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Ch. 4: Financial Forecasting,Planning, and Budgeting
, Prentice Hall, Inc.
Financial Forecasting
• 1) Project sales revenues and expenses.
Financial Forecasting
• 1) Project sales revenues and expenses.
• 2) Estimate current assets and fixed assets necessary to support projected sales.
Financial Forecasting
• 1) Project sales revenues and expenses.
• 2) 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.
• Next year, we forecast sales of $40 million.
• Net income should be 5% of sales.
• Dividends should be 50% of earnings.
This year % of $32m
AssetsCurrent Assets $8m 25%Fixed Assets $16m 50% Total Assets $24mLiab. and EquityAccounts Payable $4m 12.5%Accrued Expenses $4m 12.5%Notes Payable $1m n/aLong Term Debt $6m n/a Total Liabilities $15mCommon Stock $7m n/aRetained Earnings $2m Equity $9m Total Liab. & Equity $24m
Next year % of $40m
AssetsCurrent Assets 25%Fixed Assets 50% Total AssetsLiab. and EquityAccounts Payable 12.5%Accrued Expenses 12.5%Notes Payable n/aLong Term Debt n/a Total LiabilitiesCommon Stock n/aRetained Earnings Equity Total Liab. & Equity
Next year % of $40m
AssetsCurrent Assets $10m 25%Fixed Assets 50% Total AssetsLiab. and EquityAccounts Payable 12.5%Accrued Expenses 12.5%Notes Payable n/aLong Term Debt n/a Total LiabilitiesCommon Stock n/aRetained Earnings Equity Total Liab. & Equity
Next year % of $40m
AssetsCurrent Assets $10m 25%Fixed Assets $20m 50% Total AssetsLiab. and EquityAccounts Payable 12.5%Accrued Expenses 12.5%Notes Payable n/aLong Term Debt n/a Total LiabilitiesCommon Stock n/aRetained Earnings Equity Total Liab. & Equity
Next year % of $40m
AssetsCurrent Assets $10m 25%Fixed Assets $20m 50% Total Assets $30mLiab. and EquityAccounts Payable 12.5%Accrued Expenses 12.5%Notes Payable n/aLong Term Debt n/a Total LiabilitiesCommon Stock n/aRetained Earnings Equity Total Liab. & Equity
Next year % of $40m
AssetsCurrent Assets $10m 25%Fixed Assets $20m 50% Total Assets $30mLiab. and EquityAccounts Payable $5m 12.5%Accrued Expenses 12.5%Notes Payable n/aLong Term Debt n/a Total LiabilitiesCommon Stock n/aRetained Earnings Equity Total Liab. & Equity
Next year % of $40m
AssetsCurrent Assets $10m 25%Fixed Assets $20m 50% Total Assets $30mLiab. and EquityAccounts Payable $5m 12.5%Accrued Expenses $5m 12.5%Notes Payable n/aLong Term Debt n/a Total LiabilitiesCommon Stock n/aRetained Earnings Equity Total Liab. & Equity
Next year % of $40m
AssetsCurrent Assets $10m 25%Fixed Assets $20m 50% Total Assets $30mLiab. and EquityAccounts Payable $5m 12.5%Accrued Expenses $5m 12.5%Notes Payable $1m n/aLong Term Debt n/a Total LiabilitiesCommon Stock n/aRetained Earnings Equity Total Liab. & Equity
Next year % of $40m
AssetsCurrent Assets $10m 25%Fixed Assets $20m 50% Total Assets $30mLiab. and EquityAccounts Payable $5m 12.5%Accrued Expenses $5m 12.5%Notes Payable $1m n/aLong Term Debt $6m n/a Total LiabilitiesCommon Stock n/aRetained Earnings Equity Total Liab. & Equity
Next year % of $40m
AssetsCurrent Assets $10m 25%Fixed Assets $20m 50% Total Assets $30mLiab. and EquityAccounts Payable $5m 12.5%Accrued Expenses $5m 12.5%Notes Payable $1m n/aLong Term Debt $6m n/a Total Liabilities $17mCommon Stock n/aRetained Earnings Equity Total Liab. & Equity
Next year % of $40m
AssetsCurrent Assets $10m 25%Fixed Assets $20m 50% Total Assets $30mLiab. and EquityAccounts Payable $5m 12.5%Accrued Expenses $5m 12.5%Notes Payable $1m n/aLong Term Debt $6m n/a Total Liabilities $17mCommon Stock $7m n/aRetained Earnings Equity Total Liab. & Equity
Predicting Retained Earnings
• Next year’s projected retained earnings = last year’s $2 million, plus:
Predicting Retained Earnings
• Next year’s projected retained earnings = last year’s $2 million, plus:
