cash+budget+and+pro+forma+income+statements4

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SIFE Lakehead 2009

Financial Forecasting

AGENDA

1. Introductions2. Purpose of Financial Forecasts3. Characteristics of Good Financial Forecasts4. The Importance of Cash Flow5. Forecasting and Recognizing Assumptions taken6. Financial Forecasts that will be required

Break Even Analysis (understanding of the economics of your business)

Initial Investment Schedule

Cash Flow Forecasts (Monthly Cash Budget)

Pro forma Income Statements

Pro forma Balance Sheets Subsidiary forecasts loan amortization schedules and capital cost allowance

schedules

Statement of Forecast Assumptions7. An overview of the purpose of each forecast and their interrelationships8. Data Requirements and how they may be generated9. Annual Sales Forecast10. Monthly Sales Forecast for the First Year11. The Monthly Cash Budget12. The First Years Pro Forma Income Statement the differences between a cash budget and

pro forma income statement

13. The first years Balance Sheet14. Forecasting for years two and three15. Analyzing the forecasts16. Making adjustments to the forecasts17. Presentation of financial forecasts and the results/conclusions of those forecasts in the

Business Plan

Ken Hartviksen

Faculty of Business AdministrationLakehead University

[email protected]

SIFE Lakehead Page 1
mailto:[email protected]:[email protected]


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Subsidiary Forecasts

Break Even Analysis

Purpose:1. Forecast the number of units that must be produced and sold (annually) in

order to break even.2. Examine the cost/volume/profit relationships to test alternative plans and the

impact on the basic economics of the business3. Serve as benchmark for controlling the implementation of the business.

Formula:

unitpercostvariable-unitperPriceSelling

CostsFixedTotalAnnual

MarginonContributiUnit

CostsFixedTotalAnnual(units)pointeven-Break ==

Example:

Your firm faces $300,000 in annual fixed costs (lease costs, selling and administration,depreciation).You plan to sell your product to the consumer for $15.25 per unitYour variable costs to produce each unit (direct materials and direct labour) is $8.45

units44,1186.117,4480.6$

000,300$

$8.45-$15.25

$300,000(units)PointEvenBreak ====

Now compare this to your market sales forecast in units. If you think you can produce and sell

only 25,000 units.forget itthis is not an economic business.

You can also forecast the breakeven point in sales dollars:

12.794,672$4459.

000,300$

25.15$

45.8$1

000,300$

unitperPriceSelling

Per UnitCostVariable-1

CostsFixedTotalAnnualdollars)(salespointeven-Break ==

=

=



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The Loan Amortization Schedule

Most fixed-term loans involve a blended repayment scheme that sees you repay the loan over say 5years, at a fixed rate on a monthly basis.

Any loan involves loan repayments. These payments affect the cash flow of your business. You will

use these forecast loan payments in your cash flow forecasts

The interest portion of the loan is a tax-deductible expense of the firm.

You will use the forecast annual interest expenses in your pro forma income statements.

00575.0

1071225.1

1)r(1712250.

:rateMonthlyfor theSolving

%1225.71)2

.07(1g)compoundinannual-(semiRateAnnualEffective

12/1

12

m

2

=

+=

+=

=+=

m

m

r

r

Example assuming a one year $10,000 loan at 7% APR:


Loan Amount $10,000

Monthly Interest Rate 0.00575

Month

Loan

Principal Interest Payment

Principal

Retired

Ending

Principal

January $10,000.00 $57.50 $864.78 $807.28 $9,192.72

February 9,192.72 $52.86 $864.78 $811.92 $8,380.80

March 8,380.80 $48.19 $864.78 $816.59 $7,564.21

April 7,564.21 $43.49 $864.78 $821.29 $6,742.92

May 6,742.92 $38.77 $864.78 $826.01 $5,916.91June 5,916.91 $34.02 $864.78 $830.76 $5,086.16

July 5,086.16 $29.25 $864.78 $835.53 $4,250.62

August 4,250.62 $24.44 $864.78 $840.34 $3,410.28

Septembe 3,410.28 $19.61 $864.78 $845.17 $2,565.11

October 2,565.11 $14.75 $864.78 $850.03 $1,715.08

November 1,715.08 $9.86 $864.78 $854.92 $860.16

December 860.16 $4.95 $864.78 $859.83 $0.33

Total = $377.69 $10,377.36


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The CCA Schedule

This example assumes you acquire $32,880 worth of Class 6 assets in your first year of business, thatthe class is eligible for a 10% CCA rate and that you are able to use the maximum amount of CCA ineach year. The schedule predicts the maximum amount of CCA you can claim in years 1, 2 and 3 forincome tax purposes.

