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Ch. 4: Financial Forecasting, Planning, and Budgeting

Ch. 4: Financial Forecasting, Planning, and Budgeting.  2002 , Prentice Hall, Inc. Financial Forecasting. 1) Project sales revenues and expenses. Financial Forecasting. 1) Project sales revenues and expenses.

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Ch. 4: Financial Forecasting, Planning, and Budgeting

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  1. Ch. 4: Financial Forecasting,Planning, and Budgeting  2002, Prentice Hall, Inc.

  2. Financial Forecasting • 1) Project sales revenues and expenses.

  3. Financial Forecasting • 1) Project sales revenues and expenses. • 2) Estimate current assets and fixed assets necessary to support projected sales.

  4. Financial Forecasting • 1) Project sales revenues and expenses. • 2) Estimate current assets and fixed assets necessary to support projected sales. • Percent of sales forecast

  5. 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.

  6. This year % of $32m Assets Current Assets $8m 25% Fixed Assets $16m 50% Total Assets $24m Liab. and Equity Accounts Payable $4m 12.5% Accrued Expenses $4m 12.5% Notes Payable $1m n/a Long Term Debt $6m n/a Total Liabilities $15m Common Stock $7m n/a Retained Earnings $2m Equity $9m Total Liab. & Equity $24m

  7. Next year % of $40m Assets Current Assets 25% Fixed Assets 50% Total Assets Liab. and Equity Accounts Payable 12.5% Accrued Expenses 12.5% Notes Payable n/a Long Term Debt n/a Total Liabilities Common Stock n/a Retained Earnings Equity Total Liab. & Equity

  8. Next year % of $40m Assets Current Assets $10m 25% Fixed Assets 50% Total Assets Liab. and Equity Accounts Payable 12.5% Accrued Expenses 12.5% Notes Payable n/a Long Term Debt n/a Total Liabilities Common Stock n/a Retained Earnings Equity Total Liab. & Equity

  9. Next year % of $40m Assets Current Assets $10m 25% Fixed Assets $20m 50% Total Assets Liab. and Equity Accounts Payable 12.5% Accrued Expenses 12.5% Notes Payable n/a Long Term Debt n/a Total Liabilities Common Stock n/a Retained Earnings Equity Total Liab. & Equity

  10. Next year % of $40m Assets Current Assets $10m 25% Fixed Assets $20m 50% Total Assets $30m Liab. and Equity Accounts Payable 12.5% Accrued Expenses 12.5% Notes Payable n/a Long Term Debt n/a Total Liabilities Common Stock n/a Retained Earnings Equity Total Liab. & Equity

  11. Next year % of $40m Assets Current Assets $10m 25% Fixed Assets $20m 50% Total Assets $30m Liab. and Equity Accounts Payable $5m 12.5% Accrued Expenses 12.5% Notes Payable n/a Long Term Debt n/a Total Liabilities Common Stock n/a Retained Earnings Equity Total Liab. & Equity

  12. Next year % of $40m Assets Current Assets $10m 25% Fixed Assets $20m 50% Total Assets $30m Liab. and Equity Accounts Payable $5m 12.5% Accrued Expenses $5m 12.5% Notes Payable n/a Long Term Debt n/a Total Liabilities Common Stock n/a Retained Earnings Equity Total Liab. & Equity

  13. Next year % of $40m Assets Current Assets $10m 25% Fixed Assets $20m 50% Total Assets $30m Liab. and Equity Accounts Payable $5m 12.5% Accrued Expenses $5m 12.5% Notes Payable $1m n/a Long Term Debt n/a Total Liabilities Common Stock n/a Retained Earnings Equity Total Liab. & Equity

  14. Next year % of $40m Assets Current Assets $10m 25% Fixed Assets $20m 50% Total Assets $30m Liab. and Equity Accounts Payable $5m 12.5% Accrued Expenses $5m 12.5% Notes Payable $1m n/a Long Term Debt $6m n/a Total Liabilities Common Stock n/a Retained Earnings Equity Total Liab. & Equity

