Transcript Financial Planning & Forecasting

Financial Planning & Forecasting
Timothy R. Mayes, Ph.D.
FIN 3300: Chapter 4
1
The Ingredients of a Financial Plan

A financial plan consists of several
ingredients
•
•
•
•
•
•

Expectations about the economic environment
A sales forecast
Pro forma (forecasted) financial statements
Asset requirements
Required new financing
Cash Budget
We will focus on developing the pro formas
and the cash budget
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Forecasting: The % of Sales Method
The most basic method of forecasting
financial statements (income statements and
balance sheets) is the percent of sales method
 This method assumes that certain expenses,
assets, and liabilities maintain a constant
relationship to the level of sales
 There are two inputs to this method:

• A sales forecast (exogenous)
• The percentages which are assumed to be constant
3
Forecasting the Income Statement
Elvis Products International
Pro-forma Income Statement
For the Year Ended Dec. 31, 1997 ($ 000's)
Sales
Cost of Goods Sold
Gross Profit
No change Selling and G&A Expenses
Fixed Expenses
Depreciation Expense
EBIT
Interest Expense
Earnings Before Taxes
Taxes @ 40%
Net Income
1998%*
1998* 1997%
100.00% 4,300.00 100.00%
83.93% 3,609.11 84.42%
690.89 15.58%
7.79%
334.80
8.58%
100.00
2.60%
20.00
0.52%
236.09
3.89%
76.00
1.97%
160.09
1.91%
64.04
0.77%
96.05
1.15%
1997 1996%
3,850.00 100.00%
3,250.00 83.45%
600.00 16.55%
330.30
6.99%
100.00
2.91%
20.00
0.55%
149.70
6.09%
76.00
1.82%
73.70
4.27%
29.48
1.71%
44.22
2.56%
1996
3,432.00
2,864.00
568.00
240.00
100.00
18.90
209.10
62.50
146.60
58.64
87.96
*Forecasted
4
Types of Assets and Liabilities

There are two types of assets:
• Current assets are the firm’s short-term assets and can
generally be expected to vary directly with sales
• Fixed assets are the firm’s long-term assets and generally do
not vary directly with sales

There are two types of liabilities:
• Spontaneous liabilities are those that occur naturally
during the ordinary course of doing business. These sources
vary directly with sales
• Discretionary liabilities are those that require a special
effort for the firm to obtain. These sources do not vary
directly with sales
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Forecasting the Balance Sheet
Elvis Products International
Balance Sheet
As of Dec. 31, 1997
Assets
Cash and Equivalents
Accounts Receivable
Inventory
Total Current Assets
Plant & Equipment
Accumulated Depreciation
Net Fixed Assets
Total Assets
Liabilities and Owner's Equity
Accounts Payable
Short-term Notes Payable
Other Current Liabilities
Total Current Liabilities
Long-term Debt
Total Liabilities
Common Stock
Retained Earnings
Total Shareholder's Equity
Total Liabilities and Owner's Equity
Discretionary Financing Needed
* Forecasted
Other Information
Sales
Dividend
1998*
52.00
444.51
914.90
1411.40
527.00
186.20
1997
52.00
402.00
836.00
1290.00
527.00
166.20
1752.20
1997%
1.35%
10.44%
21.71%
33.51%
13.69%
4.32%
9.37%
42.88%
189.05
225.00
163.38
577.43
424.61
1002.04
460.00
300.04
760.04
1762.08
4.55%
5.84%
3.64%
14.03%
11.03%
25.06%
11.95%
5.87%
17.82%
42.88%
340.80
-9.88
Forecast
4300.00
22.00
1996
57.60
351.20
715.20
1124.00
491.00
146.20
1650.80
1996%
1.68%
10.23%
20.84%
32.75%
14.31%
4.26%
10.05%
42.80%
175.20
225.00
140.00
540.20
424.61
964.81
460.00
225.99
685.99
1650.80
4.24%
5.83%
3.96%
14.03%
9.42%
23.46%
13.40%
5.94%
19.34%
42.80%
145.60
200.00
136.00
481.60
323.43
805.03
460.00
203.77
663.77
1468.80
360.80
344.80
1468.80
Surplus
Actual
3850.00
Actual
3432.00
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Discretionary Financing Needed



