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Ch. 12 Financial Planning and Forecasting Financial Statements The Financial Plan
Ch. 12 Financial Planning and Forecasting Financial Statements The Financial Plan
Ch. 12 Financial Planning and Forecasting Financial Statements The Financial Plan
Ch. 12 Forecasting
Operating plans provide more implementation guidance over the short-term (1-5 years)
Specific tasks and responsibilities
Sales Forecast
Forecasting depends on ability of marketing/sales to gauge demand for product Entire chapter is worthless without accurate sales forecast Improving sales forecasts
Recent history New products Competition
Ch. 12 Forecasting
3. 4. 5. 6.
Project B/S Determine AFN and external funds Financing feedbacks Analysis and testing
Operating at capacity, so all assets (including FA) grow (proportionally) with sales Payables and accruals grow (proportionally) with sales No growth in financing accounts (N/P, bonds, and stock) Total dividends will grow 15% Projected sales growth of $300 million (15%) Historical financial statements on p.509
Case Assumptions
Forecast basis
Growth % of Sales 10%*Avg Debt - see (f) 1.15 95.00%
2011
2,300.00 2,185.00 115.00 60.00 55.00 22.00 33.00 10.35 22.65
15% growth
Ch. 12 Forecasting
2011 115.00 80.00 195.00 520.00 715.00 300.00 222.65 522.65 1,237.65
Ch. 12 Forecasting
AFN Equation
AFN = (A*/S0) S - (L*/S0) S - MS1(RR)
2011 115.00 222.35 337.35 520.00 857.35 300.00 222.65 522.65 1,380.00
Accounts payable & Accruals Notes payable Total current liabilities Long-term bonds Total debt Common stock Retained earnings Total common equity Total liabilities and equity
A* = Assets that are tied directly to sales S0 = Sales during the last year L* = Liabilities that increase spontaneously S1 = Total sales projected for next year S = Change in sales M = Profit Margin RR = Percent of net income retained or (1 - Payout Ratio)
Step 6: Analysis
Review financial ratios Implementation of strategies (what if) and impact on financial results
Ch. 12 Forecasting
Key Ratios Profit Margin ROE DSO Inventory Turnover Fixed Asset Turnover Debt/Assets TIE Op. Costs / Sales
Actual 2010 1.20% 4.80% 52.93 5.13 4.00 58.3% 1.67 95.0%
Forecast 2011 1.43% 6.31% 53.00 5.13 4.00 62.1% 1.92 95.0%
Proposed Improvements
Before
DSO (days) Accts. rec./Sales Inventory turnover Inventory/Sales Fixed Assets/Sales Op.SGA/Sales 53.00 14.50% 5.13x 19.50% 25.0% 95.0%
After
40.15 11.00% 6.67x 15.00% 23.0% 93.0%
Previous Assets Cash Accounts receivable Inventories Total current assets Net plant and equipment Total assets $ 23 334 449 806 575 1,381
Forecast basis
Ch. 12 Forecasting
After
-$115 +$162 9.33% 13.92%
Case Questions
What if operating at 75% capacity?
Effects on AFN? Effects on projected ratios?
Economies of scale:
Also leads to less-than-proportional asset increases.
Lumpy assets:
Leads to large periodic AFN requirements, recurring excess capacity.