6.

Planning of gaining profit

Planning of gaining profit represents important segment of financial planning, because of its importance for each and every financial decision. So, influence of financial decision on firms profit represents one of key criterias of efficiency of financial decision. Planning of balance components, precisely cash flows cant be complete without planning of profit. Critical variable in planning of profit is planning of sail processes. Financial manager usually takes planed sales, from marketing manager, and uses it as main variable while planning the variable cost of sold products and services. Financial manager plans other revenues, like: revenues from interests (out of market of bonds), and also operative costs, interest based on liabilities, amortization and other expenses that can occur during certain time period. By observed revenues and expenses, financial manager can calculate taxes and calculate planed net gain (profit) of the firm. Expenses of interest based on liabilities and received income of interest on market of bonds can be realistically predicted assuming that financial manager knows interest on liabilities and bonds. However, expenses of interests on new liabilities and income of interest on new bonds cannot be exactly planed unless future flow of capital or other relevant components of balance is predicted. New financial debts and monetary assets meant for investment are important components of financial planning.

Planned income statement

Chart 1 Year 1 Year 2 Year 3 Planning for year 4 1200 720 480 174 306 20 50 276 110 166

Income from sale Expeces of sold goods Bruto profit Operative expences Operative profit Other incomes Expeces of interests Profit befor taxation Taxes Pure gain (profit)

800 480 320 100 220 10 40 190 82 108

1000 600 400 120 280 4 64 220 91 129

1000 600 400 145 255 20 50 225 90 135

Planning of components of income statement for January, Year 4

Table 2a

Income from sale Expeces of sold goods BRUTO PROFIT Operative expences Operative income Other incomes Expeces from interest Profit before taxation Taxes Pure gain (profit)

100 60 40 15 25 1 -4 22 9 13

Balance sheet for December, year 3, and planned components of income for January, year 4

Ledger balance sheet on 31st December, Year 3 Table 2. ASSETS Cash Bonds Recivables Supplies CURRENT ASSETS Equipment TOTAL LIABILITES Liabilites Taxes Dividends Interst Current maturities CURRENT LIABILITIES Long-term liabilities Pure value TOTAL

20 100 180 230 530 420 950 35 28 22 18 40 143 360 447 950

7. Planning of cash flows

To precisely plan cash flow in a firm, you need current balance sheet, and component of planed profit. We are going to show you an example of planed cash flow for January of year 4, using planning of component of profit from table 1. Table 2 shows us balance sheet of firm at the end of December of year 3 and planed income component for January ( which is nearly 1/12 planed for entire business year, expressed in table1.) Table 3 shows planning of cash flows for January of year 4, and everything is based on the next assumptions: 1. 60% of leftover claims in December will be charged in January, during which 10% of January sales will be realized in cash 2. other cash receivables, majorly interest on bonds, represents amount which is stated in planning of profit component for January, 3. All other liability components, leftover in December, will be paid in January. Sales in January (which will be paid in February) is expected to amount BAM 33.000) 4. Paid salaries to employee are based on production plan in January. Salaries are 40% of sold product expenses, 5. Operative costs are shown in planning of profit component. All operative cost, for this firm, represents cash expenditures, 6. Expenditures for equipment are planned ahead. This costs are planned for January, in amount of BAM 30.000, 7. Quarterly payments are carried out based on taxes on realized income. Taxes at the end of December, will be payed in January, 8. Payments based on interest and principal amount, on long-term liabilities for January, 9. Dividends are payed out quarterly. Dividends are published in December and are shown in balance sheet. Payment of dividends will be realized in January, 10. Available cash out of bonds is amount of bonds stated in balance sheet at the end of December. Firm will hold minimal amount of cash, and extra cash is invested in bonds which can be easily converted in to money on financial market 11. Capital which is currently available (and needed) is equal to strait cash inflow increased by cash available from bonds. PLANING OF CASH FLOW FOR JANUARY, YEAR 4

Table 3. INCOME Billing Sail for cash Other income TOTAL INCOME Payment to suppliers Sallaries Operative expences Equipment Payment of taxes Payment - long -term liabilities Dividends Total expences Pure cash flow Available cash - bonds Available capital