projected net income cash dividends
sales sales net income
xx xx ( 1 - ) ( 1 - )
Predicting Retained Earnings
• Next year’s projected retained earnings = last year’s $2 million, plus:
projected net income cash dividends
sales sales net income
$40 million x .05 x (1 - .50)
xx xx ( 1 - ) ( 1 - )
Predicting Retained Earnings
• Next year’s projected retained earnings = last year’s $2 million, plus:
projected net income cash dividends
sales sales net income
$40 million x .05 x (1 - .50)
= $2 million + $1 million = $3million
xx xx ( 1 - ) ( 1 - )
Next year % of $40m
AssetsCurrent Assets $10m 25%Fixed Assets $20m 50% Total Assets $30mLiab. and EquityAccounts Payable $5m 12.5%Accrued Expenses $5m 12.5%Notes Payable $1m n/aLong Term Debt $6m n/a Total Liabilities $17mCommon Stock $7m n/aRetained Earnings $3m Equity Total Liab. & Equity
Next year % of $40m
AssetsCurrent Assets $10m 25%Fixed Assets $20m 50% Total Assets $30mLiab. and EquityAccounts Payable $5m 12.5%Accrued Expenses $5m 12.5%Notes Payable $1m n/aLong Term Debt $6m n/a Total Liabilities $17mCommon Stock $7m n/aRetained Earnings $3m Equity $10m Total Liab. & Equity
Next year % of $40m
AssetsCurrent Assets $10m 25%Fixed Assets $20m 50% Total Assets $30mLiab. and EquityAccounts Payable $5m 12.5%Accrued Expenses $5m 12.5%Notes Payable $1m n/aLong Term Debt $6m n/a Total Liabilities $17mCommon Stock $7m n/aRetained Earnings $3m Equity $10m Total Liab. & Equity $27m
Next year % of $40m
AssetsCurrent Assets $10m 25%Fixed Assets $20m 50% Total Assets $30mLiab. and EquityAccounts Payable $5m 12.5%Accrued Expenses $5m 12.5%Notes Payable $1m n/aLong Term Debt $6m n/a Total Liabilities $17mCommon Stock $7m n/aRetained Earnings $3m Equity $10m Total Liab. & Equity $27m
How muchDiscretionary
Financing will weNeed?
Next year % of $40m
AssetsCurrent Assets $10m 25%Fixed Assets $20m 50% Total Assets $30mLiab. and EquityAccounts Payable $5m 12.5%Accrued Expenses $5m 12.5%Notes Payable $1m n/aLong Term Debt $6m n/a Total Liabilities $17mCommon Stock $7m n/aRetained Earnings $3m Equity $10m Total Liab. & Equity $27m
How muchDiscretionary
Financing will weNeed?
Next year % of $40m
AssetsCurrent Assets $10m 25%Fixed Assets $20m 50% Total Assets $30mLiab. and EquityAccounts Payable $5m 12.5%Accrued Expenses $5m 12.5%Notes Payable $1m n/aLong Term Debt $6m n/a Total Liabilities $17mCommon Stock $7m n/aRetained Earnings $3m Equity $10m Total Liab. & Equity $27m
How muchDiscretionary
Financing will weNeed?
Predicting Discretionary Financing Needs
Predicting Discretionary Financing Needs
Discretionary Financing Needed =
Predicting Discretionary Financing Needs
Discretionary Financing Needed =
projected projected projected total - total - owners’ assets liabilities equity
Predicting Discretionary Financing Needs
Discretionary Financing Needed =
projected projected projected total - total - owners’ assets liabilities equity
$30 million - $17 million - $10 million
Predicting Discretionary Financing Needs
Discretionary Financing Needed =
projected projected projected total - total - owners’ assets liabilities equity
$30 million - $17 million - $10 million
= $3 million in discretionary financing
Sustainable Rate of Growth
Sustainable Rate of Growth
g* = ROE (1 - b) where
Sustainable Rate of Growth
g* = ROE (1 - b) where
b = dividend payout ratio
(dividends / net income)
Sustainable Rate of Growth
g* = ROE (1 - b) where
b = dividend payout ratio
(dividends / net income)
ROE = return on equity
(net income / common equity) or
Sustainable Rate of Growth
g* = ROE (1 - b) where
b = dividend payout ratio
(dividends / net income)
ROE = return on equity
(net income / common equity) or
net income sales assets
sales assets common equityROE = x xROE = x x
Budgets
• Budget: a forecast of future events.
