Financial Forecasting,

Financial Forecasting
Planning and Budgeting

• 1) Project sales revenues and expenses.

• 2) Estimate current assets and fixed
assets necessary to support projected
sales.
– Percent of sales forecast

 1999, Prentice Hall, Inc.

This year % of $32m

Assets
Percent of Sales Method Current Assets $8m 25%
Fixed Assets $16m 50%
Total Assets $24m
• Suppose this years sales will total
Liab. and Equity
$32 million. Accounts Payable $4m 12.5%
• Next year, we forecast sales of Accrued Expenses $4m 12.5%
$40 million. Notes Payable $1m n/a
Long Term Debt $6m n/a
• Net income should be 5% of sales. Total Liabilities $15m
• Dividends should be 50% of Common Stock $7m n/a
Retained Earnings $2m
earnings.
Equity $9m
Total Liab & Equity $24m

Next year % of $40m Next year % of $40m

Assets Assets
Current Assets 25% Current Assets $10m 25%
Fixed Assets 50% Fixed Assets $20m 50%
Total Assets Total Assets $30m
Liab. and Equity Liab. and Equity
Accounts Payable 12.5% Accounts Payable $5m 12.5%
Accrued Expenses 12.5% Accrued Expenses $5m 12.5%
Notes Payable n/a Notes Payable $1m n/a
Long Term Debt n/a Long Term Debt $6m n/a
Total Liabilities Total Liabilities $17m
Common Stock n/a Common Stock $7m n/a
Retained Earnings Retained Earnings
Equity Equity
Total Liab & Equity Total Liab & Equity

1
 Next year % of $40m
Assets
Predicting Retained Earnings: Current Assets $10m 25%
Fixed Assets $20m 50%
• Next year’s projected retained earnings = last Total Assets $30m
years $2 million, plus: Liab. and Equity
Accounts Payable $5m 12.5%
Accrued Expenses $5m 12.5%
projected net income
sales
x sales
x ( 1 - cash dividends
net income
) Notes Payable
Long Term Debt
$1m
$6m
n/a
n/a
Total Liabilities $17m
$40 million x .05 x (1 - .50) Common Stock $7m n/a
Retained Earnings $3m
Equity $10m
= $2 million + $1 million = $3million Total Liab & Equity $27m

Next year % of $40m

Assets Predicting
Predicting Discretionary
Discretionary Financing
Financing
Current Assets $10m 25% Needs
Needs
Fixed Assets $20m 50%
Total Assets $30m Discretionary Financing Needed =
Liab. and Equity
Accounts Payable $5m 12.5%
How much projected projected projected
Accrued Expenses $5m 12.5%
Discretionary total - total - owners’
Notes Payable $1m n/a
Financing assets liabilities equity
Long Term Debt $6m n/a
Total Liabilities $17m will we
Common Stock $7m n/a
Need? $30 million - $17 million - $10
Retained Earnings $3m million
Equity $10m
Total Liab & Equity $27m = $3 million in discretionary financing

Budgets 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.