108 (60 % out of 180 KM) 10 (10% out of 100 KM) 1 (Planned income for January 119 35 24 15 30 28 0 22 154 -35 100 65 (Accounts of Decembar debts) (40% out of 60 KM) (Planing of income for January (Planned) (Occures because of tax debt from Decembar (Doesn't occure) (Dividend debt from December) (Total income - total expences) Accounting balance sheet for December

8. Planning of balance sheet

During financial planning of balance sheet, planed balance sheet is used bought for short-term (in one year frame) and long-term (over one year) planning. Short-term planning usually includes planning of cash flow, and also planning of balance sheet, and profit component. In process of that kind of planning ordinary procedure is shown in direct planning of profit component from which financial planning of cash flow is developed. Balance sheet is put together by using planed profit component, and planed cash flow (together with current ledger balance sheet). Long-term planning uses planed balance sheet, profit component, but not the cash flow. Later on form of balance sheet will be presented, based on planed cash flow, using tables 2 and 3. 8.1. Additional planning of balance sheet According to last component of profit, and planed cash flow, in certain period of time developing of planed balance sheet for the end of given period of time, is more of trouble of calculation than it is of planning. Additional planning of balance sheet must be based on assumptions and evaluations used in process of planning component of gain and cash flow, or else, balance sheet will be inconsistent with other planings. General procedure that is being used in planning of balance sheet components is: Final balance sheet (planed) = opening balance sheet ( known) + inflow (planned) outflow (planed). Financial manager takes current component value ( opening balance sheet) and ads pure difference take out to component of gain (profit) and cash flow (inflow-outflow) so it gets the planed value for the end of time period ( final balance sheet). For e.g, receivables are foreseen as:

Final components of receivables = opening components of receivables + selling with the given loan in the frames of our time period billing in our time period. Planed balance sheet for 31st of January in year4 and source of data used for putting it together, are shown in the table no. 4. If all calculations are correct and consistent (with the planed component of gain (profit) and cash flows), balance sheet will be balanced. Table 4. ASSETS Cash Bonds Recivables Supplies CURRENT ASSETS Equipment TOTAL LIABILITES Liabilites Taxes Dividends Interst Current maturities CURRENT LIABILITIES Long-term liabilities Pure value TOTAL

20 65 162 230 477 477 924 33 9 0 22 40 104 360 460 924

Cash amounts the same as in December (minimal balance). Bonds represent value of planning of cash flow capital available cash. Receivables represent balance in December: KM 180 + January sale with the loan amounting KM 90 collection of KM 108. Supplies balance in December KM 230 + production KM 60 cost of sold goods KM 60. Equipment balance in December KM 420 + expense KM 30 amortization KM 3. Components of in debt January sale. Taxes January taxes. Dividends payment from January Interest balance in December KM 18 + interests in January KM 4 Current maturities there are no shown changes.

Pure value balance in December KM 447 + retained earnings KM 13 8.2 Primary planning of balance sheet Planed balance sheet can also be primary method of planning needed and available cash funds. This method of planning balance sheet is frequently used with long - term planning, with which there is no planning of cash flow. In this case component of gain (profit) is planned for each next period, and individual components of balance sheet are directly predicted. Balance sheet balance is accomplished by adding needed cash capital or assets. So, financial manager observes total assets and liabilities (including shares) so that the balance sheet would be as realistic as possible. Total assets must be equal with total liabilities, increased by shares. If planed assets are lower than liabilities increased by shares, than firm must have aditional assets (available cash assets), so the balance can be accomplished. Similar to that, if liabilities increased by shares are lower than total assets, than balance is made by increasing liabilities (requested cash). Let us assume that we want to plan balance sheet of the firm on December 31st, year 4, using planed component of gain (profit) from table 1. We will be using percentage of sale type of approach, on most of the balance sheet components on December 31st, year 3 (out of table 2), and percentage of sale in year 3. To develop planning of balance sheet on 31st December, year 4, this percentages are applied for planning of sale ( KM 1.00), for year 4. This planning and usage of percentages is shown in table 5. Component that shows bonds is being used for balancing components on the side of balance sheet which consist assets, and requested cash us used for balancing liabilities in balance sheet. PLANED BALANCE SHEET FOR DECEMBAR IN 4th YEAR Table 5. Sail in year 3 1000 KM Predicted sail in year 4: 1200 KM 31.12.2002 Percentage Planing of sail 31.12. year 4