Budgets
• 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.
WORKSEET________________________ _ DCT___________________________________Sales 55,000Collections; First month (30%) Second month (70%)Total collectionsPurchases (60% of next month’s sales) Payments (one-month lag)CASH BUDGET______________________________________________________________Cash receiptCollections (see above)CASH DISBURSEMENTS______________________________________________________ Purchases Wages and salaries Rent other expenses Interest expenses on existing debt Taxes Purchases of equipment Loan repaymentTotal disbursements___________________________________________________________
Net monthly changePlus: beginning cash balanceLess: interest on short-term borrowingEquals: ending cash balance before short term borrowingFinancing needed (a)Ending cash balance__________________________________________________________Cumulative borrowing_________________________________________________________
WORKSEET________________________ _ OCT__________ NOVEMBER____ DECEMBER _____Sales 55,000 $62,000 $50,000Collections; First month (30%) Second month (70%)Total collectionsPurchases (60% of next month’s sales) $30,000 Payments (one-month lag)CASH BUDGET______________________________________________________________________Cash receiptCollections (see above)CASH DISBURSEMENTS_____________________________________________________________ Purchases Wages and salaries Rent other expenses Interest expenses on existing debt Taxes Purchases of equipment Loan repaymentTotal disbursements___________________________________________________________________
Net monthly changePlus: beginning cash balanceLess: interest on short-term borrowingEquals: ending cash balance before short term borrowingFinancing needed (a)Ending cash balance__________________________________________________________________Cumulative borrowing_________________________________________________________________
WORKSEET________________________ _ DCT__________ NOVEMBE________ DECEMBER____Sales 55,000 $62,000 $50,000Collections; First month (30%) $18,600 Second month (70%) $38,500Total collections $57,100Purchases (60% of next month’s sales) $30,000 $36,000 Payments (one-month lag) $30,000CASH BUDGET______________________________________________________________________Cash receiptCollections (see above) $57,100CASH DISBURSEMENTS_____________________________________________________________ Purchases $30,000 Wages and salaries Rent other expenses Interest expenses on existing debt Taxes Purchases of equipment Loan repaymentTotal disbursements___________________________________________________________________
Net monthly changePlus: beginning cash balanceLess: interest on short-term borrowingEquals: ending cash balance before short term borrowingFinancing needed (a)Ending cash balance__________________________________________________________________Cumulative borrowing_________________________________________________________________
WORKSEET______________________ DCT____ NOVEMBE________ DECEMBER____ JANUARY_______Sales $55,000 $62,000 $50,000 $60,000Collections; First month (30%) $18,600 $15,000 Second month (70%) $38,50 $43,400Total collections $57,100 $58,400Purchases (60% of next month’s sales) $30,000 $36,000 $48,000Payments (one-month lag) $30,000 $36,000CASH BUDGET_____________________________________________________________________________Cash receiptCollections (see above) $57,100 $58,400 CASH DISBURSEMENTS_____________________________________________________________________ Purchases $30,000 $36,000 Wages and salaries $4,000 Rent $3,000 other expenses $1,000 Interest expenses on existing debt $4,000 Taxes Purchases of equipment $10,000 (capital budgeting) Loan repaymentTotal disbursements__ _________________________________________________________ $58,000_______
Net monthly changePlus: beginning cash balanceLess: interest on short-term borrowingEquals: ending cash balance before short term borrowingFinancing needed (a)Ending cash balance_________________________________________________________________________Cumulative borrowing________________________________________________________________________
