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Chapter 4 – Financial Forecasting, Planning, and Budgeting

Chapter 4 – Financial Forecasting, Planning, and Budgeting.  2005, Pearson Prentice Hall. Financial Forecasting. 1) Project sales revenues and expenses. Financial Forecasting. 1) Project sales revenues and expenses.

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Chapter 4 – Financial Forecasting, Planning, and Budgeting

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  1. Chapter 4 –Financial Forecasting,Planning, and Budgeting  2005, Pearson Prentice Hall

  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 = $3 million 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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