost
Calculate of the quantities of equilibrium revised: we calculated the contribution margin that represents the margin that is obtained to cover the costs and fixed expenses, to provide therefore profit.
Margin of contribution = reviewed price sale  reviewed variable cost
Margin of contribution = $10.898 – 7.285 = 3.613
Next, the amount of balance calculates reviewed dividing to the fixed costs on the margin of contribution with reviewed sale price and variable cost.
2,767 units are due to produce minimum to obtain the balance point.
With production and sale in a point of balance, have: 

reviewed result statement 

SALES: amount produced and sold * price average of sale: 2.767 * 11736 
32.483.801,76 

VARIABLE COSTS: 55% of the price of the list * produced and sold amount: (12.000*0.55)*2767 
18.267.986,67 

CONTRIBUTION MARGIN 
14.215.815,08 

FIXED COSTS 
10.000.000,00 

UAII 
4.215.815,08 

The Generated profits correspond a: 

The cost of capital 

PRESENT VALUE OF THE SALES: I=2,5% (cost of the capital), n=3 (term of credit 90/30), value future=32.483.801, 76 (value of the production * the price average of sale) 
30.164.439,17 

CAPITAL COST OF THE SALE: future value of the sales less present value of the sales 
2.319.362,58 
2.319.362,58 
FUTURE VALUE OF THE VARIABLE COSTS: I=2.5% (costs of the capital), n = 4 (rotation of inventory 120/30), VP=18.267.986, 67 (variable costs *amount produced and sold) 
20.164.439,17 

COST OF CAPITAL BY STORAGE: future value of the variable costs except for the present value of the variable costs of production. 
1.896.452,50 
1.896.452,50 
UAII 

4.215.815,08 
Note: one is due to consider that in the production level and sale in the balance point only considers capital costs. It is assumed that additional costs by financing do not exist.
E. ALTERNATIVES TO GENERATE PROFITS: the projection facilitates the establishment of alternatives that allow improving the initial situation or of balance. It is important to remember that each one of the alternatives that are identified can be excluding or no, that is to say, are possible to be implemented several alternatives in the simultaneous form (when they are not excluding) or one is due to choose to select the best one, before the impossibility of the simultaneous implementation. In the original exercise raised in the charter Operative Leverage, five alternatives are raised in as "A" he is compatible with the remaining alternatives (B, C, D, and E) reason why it is decided to implement it. The remaining alternatives will have to be evaluated to establish the best one.
2. STRATEGY IMPLEMENTED
ALTERNATIVE "A"
A. CALCULATION OF THE NEW POINT OF BALANCE WITH THE IMPLEMENTATION OF THE ALTERNATIVE "A": for calculate the new point of balance we must identify:
a. Calculations of the new fixed costs: with the implementation of the alternative "A" the fixed costs they are reduced by 15%.
Fixed costs = previous fixed costs * (1  % reduction of the fixed costs)
Fixed costs = 10'000.000 * (1  0,15) = $8'500.000
b. Calculate of the new margin of contribution: it is equal at the cost of sale less variable costs:
Calculation of the reviewed cost of sale: considering the diminution of the cost of capital to 2%, an increase of the production and sale in 5%, and reduction of the fixed costs in a 15%.