ASSETS Cash Bonds Recivables Supplies CURRENT ASSETS Equipment TOTAL LIABILITES Required cash Liabilites Taxes Dividends Interst

20 100 180 230 530 420 950 20 35 28 22 18

2% X 18 23 42

24 0 216 276 516 504 1020 2 42 33,6 26,4 21,6

X 3,5 2,8 2,2 1,8

Current maturities CURRENT LIABILITIES Long-term liabilities Pure value TOTAL

40 143 360 447 950

40 163,6 320 536,4 1020

Y 44,7

PLANING OF CAPITAL INVESTMENTS 1. STRATEGIC SIGNIFICANCE OF INVESTMENT DECISIONS

Investments represent reallocation of resources, and so the process of investment can be seen on macro and micro level. Macroeconomic investment policy represents managing investments on national level and represents analysis and decision making of complete national investments as elements of macroeconomic policy. Microeconomic investment policy some investment projects are chosen and determined and there execution and preparation are being preserved. It is possible to talk about sector investment policy, with which investment strategies for certain sectors are decided upon, just like measures of sector investment policy. You can say that firm has basic role in development of modern world and that whole materialistic and spiritual development of modern civilization is tied to firms. In other words, socially economic development gets its operative form on the firms level. Tempo and quality of that development is in correspondence with running and development of the firm itself. Taking this under consideration, just like the purpose of this work, we will observe investments from firms aspect, micro-level that is of capital investments. Under term investment, in the broadest possible sense, most often is considered investment in fixed and current funds, and investing is considered as process of optimal and intertemporal allocation of resources. Capital investment involves relatively big expenses in present for which is realistically to expect to generate cash flows in the future, during period longer than one year. So investments can be easily defined as investment in present with the goal of realizing effects in the future. Investment, as larger resource procurement, in long term asks for different paying consequences, in form payingbilling in longer period of time. Besides this, traditional approach of defining investment processes, capita investments can be observed from the aspect of usage of favorable business opportunities. In that case investment should be understood as process of investment of capital in firm with intention of creating favorable business opportunities, which will be used and transformed in profit. Investment in research and development can lead, for example, to patents and new technologies which create those opportunities. Commercialization of patents and technologies, by developing new plants and

expenses for marketing, can made possible for firms to take advantage of favorable profit opportunities. From aspect of favorable business opportunities, making of investment decision is process of choice between two or more possibilities, and the decision itself represents outcome of that choice. Risk in this case, is not only consequence of not knowing all possible alternatives, like impossibility to calculate all consequences chosen action directives. Even thou there is a large number of definitions of investments, we can say that common characteristics of all capital investments are : investing is investment of assets, that is postponement of current spending, with one goal, to achieve future inflow, which will be enough to compensate: 1. Time for which the invested assets were immobile, 2. Expected inflation rate and 3. To take risk Investments represent basic lever of growth and development of firm, but also society in whole. In other words, investments are based upon assumptions of advancement, but also maintenance of current level of development. So you can say that investing in basics, symbolizes current vitality and expected success of investor. Because, investments are basic lever of development, firm can be observed as portfolio of investment projects. In that case basic assumptions of portfolio theory are complementary to goals of long-term development. Long-term development is continuous process with permanent goal of increasing firm owners assets. From aspect of portfolio theory, development considers continuous rebalancing of portfolio (investment projects), with the goal of maximizing values of firm owner property, with certain level of risk. However, every investment doesn't always bring profit. In case that expected returns cannot compensate invested assets, in that case we talk about failed investments. From investors aspect, but also national economy in whole, that kind of investment is considered as pure loss. In other words, fail in development and investments are always hard and long-term. Investment are not consider as positive effects ,that is growth and development. Investment gives just realistic base for future effects to be achieved. So investment should be observed only as potential energy. How long will that energy be put into use, that is, how big results will achieve, it depends on efficiency of investment. In other words, will positive effects of investment be accomplished, depends on sting of economic and technical conditions, quality and quantity of production, expenses of production, state of market, invested funds etc. Process of economic growth and development is inseparable of investments. Yet, every development decision isnt investment decision. Only development decisions which consider spending of capital can be considered investment decisions. Even thou risk and uncertainty is always present (Paul A. Samuelson), it is imminent in investment decisions. In the definition itself it is consisted implicitly term of uncertainty and risk, considering that future time is consisting part of that definition. Risk of failed investments isn't always possible to completely avoid, so, it is with the goal of proper evaluation of investment, necessary conduct analysis of risk and uncertainty.