Sample Initial Investment Schedule


ss

ber

2

Undepreciated

capital cost

(UCC) at the

start of the

year

3

Cost of

additions in

the year

4

Proceeds of

dispositions

in the year

5

UCC

after additions

and

dispositions

(col. 2 plus 3

minus 4)

6

Adjustments f or

current year

additions (1/2

times (col. 3

minues 4)) If

negative, enter

7

Base amount

for capital

cost

allowance

(col. 5 minus

6)

8

Rate

%

9

CCA

for the year

(col. 7 times 8

or an adjusted

amount)

10

UCC at the

end of the

year (col. 5

minus 9)

6 0.00 32,880.00 0.00 32,880.00 16,440.00 16,440.00 10% 1,644.00 31,236.00

6 31,236.00 0.00 0.00 31,236.00 0.00 31,236.00 10% 3,123.60 28,112.40

6 28,112.40 0.00 0.00 28,112.40 0.00 28,112.40 10% 2,811.24 25,301.16

Schedule 3

Toxic Chemical Assessments LimitedInitial Investment and Proposed Financing

Initial Startup Costs Proposed Financing

Working Capital:

Cash $100,000.00 Shareholder Invesment:

Other Assets: Shelley Write $100,000.00

Incorporation, e-mail, web site design $15,000.00 Freddy Khan $35,000.00

Accreditation $30,000.00 Sara Jesper $40,000.00

Antonio Balgeras $5,000.00

Fixed Assets: Borrowing:

Computer Systems (5), scanner, printer $15,000.00 FedNor/ Royal Bank $476,000.00

Office Equipment $10,000.00

Equipment $276,000.00

Office space $7,000.00

Lab space demolition $7,500.00

Painting touch-ups $5,000.00

Refrigeration of 3 storage areas $40,000.00

Shelving for storage areas $16,000.00

Mechancial for storage areas $10,000.00

Modular labs $85,000.00Lighting and fixtures $13,000.00

Other $26,500.00

Fixed Asset Sub total = $511,000.00

TOTAL = $656,000.00 TOTAL = $656,000.00


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Sample Cash Budget

Note: cash budgets contain only cash receipts and cash disbursements (never depreciation)They will include loan payments (both principal and interest)

Analyzing Your Forecast Financial Position Financial Ratios

Liquidity Ratio:

sLiabilitieCurrentAssetsCurrentratioCurrent =

Debt Ratio:

AssetsTotal

DebtTotalRatioDebt =

Profitability Ratios:

RevenueSalesTotalForecast

IncomeNetForecastMarginProfitNet =

EquityOwnersTotal

IncomeNetAnnualForecastROEEquityonReturn ==

EquityOwnersTotalDebtTotal

IncomeNetAnnualForecastROIcapital)(investedInvestmentonReturn

+

==


January February March Total

Cash Receipts:

Cash Sales 12000 20000 20000 52000

Sale of Fixed Assets 0 0Total Cash Receipts 12000 20000 20000 52000

Cash Disbursements:

Payments on A/P 7800 13000 13000 33800

Wages and Benefits 1800 3000 3000 7800

Heat, Light, Water 2000 2000 2000 6000

Purchase of Fixed Assets 7000 0 7000

Total Cash Disbursements 18600 18000 18000 54600

Net Cash Inflow (Outflow) -6600 2000 2000

Beginning Cash 5000 -1600 400

Ending Cash without financing -1600 400 2400


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Sample Pro Forma Income Statement

Schedule 8

Sample Business Inc Pro Forma Income Statement

for the year ended December 31, 2004

Sales Revenue $43,000

Other Income 0

Total Income $43,000

Less:

Operating Expenses:

Office Supplies $2,100

Telephone 1,440

Courier Services 2,400

Lab Supplies 0

Internet Service Provider 240

Consulting Fee Expenses 4,300Salaries, Benefits and Training Costs 428,000

Licensing and Training Costs 39,925

Other Expenses:

Advertising 53,000

Insurance 10,000

Professional services - legal services, incorporation, etc 4,000

Professional services - web site design 6,000

External Auditor Fees 5,000

Depreciation Expense (Capital Cost Allowance) 75,150

Financing-related Expenses:

Interest on Bank Loan 77288.691

Total Expenses $708,844Earnings before taxes -665843.7

Taxes 20% -133168.7

Net Income -$532,675

Dividends $0

Additions to Retained Earnings -$532,675

Number of Shares Outstanding 3300

Earnings Per Share -$161.42

Note: The pro forma income statement can be taken from the totals found on your cash budgethowever, the income statement will include non-cash items like depreciationand will ONLY include

the interest expense on loan payments (not the sum of the loan payments).



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Sample Pro Forma Balance Sheet

Schedule 9

Example Inc.Pro Forma Balance Sheet

as forecast at December 31, 2004

Assets Liaibilities and Owners Equity

Cash $357,160 Accounts Payable

Accounts Receivable Bank Loan 1,653,863

Inventories

Owner's Equity:

Gross Fixed Assets 511,000 Common stock 220,000

Accumulated Depreciation 75,150 Retained Earnings -532,675

Net Fixed Assets 435,850Intangible Assets 45,000

TOTAL ASSETS $838,010 TOTAL LIABILITIES AND O.E. $1,341,188

NOTE: The foregoing are only examples of financial statements. Each must be modified to suit yourbusiness.

The following schematic illustrates the process you will need to follow to develop your integratedfinancial forecasts:


SalesForecast

CashBudget

InitialInvestment

Pro FormaIncome

Statement

Pro FormaBalanceSheet

DetailedExpenseForecasts

Loan

AmortizationSchedule

Capital Cost

AllowanceSchedule

Analyze forecasts, adjust inputs and forecast again.

cash+budget+and+pro+forma+income+statements4

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