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Financial Planning and Forecasting

Chapter 17. Financial Planning and Forecasting. Forecasting Sales Projecting the Assets and Internally Generated Funds Projecting Outside Funds Needed Deciding How to Raise Funds. Preliminary Financial Forecast: Balance Sheets (Assets).

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Financial Planning and Forecasting

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  1. Chapter 17 Financial Planning and Forecasting Forecasting Sales Projecting the Assets and Internally Generated Funds Projecting Outside Funds Needed Deciding How to Raise Funds

  2. Preliminary Financial Forecast:Balance Sheets (Assets)

  3. Preliminary Financial Forecast: Balance Sheets (Liabilities and Equity)

  4. Preliminary Financial Forecast: Income Statements

  5. Key Financial Ratios

  6. Key Assumptions in Preliminary Financial Forecast for NWC • Operating at full capacity in 2012. • Each type of asset grows proportionally with sales. • Payables and accruals grow proportionally with sales. • 2012 profit margin (2.52%) and payout (30%) will be maintained. • Sales are expected to increase by $500 million. (%DS = 25%)

  7. Determining Additional Funds Needed Using the AFN Equation AFN = (A0*/S0)S – (L0*/S0)S – M(S1)(1 – Payout) = ($1,000/$2,000)($500) – ($100/$2,000)($500) – 0.0252($2,500)(0.7) = $180.9 million

  8. Management’s Review of the Financial Forecast • Consultation with some key managers has yielded the following revisions: • Firm expects customers to pay quicker next year, thus reducing DSO to 34 days without affecting sales. • A new facility will boost the firm’s net fixed assets to $700 million. • New inventory system to increase the firm’s inventory turnover to 10x, without affecting sales.

  9. Management’s Review of the Financial Forecast • These changes will lead to adjustments in the firm’s assets and will have no effect on the firm’s liabilities and equity section of the balance sheet or its income statement.

  10. Revised (Final) Financial Forecast:Balance Sheets (Assets)

  11. Key Financial Ratios: Final Forecast

  12. What was the net investment in capital?

  13. How much free cash flow is expected to be generated in 2013? FCF = EBIT(1 – T) – Net investment in capital = $125(0.6) – $225 = $75 – $225 = -$150

  14. Suppose Fixed Assets Had Been Operating at Only 85% of Capacity in 2012 • The maximum amount of sales that can be supported by the 2012 level of assets is: • 2013 forecast sales exceed the capacity sales, so new fixed assets are required to support 2013 sales.

  15. How can excess capacity affect the forecasted ratios? • Sales wouldn’t change but assets would be lower, so turnovers would improve. • Less new debt, hence lower interest and higher profits • EPS, ROE, debt ratio, and TIE would improve.

  16. How would the following items affect the AFN? • Higher dividend payout ratio? • Increase AFN: Less retained earnings. • Higher profit margin? • Decrease AFN: Higher profits, more retained earnings. • Higher capital intensity ratio? • Increase AFN: Need more assets for a given level of sales. • Pay suppliers in 60 days, rather than 30 days? • Decrease AFN: Trade creditors supply more capital (i.e., L0*/S0 increases).

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