Considering this it can be said that investment activity is most certainly one of most important economic activities, and investment decisions most important and probably most difficult decisions with which investors have to face. By initiation of actions in present, investment should improve strategic position of firm in the future. So investment decisions have strategic character. We are going to mention some of the moments that go in favor of that: In making of investment decision, it is usually a large sum of money that should be invested in some investment project Investments decision effects are ones that you can sense throughout the longer period, in years Mistakes in investment decisions cannot be removed (irreversibility of investment) or, in best case scenario it cannot be removed in short period of time and without expenses, Investment decision presents setting the business plan of firms for couple of next years Investments determine direction of development of enterprises And, most importantly, investment decisions involve great uncertainty Investment decisions, like any other decisions should be studied from aspects of more criterias before decision is made. With emphasis on evaluation of probability and balance between risk and profit.

2. TYPES OF INVESTMENTS
Different forms of capital investments demand different approach, different types of analysis. Larger projects consider deeper and stricter analysis and evaluation contrary to smaller investments. It is necessary to explain some types of investments. Besides, it is of big importance that different types of investment determine liquidity of assets of firm, level of risk, sources of financing and affects result of doing business and development of firm. Investments can be classified from different aspects. However, there is no ideal and general calcification of capital investments. Without pretention to consider all types of investment we will try to point out most important types of investments from liquidity aspect, safety and efficiency. Depending on which form of assets is being invested in, we can divide investment on: Financial Real Financial investments represent investment in claims by which financial assets of firm is created. Characteristic of every financial investment in a firm is yield (fixed or variable), which attracts investors to get into process of financial investment. Amount of financial investment represent financial suficit which is developed as sufficit of money assets over investments in fixed assets and supplies of firm. Financial asset represent most liquid type of assets in one firm. That means that firm can transform investment with long term into liquid, monetary type of assets (by selling it on the financial market). Financial investments can be:

Money (deposit money and cash) Loan (long term, and short term) Deposits (bank deposits) Securities ( bonds, shares, commercial records etc.) Money represents most liquid type of financial investment. However, it is the least profitable type of financial investments. Financial investments in the shape of bank deposits represent high degree of security, with fixed compensations. However, deposits in business banks have insufficient degree of flexibilities in term of adjustment to newly developed situation of investors. Loans represent profitable and relatively flexible type of financial investments. They can completely adapt to assets, in terms of deadline and security of their returns. Securities represent most favorable type of financial investments. Investments in securities are profitable and liquid type of financial investments. Every company tries to give optimal structure of financial investments. Because firm can be observed as portfolio of investment projects, it can be said that firm seeks to optimal portfolio of financial assets, which will give maximum income, with given minimum level of risk and satisfying level of liquidity. Real investments consider investment in material assets. Unlike financial investments, with which income is consequence of holding financial assets, with investment in real assets. Real investments consider, besides investment in fixed assets, investment in net tangible capital of firm needed for business activities. While a financial asset is characterized by high degree of liquidity, investments in real goods are irreversible. Estimated value of investment in real goods represents complex process unlike valuation of financial investments. With aspect of goal, that is motive that's been tried to accomplish by investing, investment projects can be divided on: New investments Investments of replacement Investments of reconstruction and modernization Investments with the goal of removal of bottleneck situation Investments of product circling of capacities Investment with the goal of setting new, efficient organization of running business Other investments ( investment in goodwill, research-development projects, propaganda campaigns, investment in education and work force etc.)