c.
Fixed costs = $10'000.000  ($10.000.000 x 15%) = $ 8'500.000 Units to produce and to sell with the new strategy
 Point of balance = 2.767 + 5% = 2.905
 Considering an increase in the production of 5%
 Fixed costs = 10'000.000  15% = $8'500.00
 Considering a diminution of 15% in the fixed costs
B. POINT OF BALANCE WITH THE IMPLEMENTATION OF THE STRATEGY "A"
Fixed costs/Margin of Contribution2,027 units are due to produce minimum not to generate losses.
The company decided to implement the strategy "A", thus we considered its data like part of the basic exposition of the problem.
Next, we presented a matrix in the summary of the different alternatives raised and developed in the exercise. (See Operative Leverage)
ALTERNATIVEA
B
C
D
E
Sales
32.126.395
48.126.395
47.832.895
46.951.690
49.305.395
 Variable C.
(19.945.730)
(33.677.730)
(34.330.000)
(32.304.530)
(34.330.000)
Margin
12.180.665
14.448.665
13.502.895
14.647.160
14.975.395
 Fixed C.
8.500.000
8.500.000
8.500.000
8.500.000
8.500.000
UAII
3.680.665
5.948.665
5.002.895
6.147.160
6.475.395
After a comparison of the results of each one of the alternatives, one determines that the best option is the E.
ALTERNATIVE "E"
 A client is arranged to buy 2,095 units and she pays them to $8,200 of counted. The company is producing 2,905 and as the client wishes 2,095 altogether it would be using the total of the capacity of the plant.

