Financial forecasting planning and budgeting
Download
1 / 11

Financial Forecasting - PowerPoint PPT Presentation


  • 877 Views
  • Updated On :

Financial Forecasting, Planning, and Budgeting Financial Forecasting: Project sales revenues and expenses Estimate current assets and fixed assets necessary to support projected sales Percent of sales forecast Percent of Sales Method Suppose this year’s sales will total $32 million

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Financial Forecasting' - omer


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
Financial forecasting planning and budgeting l.jpg
Financial Forecasting, Planning, and Budgeting

  • Financial Forecasting:

    • Project sales revenues and expenses

    • Estimate current assets and fixed assets necessary to support projected sales

  • Percent of sales forecast


Percent of sales method l.jpg
Percent of Sales Method

  • Suppose this year’s sales will total $32 million

  • Next year, we forecast sales of $40 million

  • Net income should be 5% of sales

  • Dividends should be 50% of earnings


Construction of forecast balance sheet l.jpg
Construction of Forecast Balance Sheet

  • All asset accounts are assumed to vary proportionally with sales

  • Accounts Payable and Accrued Expenses are the Current Liability accounts that vary with sales directly – remember liabilities and equity are financing sources for a firm

  • Because of this Accounts Payable and Accrued Expenses are called spontaneous sources of financing


Percent of sales method continued l.jpg
Percent of Sales Method (Continued)

This year% of $32m

Assets

Current Assets $8m 25%

Fixed Assets $16m 50%

Total Assets $24m

Liab. and Equity

Accounts Payable $4m 12.5%

Accrued Expenses $4m 12.5%

Notes Payable $1m n/a

Long Term Debt $6m n/a

Total Liabilities $15m

Common Stock $7m n/a

Retained Earnings $2m

Equity $9m

Total Liab. & Equity $24m


Slide5 l.jpg

Percent of Sales Method (Continued)

Next year% of $40m

Assets

Current Assets $10m 25%

Fixed Assets $20m 50%

Total Assets $30m

Liab. and Equity

Accounts Payable $5m 12.5%

Accrued Expenses $5m 12.5%

Notes Payable $1m n/a

Long Term Debt $6m n/a

Total Liabilities $17m

Common Stock $7m n/a

Retained Earnings ???

Equity ???

Total Liab. & Equity


Predicting retained earnings l.jpg
Predicting Retained Earnings

  • Next year’s projected retained earnings = last year’s $2 million, plus:

  • $40 million x 0.05 x (1 - 0.50)

  • = $2 million + $1 million = $3million


Predicting discretionary financing needs l.jpg
Predicting Discretionary Financing Needs

Next year% of $40m

Assets

Current Assets $10m 25%

Fixed Assets $20m 50%

Total Assets $30m

Liab. and Equity

Accounts Payable $5m 12.5%

Accrued Expenses $5m 12.5%

Notes Payable $1m n/a

Long Term Debt $6m n/a

Total Liabilities $17m

Common Stock $7m n/a

Retained Earnings $3m

Equity $10m

Total Liab. & Equity $27m

How much

Discretionary

Financing

will we

Need?


Predicting discretionary financing needs continued l.jpg
Predicting Discretionary Financing Needs (Continued)

  • Discretionary Financing Needed = [Projected Total Assets] – [Projected Total Liabilities] – [Projected Shareholders’ Equity]

  • Alternatively:

  • DFN = [Projected Total Assets] – [Projected Liabilities & Shareholders’ Equity]

  • DFN = $30 million – $17 million – $10 million

  • DFN = $3 million in discretionary financing


Predicting discretionary financing needs continued9 l.jpg
Predicting Discretionary Financing Needs (Continued)

  • At this point corporation has to decide how to finance the DFN

  • The Company can sell Bonds (Long-Term Debt) or Equity

  • This is why we call Long-Term Debt and Equity as sources of external capital

  • Note that paid-in capital is the difference between selling price of equity and face value times the number of shares sold


Sustainable rate of growth l.jpg
Sustainable Rate of Growth

  • Sustainable rate of growth is the rate the sales can grow without selling new equity and maintaining debt ratio (this means that if a firm retains earnings it would need to issue new debt to maintain debt ratio)

  • g* = ROE (1 – b) where

    b = dividend payout ratio

    (dividends / net income)

    ROE = return on equity

    (net income / common equity)


Budgets l.jpg
Budgets

  • Budget: a forecast of future events

  • Budgets indicate the amount and timing of future financing needs

  • Budgets provide a basis for taking corrective action if budgeted and actual figures do not match

  • Budgets provide the basis for performance evaluation


ad