New investments are mostly considered projects for construction of brand new section or entire factory. This projects consider great investments, and demand deeper analysis. In theory investments replacement of fixed assets is covered as special type of investment, which represents investments that are being done for replacement of some fixed assets because next two reasons: 1. Physical deterioration and dilapidation and

2. Economic obsolescence In practice this is very common form of investment. Regarding reasons for replacement, it should be noted that the physical deterioration is less common reason, while economic obsolescence is more common reason for replacement. Because of that this form of investment approaches by its consequences to the new forms of investment. For this form of investment it is important that their goal can be: only maintenance of production capacities, maintenance of current business volume, lowering costs and replacement with the goal of expansion. From investment in simple replacement (maintenance of production capacities) is not expected to impact improvement of running business, so it is often looked at as bad necessity. Old assets still are most likely replaced with more productive and economic assets, which means that replacement actually represents more economic, productive and efficient running of business in a firm. As object of replacement most likely it is equipment. Replacement of other assets occurs less. This investments requires smaller assets, you approach it without analysis or observations different possibilities of replacement. Thant kind of approach can have negative consequences on succesfull running business of the firm, so it is necessary to analyze need and possibilities of replacement, consider more variants and then decide about replacement. Reconstructions and modernization Between replacement of fixed assets and reconstruction and modernization there is very important common characteristic. In both cases, we replace old assets with new one, and consequences are pretty much the same. In both cases, obsolete assets are being modernized, or reconstruction or replacement. So when we look at it from that perspective it's going to be really hard to set the boundaries between replacement, and modernization and reconstruction. So the difference should be seeked by observation from different side: from aspect of the goal that we want to achieve with that kind of investment. So that you can say that replacement is process that is being done with the goal of maintaining production ability of a firm, and that increasing of production level, enlargement of products produced, larger ratability, modernization, and improvement of product quality etc. are being done on the way, because they are consequence of production ability of newly planted equipment or other assets. On the other side, for reconstruction and modernization we can say that are being done with the goal of promotion of business activity, and replacement of fixed assets that happens in this process is only way to achieve these goals. Reconstruction and modernization in Bosnia and Herzegovina has special importance. Destruction and damaging economic and noneconomic facilities that are made during the war demand huge repairment. However, we can't allow that these objects are being set in original state without any thought put into it. During repairment of this facilities it is needed to consider would they in their

previous state match the terms and conditions today. When we are fixing this object we need to do it so that they are modernized for current production. From the aspect of dependence of investment projects, we can talk about next forms: Independent investment projects Investment projects that include each other Independent capital investment considers investment alternatives that don't compete with each other. That means that, in this case, acceptance of one investment opportunity doesn't mean elimination of another investment. That means that, for firm to have unlimited sources of capital, all independent investment projects could be financed and realized, if only they correspond to defined criterias and efficiency of capital investment. With mutually exclusive investments, acceptance of one project out of these eliminates others investment opportunities from process of consideration and analysis. In this case, best among the group of projects becomes independent project which is being competitive with others independent projects for sources of capital out of which they should be financed from. From aspect of dynamics of investment and income, investment projects are divided to: Short-term investment short-term income, Multiple-term investment short-term income, Short term investment multiple term income, Multiple term investment multiple term income.

If investment are being done in specific moment of time, and effects are being created one moment after certain time of investment, that those are investment types of: short term investment short term income. This type of investment is characteristic for financial investments and it is very rare with real investments. For example of this type of investment we can say that it is single buying of a building that the company will sell after the price goes up. More time investments (inputs), with one income (output) in certain time period after last investment, represents type of project: multiple investment short term income. This type of investment is often used. Typical example of this type of investment represents investment in equipment. In practice is still, most common case of investment that appears in multiple time periods, with incomes that are created in mineable lifetime of project.