Ordinarily, the pro-forma balance sheet will not
balance!
This is intentional, and the amount needed to make it
balance is referred to as the Discretionary Financing
Needed, DFN (or External Financing Needed, EFN)
This is a “plug figure” that represents the amount of
discretionary financing that the firm will need to
obtain in order to support its forecasted level of sales
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The Cash Budget
A cash budget is a document which shows
the expected cash inflows and outflows for a
chosen time period (say, 6 or 9 months).
 The benefits of the cash budget are:

• It provides an estimate of the ending cash balance
in each month
• It provides estimates and sources of the cash
inflows and outflows
• It provides a basis of comparison against which
managers can be evaluated
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Parts of the Cash Budget

In a simple cash budget, there are three parts:
• The Worksheet Area
• The Inflows and Outflows
• The calculation of the ending cash balance

Essentially, a cash budget starts with the
beginning cash balance, adds expected cash
inflows, and subtracts any expected cash
outflows. The result is the expected ending
cash balance.
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Cash Budget: An Example

Here is the information required to assemble the cash budget
for Bithlo Barbecues:
• Expected sales are on the next slide
• 40% of sales are for cash. Of the remainder, 75% is collected the
following month, and 25% is collected two months after the sale.
• Inventory purchases are equal to 50%of the next month’s sales.
60% of purchases are paid for the following month, and the
remainder one month later.
• Wages are 20% of sales. Leasing expenses is $10,000 per month.
Interest payments of $30,000 are due in June and September. A
$50,000 dividend payment will be made in June. Taxes of $25,000
are due in June and September. A $200,000 capital improvement
will be paid for in July.
• The company must keep a minimum cash balance of $15,000.
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Cash Budget: Worksheet Area

The worksheet area is where we gather certain key
numbers which will be used in the rest of the cash
budget.
Sales
Collections:
Cash
First Month
Second Month
Total Collections
Purchases
Payments:
First Month
Second Month
Total Payments
Bithlo Barbeques
Cash Budget
For the Period June to September 1998
April
May
June
July
August September October
291,000 365,000 387,000 329,000 238,000
145,000
92,000
40%
45%
15%
154,800 131,600
95,200
164,250 174,150 148,050
43,650
54,750
58,050
362,700 360,500 301,300
50% 182,500 193,500 164,500 119,000
72,500
60%
40%
116,100
98,700
71,400
73,000
77,400
65,800
189,100 176,100 137,200
58,000
107,100
49,350
214,450
46,000
43,500
47,600
91,100
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Cash Budget: Inflows & Outflows

This section shows all of the cash collections
and disbursements. Note that these are only
cash inflows and outflows. The cash budget is
not the same as the income statement.
Collections
Less Disbursements:
Inventory Payments
Wages
Lease Payment
Interest
Dividend (Common)
Taxes
Capital Outlays
Total Disbursement
362,700
20%
360,500
301,300
214,450
189,100 176,100 137,200
77,400
65,800
47,600
10,000
10,000
10,000
30,000
0
0
50,000
0
0
25,000
0
0
0 200,000
0
381,500 451,900 194,800
91,100
29,000
10,000
30,000
0
25,000
0
185,100
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Cash Budget: The Ending Cash Balance

This section is where we calculate the ending cash
balance and determine if we will need to borrow for
each month.
Beginning Cash Balance
Collections - Disbursement
Unadjusted Cash Balance
Current Borrowing Needed
Ending Cash Balance
Notes:
Minimum Acceptable Cash 15,000
20,000
0
20,000
20,000
(18,800)
1,200
13,800
15,000
15,000
15,000
(91,400) 106,500
(76,400) 121,500
91,400
0
15,000 121,500
121,500
29,350
150,850
0
150,850
Note that Bithlo Barbecues will need to borrow in June and July, and
will have excess cash in August and September.
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