Additional income = 2.095 units x $8.200
= $17'179.000
Income previous period =
2.905 units x $11.059
= $32.126.395
Total of income in sales
= $49.305.395
A. PRICE FOR THE MIXTURE OF SALES:
$49.305.395
5.000
= 9.861/units
ANALYSIS OF THE ALTERNATIVES
STRATEGY "A"
E
Sales
$32.126.395
$49.305.395
 Variable C.
($19.945.730)
($34.330.000)
Margin
$12.180.665
$14.975.395
 Fixed C.
($8'500.000)
($8'500.000)
UAII
$ 3.680.665
$ 6.475.395
a. Days of portfolio average: (sold units on credit / ( units on credit + units of counted )) * term of portfolio
(2.905 / (2.905 + 2.095)) * 90 = 52 days
b. Calculation of the cycle of production of days: days of inventory + days of portfolio average  days supplier
120 + 52  30 = 142 days
The term of the supplier calculates according to the basic information considering that the raw material is equivalent thus to 50%:
60 days * 0,50 = 30 days
c. Calculation of capital of work2. AVAILABLE
A. DAILY PRODUCTION: total production / workable days:
5000 / 300 = 17 unitsB. VALUE OF THE DAILY PRODUCTION: variable costs * produced units:
6.600 * 17 = $112.200
In the exercise, the percentage of the variable costs that are in cash, for practical effects is not specified we suppose that he is 100%.
In cash fixed costs by produced unit.
(Total fixed costs * % effective derogations) / total production
($ 8’500.000 * 0.8)/5.000 = $1.360Value fixed costs daily production:
$1.360 * 17 = $23.120A day of treasury is equal to daily variable costs + daily fixed costs:
$112.200 + $23.120 = $135.320Therefore: day of the treasury by the cycle of production (calculated in days)
$135.320 * 142 = $19’215.440For practical effects, the number comes near: $20.000.000
C. ACCOUNTS TO RECEIVE
a. Calculation of units sold on credit to the day:
Sold units on credit / workable days
2.095 / 300 = 10
b. Calculation of portfolio:
Units comings on credit * price * days of portfolio
10 * $11.059 * 90 = $9´953.100
For practical effects, the number comes near: $10.000.000D. INVENTORIES
a. Value of raw material: 55% of variable costs = $3.300
55% of variable costs * daily production * days of supplier
(6.600 * 55%) * 17 *60 = $3´366.000
b. Value of products in process:MP:
raw material
MO:
manual labor
CV:
variable costs
GG:
general expenses
UD:
daily units to produce
DPP:
day of product in process
Consideration: MP, MO, and GG are taken in percentage according to their participation in the cost decomposition.
c.
Note: in a productive process properly balanced, the general product in process initiating nonliving expenses of manual labor nor expenses of manufacture; when finalizing, it has been the 100% of both headings, which indicates that on average they take 50%.
Value finished product:
Costs several totals * daily production * days average of the supplier
$6.600 * 17 * 30 = $3´366.000
Value Inventory = 1 + 2 + 3 = $9.256.500RETAKING THE BEST ALTERNATIVE OF FINANCING:
 Better alternative of financing: A
MATRIX "A"
Quantity
Cost of
Shares 4000 to $1000
4.000.000,00
0,329
0,16
5,26%
Retained utility
2.000.000,00
0,298
0,08
2,38%
Suppliers
7.000.000,00
0,601
0,28
16,83%
Loan to short t.
8.000.000,00
0,345
0,32
11,04%
Loan to long t.
1.000.000,00
0,268
0,04
1,07%
Labor liabilities
2.000.000,00
0,127
0,08
1,02%
Bonds
1.000.000,00
0,268
0,04
1,07%
Total
25.000.000,00
1,00
38,68
Number of shares
4.000,00
UPA
477,59
Interests
3.549.244,24
CURRENT ASSETS
AVAILABLE$20'000.000
PORTFOLIO
$10'000.000
INVENTORIES
9´256.500
TOTAL =
$39'256.500
A. FINANCING SOURCES
LONG TERM LIABILITIES + PATRIMONYThe company does not have discountable current liabilities because the short term liabilities are a renovation of a line of permanent credit, turning liabilities in the long term.
Liabilities of short term + liabilities of long term + liabilities labored + bonds + shares + retained utilities
8´000.000 +1´000.000 + 2´000.000 + 1´000.000 + 4´000.000 + 2´000.000 = $18´000.000B. NECESSITIES OF CURRENT ASSETS
Current assets  suppliers = $39´256.500  7´000.000 = $32'256.500C. AVAILABILITY FOR INVESTMENT IN FIXED ASSETS
Passive total of long term  necessities of current assets
SOURCE OF FINANCING LT$18'000.000
ACT. CURRENT NECESSITIES
$35'256.500
INVESTMENT DISPOSITION =
$14'256.500
The company requires capitalization since it does not have the resources necessary to cover his necessities.
ALTERNATIVES TO IMPROVE THE FINANCIAL SITUATION OF THE COMPANY AND TO FINANCE THE INVESTMENT OF FIXED ASSETS
a. To lower the term of sale: to lower to 30 days the rotation of portfolio soon and a discount by payment of 10%. One hope that 50% of the client take refuge in the discount and 50% no.
b. After a market study one settles down that the sale price can be raised in a 10% without affecting the neither variable costs.
c. To rise to the days supplier 75.A. CALCULATION OF THE NEW SALE PRICE