WORKSEET_____________________DCT___ NOV____ DEC___ JAN__________________Sales $55,000 $62,000 $50,000 $60,000Collections; First month (30%) $18,600 $15,000 Second month (70%) $38,50 $43,400Total collections $57,100 $58,400Purchases (60% of next month’s sales) $30,000 $36,000 $48,000Payments (one-month lag) $30,000 $36,000CASH BUDGET__________________________________________________________________Cash receiptCollections (see above) $57,100 $58,400 CASH DISBURSEMENTS__________________________________________________________ Purchases $30,000 $36,000 Wages and salaries $4,000 Rent $3,000 other expenses $1,000 Interest expenses on existing debt $4,000 Taxes Purchases of equipment $10,000 (capital budgeting) Loan repaymentTotal disbursements__ ___________________________________ $58,000__________________Net monthly change $400
Plus: beginning cash balance $10,000Less: interest on short-term borrowing 0______Equals: ending cash balance before $10,400 short term borrowingFinancing needed (a) $0Ending cash balance ____________________________________$10,400__________________Cumulative borrowing_____________________________________0________________________
WORKSEET_____________________DCT___ NOV____ DEC___ JAN______FEB_______Sales $55,000 $62,000 $50,000 $60,000 $80,000Collections; First month (30%) $18,600 $15,000 $18,000 Second month (70%) $38,50 $43,400 $35,000Total collections $57,100 $58,400 $53,000Purchases (60% of next month’s sales) $30,000 $36,000 $48,000 $51,000Payments (one-month lag) $30,000 $36,000 $48,000CASH BUDGET_______________________________________________________________Cash receiptCollections (see above) $57,100 $58,400 $53,000CASH DISBURSEMENTS_______________________________________________________ Purchases $30,000 $36,000 $48,000 Wages and salaries $4,000 $5,000 Rent $3,000 $3,000 other expenses $1,000 $500 Interest expenses on existing debt $4,000 Taxes Purchases of equipment (capital budgeting) $10,000 Loan repaymentTotal disbursements__ ___________________________________ $58,000__ $56,500____Net monthly change $400 $(3,500) Plus: beginning cash balance $10,000 $10,400Less: interest on short-term borrowing 0______ 0______Equals: ending cash balance before $10,400 $6,900 short term borrowingFinancing needed (a) $0 $3,100Ending cash balance ____________________________________$10,400__ $10,000____Cumulative borrowing_____________________________________0_______ 3,100______
WORKSEET_____________________DCT___ NOV____ DEC___ JAN______FEB_____ MARCHSales $55,000 $62,000 $50,000 $60,000 $80,000 $85,000 Collections; First month (30%) $18,600 $15,000 $18,000 $24,000 Second month (70%) $38,50 $43,400 $35,000 $42,000Total collections $57,100 $58,400 $53,000 $66,000Purchases (60% of next month’s sales) $30,000 $36,000 $48,000 $51,000 $42,000Payments (one-month lag) $30,000 $36,000 $48,00_ $51,000CASH BUDGET_____________________________________________________________________Cash receiptCollections (see above) $57,100 $58,400 $53,000 $66,000CASH DISBURSEMENTS_____________________________________________________________ Purchases $30,000 $36,000 $48,000 $51,000 Wages and salaries $4,000 $5,000 $6,000 Rent $3,000 $3,000 $3,000 other expenses $1,000 $500 $1,200 Interest expenses on existing debt $4,000 $200 Taxes $5,200 Purchases of equipment (capital budgeting) $10,000 Loan repayment $8,000Total disbursements__ ___________________________________ $58,000__ $56,500 $74,600Net monthly change $400 $(3,500) $(8,600)
Plus: beginning cash balance $10,000 $10,400 $10,000Less: interest on short-term borrowing 0______ 0______ 31_____Equals: ending cash balance before $10,400 $6,900 $1,369 short term borrowingFinancing needed (a) $0 $3,100 $8,631Ending cash balance ____________________________________$10,400__ $10,000 $10,000_Cumulative borrowing_____________________________________0_______ 3,100____ 11,731__
