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Understanding the Link Between Sales Growth and Financial Planning Models

This article explores the crucial relationship between sales and financial planning, illustrating how changes in sales impact assets, liabilities, and owners' equity. We delve into pro forma income statements and balance sheets, showcasing simplified calculations for external funds needed (EFN) based on projected sales growth. Real-world scenarios are examined to determine the sustainable growth rate when external funding is absent. Gain insights into financial strategies that align with sales performance and understand the implications for overall business growth.

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Understanding the Link Between Sales Growth and Financial Planning Models

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  1. Financial Planning

  2. Financial Planning Models Begin With Sales, butWhere do Sales Come From? Economy Industry Product Sales

  3. Changes in Sales Necessitate Changes in Assets and in Liabilities and Owners’ Equity Sales Assets Liabilities Owners’ Equity

  4. Problem 9 Pro Forma Income Statement

  5. Problem 9 Pro Forma Income Statement

  6. Problem 10 Pro Forma Balance Sheet

  7. Problem 11 Pro Forma Balance Sheet

  8. External Funds Needed (Simplified) Where, CA = Current Assets FA = Fixed Assets SL = Spontaneous Liabilities S = Original Sales g = growth rate in sales  = net profit margin d = dividend payout ratio

  9. External Funds Needed (Simplified)With Numbers • CA*g = $11,350*.15 = $1,702.50 • FA*g = $20,000*.15 = $3,000.00 • SL*g = $ 5,000*.15 = $ 750.00 • S*(1+g)**(1-d) = $16,000*(1.15)*.289*.675 = $3,589.38 • EFN = 1,702 + 3,000 - 750 - 3589 = 363  365

  10. External Funds and Growth Suppose EFN = 0, what is the growth rate? Implies that = .0995/[1-.1595-.0995] = .1343 = 13.43% Suppose no external funding of any kind is used. What is the growth rate? Suppose no external equity is used, but enough debt is used to maintain the same total debt-to-total asset ratio. What growth can be sustained?

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