Client Type Discount
Average
50%
10%
5%
50%
0%
0%
price of sale
95%
Total price including the policy of discounts
Price of list * sale price with policy of discount:
$12.000 * 95% = 11.400
Price readjusted with the increment of 10%
New price + increase of 10%:
$11.400 + 10% = $12.540
Present value: $12.234
($12.540, 2.5%, 1 months)
B. CALCULATION OF SALESCalculate of Sales Price
Units
Sales
Counted
9.020,00
2.095,00
18.896.900
With discount
12.234,15
2.905,00
35.540.195
Total sales
54.437.095
Elaboration of the new earnings statement
Sales54.437.095
Variable costs
(33.000.000)
Fixed costs
(8.500.000)
UAII
12.937.095
Interests
(3.549.244)
UAI
9.387.851
Taxes
(2.760.748)
Net Utility
6.627.103
Another calculus the values of portfolio and accounts to pay for the elaboration of the general balance sheet and deduction of the new financial structure.
a. With the change of the strategy of financing the term of sale passage of 90 days to 60 days.
50% of the clients buy to 30 days30/2 = 15
+
Other 50% buy to 90 days
90/2 = 45
Total:
60
b. When changing the term of sale changes to the days portfolio.
(Number of units on credit / total units) *time of sale
(2905/5000) * 60 = 35
c. Consequently to the change of the days portfolio it changes the cycle of production:
Days inventory + days portfolio  days suppliers
120 + 35  75 = 80
WE COME TO CALCULATE THE NEW WORK CAPITAL:
Available:
Daily production: annual production / working days = 5.000 / 300 = 17 unities
Value daily production: daily production * variable costs = 17 * 6.600 = $112.200New value day treasury:
D.F. costs * daily production + value daily production =
(1.360 * 17) + 112.200 =135.320
New value day available:
day treasury * productive cycle =
135.320 * 80 = $10.825.600
a comes near $10.800.000.oo
Accounts to receive:
Sales on credit daily: sold units on credit / working days = 2.905 / 300 = 10
Value Portfolio average:sales on credit daily * sale price* term of sale
10 * 12.540 * 60 = 7.500.000
The value of the inventories: it remains equal = $9.256.500.oo
NEW CAPITAL VALUE OF WORK
AVAILABLE10.800.000
PORTFOLIO
7.500.000
INVENTORIES
9.256.500
TOTAL
27.556.500
NEW FINANCIAL STRUCTURE
Quantity
Cost of Capital
Percentage
C.C. Weighed
Shares 4000 to $1000
4.000.000,oo
0,329
0,126474
4,16%
Utility of the Period
6.627.103,oo
0,298
0,209539
6.24%
Retained utility
2.000.000,oo
0,298
0,063237
1,88%
Suppliers
7.000.000,oo
0,601
0,221329
13,30%
Loan to s t.
8.000.000,oo
0,345
0,252948
8.73%
Loan to l.t.
1.000.000,oo
0,268
0,031618
0,85%
Labor liabilities
2.000.000,oo
0,127
0,063237
0,80%
Bonds
1.000.000,oo
0,268
0,031618
0,85%
TOTAL
31.627.103,oo
1
36.81%
Number of shares
4.000,00
Interests
3.549.244,24
Total
FINANCING SOURCES
a. Liabilities of short term + liabilities of long term + labor liabilities + bonds + shares + retained utilities + Utilities of the period =
 8´000.000 +1´000.000 + 2´000.000 + 1´000.000 + 4´000.000 + 2´000.000 + 6.627.103 = $24.627.103
b. Necessities of the current assets =
 Current assets  suppliers = $27´556.500  7´000.000 =
 $20´256.500
c. Availability for investment in fixed assets:
 Passive total of long term  necessities of current assets
SOURCE OF FINANCING LT24'627.103
ACT. C. NECESSITIES
(20'256.500)
INVESTMENT DISPOSITION =
4.370.603
The company requires capitalization since it does not have the resources necessary to cover his necessities in new fixed assets that they are appraised in value of $5.000.000.
The necessary capitalization is of (5.000.000  4.370.603 = 629,397) approximately 700,000, as several viable strategies in the market were used and already combined is necessary to recur to the partners for the contribution of this one value.
FINAL FINANCIAL STRUCTUREQuantity
Cost of Capital
Percentage
C.C. Weighed
Shares 4700 to $1000
4.700.000,00
0,329
0,153813
0,050605
Utility of the Period
6.627.103,00
0,298
0,216880
0,064630
Retained utility
2.000.000,00
0,298
0,065453
0,019505
Suppliers
5.229.397,00
0,601
0,171139
0,10285
Loan to short t.
8.000.000,00
0,345
0,261810
0,090324
Loan to long t.
1.000.000,00
0,268
0,032726
0,008771
Labor liabilities
2.000.000,00
0,127
0,065453
0,008312
Bonds
1.000.000,00
0,268
0,032726
0,008771
TOTAL
30.556.500,oo
1
0,353772
Number of shares
4.700,00
Interests
3.549.244,24
Once collected the previous data we can develop the General Balance sheet Projected.
ASSETSLIABILITIES
Available
10.800.000
current liabilities
5.229.397
Portfolio
7.500.000
liabilities to s t. (line of credit)
8.000.000
Inventory
9.256.500
liabilities to l t.
4.000.000
Fixed assets
5.000.000
capital
4.700.000
Deprecation period (accelerated 40%)
(2.000.000)
retained utility
2.000.000
Net Fixed assets
3.000.000
utility of the exercise
6.627.103
TOTAL PATRIMONY
13.327.103
TOTAL ASSETS
30.556.500
PASSIVE TOTAL + PATRIMONY
30.556.500