Financial Planning and

Forecasting
Maulana Rizky Faadillah - 195020207111058
Strategic Planning
Management textbooks often list the following as the key elements of a strategic plan:

 Mission Statement A condensed version of a firm’s strategic plan.

 Corporate Scope Defines a firm’s lines of business and geographic areas of operation.
 Statement of Corporate Objectives Sets forth specific goals to guide management.
 Corporate Strategies Broad approaches developed for achieving a firm’s goals.
The Sales Forecast
Financial plans generally begin with a sales forecast, which starts with a review of sales
during the past 5 years, shown as a graph.1 for Allied Food. These numbers are based on
Allied’s financial statements, which were first presented in Chapter 3. The data below the
graph show 5 years of historical sales.
The AFN Equation
We saw in Chapter 3 that in 2018, Allied had assets of $2,000 million and sales of $3,000
million. Thus, it required $2,000/$3,000 5 $0.6667 of assets to generate each dollar of
sales. Moreover, the company plans to increase sales by 10%, or $300 million, in 2019:

Assuming the assets-to-sales ratio remains constant, Allied will need an additional $200
million of assets to support the $300 million increase in sales:

Note that if growth is low (say, 0%), DSales will be zero, and there will be no required
increase in assets. On the other hand, if sales grow very rapidly, the requirement for
additional assets will be large. Thus, the increase in assets is fundamentally dependent on
the growth rate in sales.
Naturally, if assets are to grow by $200 million, liabilities and equity must also grow by the
same amount—the balance sheet must balance. But from where will this capital come? Here are
a firm’s primary capital sources:
 Spontaneous Increases in Accounts Payable and Accruals.
 Addition to Retained Earnings.
 AFN: Additional Funds Needed.

We can combine these concepts to develop Equation 17.1, the AFN equation. AFN is the total
amount of new interest-bearing debt and preferred and common stock the firm must issue to
support its planned growth:7
EXCESS CAPACITY ADJUSTMENTS
Forecasted Financial Statements
PART I. INPUTS
• Adjustable Inputs
• Fixed Inputs

PART II. FORECASTED INCOME STATEMENT

PART III. FORECASTED BALANCE SHEET

PART IV. RATIOS AND EPS

USING THE FORECAST TO IMPROVE OPERATIONS

Using Regression to Improve Forecasts
In financial statement forecasts, it is often appropriate to assume that most of the assets
increase at the same rate as sales. However, that is often not the case. We noted in our
discussion of the AFN equation that excess capacity might exist, in which case assets
would increase less rapidly than sales. Similarly, economies of scale might exist, and this
too could enable sales to increase less rapidly than assets.
Analyzing the Effects of Changing Ratios
• MODIFYING ACCOUNTS RECEIVABLE

• MODIFYING INVENTORIES

• OTHER “SPECIAL STUDIES”

THANK YOU