WORKSEET_____________________DCT___ NOV____ DEC___ JAN______FEB_____ MARCH__ APRILSales $55,000 $62,000 $50,000 $60,000 $80,000 $85,000 $70,000Collections; First month (30%) $18,600 $15,000 $18,000 $24,000 $25,500 Second month (70%) $38,50 $43,400 $35,000 $42,000 $56,000Total collections $57,100 $58,400 $53,000 $66,000 $81,500Purchases (60% of next month’s sales) $30,000 $36,000 $48,000 $51,000 $42,000 $39,000Payments (one-month lag) $30,000 $36,000 $48,00_ $51,000 $42,000CASH BUDGET_____________________________________________________________________Cash receiptCollections (see above) $57,100 $58,400 $53,000 $66,000 $81,500CASH DISBURSEMENTS_____________________________________________________________ Purchases $30,000 $36,000 $48,000 $51,000 $42,000 Wages and salaries $4,000 $5,000 $6,000 $4,000 Rent $3,000 $3,000 $3,000 $3,000 other expenses $1,000 $500 $1,200 $1,500 Interest expenses on existing debt $4,000 $200 Taxes $5,200 Purchases of equipment (capital budgeting) $10,000 Loan repayment $8,000Total disbursements__ ___________________________________ $58,000__ $56,500 $74,600 $50,500Net monthly change $400 $(3,500) $(8,600) $31,000
Plus: beginning cash balance $10,000 $10,400 $10,000 $10,000Less: interest on short-term borrowing 0______ 0______ 31_____ $117__Equals: ending cash balance before $10,400 $6,900 $1,369 $40,883 short term borrowingFinancing needed (a) $0 $3,100 $8,631 $(11,731)
Ending cash balance ____________________________________$10,400__ $10,000 $10,000__ $29,152Cumulative borrowing_____________________________________0_______ 3,100____ 11,731______0____
WORKSEET_____________________DCT___ NOV____ DEC___ JAN______FEB_____ MARCH__ APRILSales $55,000 $62,000 $50,000 $60,000 $80,000 $85,000 $70,000Collections; First month (30%) $18,600 $15,000 $18,000 $24,000 $25,500 Second month (70%) $38,50 $43,400 $35,000 $42,000 $56,000Total collections $57,100 $58,400 $53,000 $66,000 $81,500Purchases (60% of next month’s sales) $30,000 $36,000 $48,000 $51,000 $42,000 $39,000Payments (one-month lag) $30,000 $36,000 $48,00_ $51,000 $42,000CASH BUDGET_____________________________________________________________________Cash receiptCollections (see above) $57,100 $58,400 $53,000 $66,000 $81,500CASH DISBURSEMENTS_____________________________________________________________ Purchases $30,000 $36,000 $48,000 $51,000 $42,000 Wages and salaries $4,000 $5,000 $6,000 $4,000 Rent $3,000 $3,000 $3,000 $3,000 other expenses $1,000 $500 $1,200 $1,500 Interest expenses on existing debt $4,000 $200 Taxes $5,200 Purchases of equipment (capital budgeting) $10,000 Loan repayment $8,000Total disbursements__ ___________________________________ $58,000__ $56,500 $74,600 $50,500Net monthly change $400 $(3,500) $(8,600) $31,000
Plus: beginning cash balance $10,000 $10,400 $10,000 $10,000Less: interest on short-term borrowing 0______ 0______ 31_____ $117__Equals: ending cash balance before $10,400 $6,900 $1,369 $40,883 short term borrowingFinancing needed (a) $0 $3,100 $8,631 $(11,731)
Ending cash balance ____________________________________$10,400__ $10,000 $10,000__ $29,152Cumulative borrowing_____________________________________0_______ 3,100____ 11,731______0____
WORKSEET_______________________DCT______NOV____DEC______ JAN_Sales 55,000 $62,000 $50,000 $60,000 Collect First month (30%) $18,600 $15,000 Second month (70%) $38,500 $43,400Total collections $57,100 $58,400Purchases (60% of next month’s sales) $30,000 $36,000 $48,000 Payments (one-month lag) $30,000CASH BUDGET_______________________________________________________Cash receiptCollections (see above)CASH DISBURSEMENTS_______________________________________________ Purchases Wages and salaries Rent other expenses Interest expenses on existing debt Taxes Purchases of equipment Loan repayment
Total disbursements_______________________________________________
70% 30%70%
30%
JAN FEB MARCH APRILNet monthly change $400 $(3,500) $(8,600) $31,000Plus: beginning cash balance 10,000 10,400 10,000 10,000Less: interest on short-term borrowing 0 0 31 117Equals: ending cash balance before 10,400 6,900 1,369 40,883 short term borrowingFinancing needed (a) 0 3,100 8,631 (11,731)Ending cash balance_______________10,400____10,000____10,000____29,152__
Cumulative borrowing__________________0_____3,100_____11,731_______0___