  15. Next year % of $40m Assets Current Assets $10m 25% Fixed Assets $20m 50% Total Assets $30m Liab. and Equity Accounts Payable $5m 12.5% Accrued Expenses $5m 12.5% Notes Payable $1m n/a Long Term Debt $6m n/a Total Liabilities $17m Common Stock n/a Retained Earnings Equity Total Liab. & Equity

  16. Next year % of $40m Assets Current Assets $10m 25% Fixed Assets $20m 50% Total Assets $30m Liab. and Equity Accounts Payable $5m 12.5% Accrued Expenses $5m 12.5% Notes Payable $1m n/a Long Term Debt $6m n/a Total Liabilities $17m Common Stock $7m n/a Retained Earnings Equity Total Liab. & Equity

  17. Predicting Retained Earnings • Next year’s projected retained earnings = last year’s $2 million, plus:

  18. 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 ( 1 - )

  19. 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 ( 1 - )

  20. 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 ( 1 - )

  21. Next year % of $40m Assets Current Assets $10m 25% Fixed Assets $20m 50% Total Assets $30m Liab. and Equity Accounts Payable $5m 12.5% Accrued Expenses $5m 12.5% Notes Payable $1m n/a Long Term Debt $6m n/a Total Liabilities $17m Common Stock $7m n/a Retained Earnings $3m Equity Total Liab. & Equity

  22. Next year % of $40m Assets Current Assets $10m 25% Fixed Assets $20m 50% Total Assets $30m Liab. and Equity Accounts Payable $5m 12.5% Accrued Expenses $5m 12.5% Notes Payable $1m n/a Long Term Debt $6m n/a Total Liabilities $17m Common Stock $7m n/a Retained Earnings $3m Equity $10m Total Liab. & Equity

  23. Next year % of $40m Assets Current Assets $10m 25% Fixed Assets $20m 50% Total Assets $30m Liab. and Equity Accounts Payable $5m 12.5% Accrued Expenses $5m 12.5% Notes Payable $1m n/a Long Term Debt $6m n/a Total Liabilities $17m Common Stock $7m n/a Retained Earnings $3m Equity $10m Total Liab. & Equity $27m

  24. Next year % of $40m Assets Current Assets $10m 25% Fixed Assets $20m 50% Total Assets $30m Liab. and Equity Accounts Payable $5m 12.5% Accrued Expenses $5m 12.5% Notes Payable $1m n/a Long Term Debt $6m n/a Total Liabilities $17m Common Stock $7m n/a Retained Earnings $3m Equity $10m Total Liab. & Equity $27m How much Discretionary Financing will we Need?

  25. Next year % of $40m Assets Current Assets $10m 25% Fixed Assets $20m 50% Total Assets $30m Liab. and Equity Accounts Payable $5m 12.5% Accrued Expenses $5m 12.5% Notes Payable $1m n/a Long Term Debt $6m n/a Total Liabilities $17m Common Stock $7m n/a Retained Earnings $3m Equity $10m Total Liab. & Equity $27m How much Discretionary Financing will we Need?

  26. Next year % of $40m Assets Current Assets $10m 25% Fixed Assets $20m 50% Total Assets $30m Liab. and Equity Accounts Payable $5m 12.5% Accrued Expenses $5m 12.5% Notes Payable $1m n/a Long Term Debt $6m n/a Total Liabilities $17m Common Stock $7m n/a Retained Earnings $3m Equity $10m Total Liab. & Equity $27m How much Discretionary Financing will we Need?

  27. Predicting Discretionary Financing Needs

  28. Predicting Discretionary Financing Needs Discretionary Financing Needed =

  29. Predicting Discretionary Financing Needs Discretionary Financing Needed = projected projected projected total - total - owners’ assets liabilities equity

  30. Predicting Discretionary Financing Needs Discretionary Financing Needed = projected projected projected total - total - owners’ assets liabilities equity $30 million - $17 million - $10 million

  31. 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

  32. Sustainable Rate of Growth

  33. Sustainable Rate of Growth g* = ROE (1 - b)where

  34. Sustainable Rate of Growth g* = ROE (1 - b)where b = dividend payout ratio (dividends / net income)

  35. 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

  36. 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 equity ROE = x x

  37. Budgets • Budget: a forecast of future events.

  38. 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.

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