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Financial Planning and Forecasting

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  1. Financial Planningand Forecasting Ing. Zuzana Čierna, PhD. Department of Finance SPU – FEM, Nitra

  2. From an investor’s standpoint, predicting the future is what financial statement analysis is all about, while from management’s standpoint, financial statement analysis is useful both to help anticipate future conditions and, more important, as a starting point for planning actions that will improve the firm’s future performance.

  3. Projected financial statements are used to estimate future free cashflows, which determine the company’s overall value. Thus, managers forecast freecash flows under different operating plans, forecast their capital requirements, andthen choose the plan that maximizes shareholder value. Operating plans provide detailed implementation guidance, based on the corporatestrategy, to help meet the corporate objectives. These plans can be developedfor any time horizon. Financial plan – a document which involves current and future needs of funds and currently existing and expected future resources to cover.

  4. long-term financial plan • short-term financial plan Content of  short-term FP  - profit plan,- financial statement,- cash flow plan,- plan distribution of profit

  5. Five-Year Operating Plan Outline

  6. Percent of Sales Method A method of forecasting futurefinancial statements that expresseseach account as a percentage ofsales. Once sales have been forecasted, we must forecast future balance sheets and incomestatements. • FORECASTED INCOME STATEMENT • FORECAST THE BALANCE SHEET • RAISING THE ADDITIONAL FUNDS NEEDED • FORECASTING FREE CASH FLOW

  7. Percent of Sales Method(steps) 1.step: Financial analysis of current period 2.step: Aims formulation for time horizon of FP 3.step: Assessment of basic requirements: a) balance sheet items is most closely linked to sales b) structure of assets and liabilities of current period are adequate to the level of sales 4.step: If 3.b) is not fulfill there is necessary to make correction of balance sheet items of current period. It can be made by Financial ratios method.

  8. Percent of Sales Method(steps) 5.step: Identification of those balance sheet items, which are changed in dependence on the sales changes. Share quantification of sheet balance items on sales. 6.step: Calculation of planned balance sheet items. Share of balance sheet items on sales times planned sales. Balance sheet itemswithout dependence on sales changesare taken from current balance sheet.

  9. Percent of Sales Method(steps) 7.step: Calculation of additional funds needed.Disparity between higher assets and lower liabilities. 8.step:Structure of additional funds needed in accordance with aims of financial plan. 9.step: New plan of balance sheet and plan of cash flow. 10.step:Control if aims of FP were fulfill.

  10. Financial ratios method Selected financial ratios are used as „model values“. Firm wants to reach these values in future. These values can be formulated as: • specific aims of firm • average values of firms in the same sector • values of competitive firm

  11. Example: We want to make a financial plan for year 2013. Expected Balance sheet31.12.2012 Fixed assets 375Registered Capital 475 Inventories 300Retained Profit 52 Receivables 215 Liabilities to suppliers 130 Financial Accounts 25Short-term bank loans 35 Current Assets 540Wages, taxes and other liabilities 105 Short-term liabilities 270 Long-term bank loans 118 Total Assets 915 Total capital and liabilities 915

  12. (1., 2.step) Expected sales in year 2012 = 1600euro; Net income = 80euro; Dividends = 20euro. Expected growth of sales in 2013 is 25% in compare with sales in year 2012. Aims formulation for year 2013: 1.) 5% profitability of sales.2.) Dividends 50% from net income. 3.) Debts from total assets – no more than 40%.

  13. (3.step) Structure of assets (Expected Balance sheet 31.12.2012) are not adequate to the level of sales! We have to make correction by Financial ratios method: Selected financial ratios values of competitive firm: Inventories turnover ratio = 6 DSO = 40 Inventories turnover ratio = sales/inventories Days sales outstanding = (receivables * 365)/sales

  14. (4.step) Correction of balance sheet items of currentperiod. Model values: Inventories turnover ratio = 6 DSO = 40 We have to make correction in inventories and receivables. Inventories turnover ratio = sales/inventories= 1600/300 = 5,33 New value of inventories = 1600/6 = 266,6  270 Days sales outstanding = (receivables * 365)/sales= (215 * 365)/1600 = 41,9 New value of receivables = (40 * 1600)/365 = 175,3  180

  15. (4.step) Expected Balance sheet (after correction)31.12.2012 Fixed assets 375Registered Capital 475 Inventories 270Retained Profit 52 Receivables 180 Liabilities to suppliers 130 Financial Accounts 90Short-term bank loans 35 Current Assets 540Wages, taxes and other liabilities 105 Short-term liabilities 270 Long-term bank loans 118 Total Assets 915 Total capital and liabilities 915

  16. (5., 6.step) Expected growth of sales in 2013 is 25%: 1600 + 25% = 2000euro (1) (2) Share on sales (in current period) Planned balance sheet (% from 1600 euro) (planned sales * column 1) Financial accounts (90/1600) * 100 = 5,6 2000 * 0,056 = 112 Receivables (180/1600)*100 = 11,3 2000 * 0,113 = 226 Inventories (270/1600)*100 = 16,9 2000 * 0,169 = 338 Current assets (540/1600)*100 = 33,8 2000 * 0,338 = 676 Fixed assets (373/1600)*100 = 23,4 2000 * 0,234 = 468 Total assets(915/1600)*100 = 57,1 2000 * 0,571 = 1144 Liabilities to suppliers (130/1600)*100 = 8,1 2000 * 0,081 = 162 Short-term bank loanswithout dependence on sales changes are taken from current balance sheet: 35 Wages, taxes and other liabilities (105/1600)*100 = 6,6 2000 * 0,066 = 132 Short-term liabilities –– 329 Long-term bank loanswithout dependence on sales changes are taken from current balance sheet: 118 Registered Capital without dependence on sales changes are taken from current balance sheet: 475 Retained Profit 102 Total capital and liabilities–– 1024

  17. Calculation ofRetained Profit: (5.,6.step) Change in Retained profit = Net income – Dividends Retained profit Retained profit Change in of planned period = of current period + Retained profit Net income (from aims formulation: 1.) 5% profitability of sales): 100 euro (5% from planned sales2000 euro) Dividends (from aims formulation: 2.) 50% from net income): 50 euro (50% from net income 100 euro) Change in Retained profit = 100 – 50 = 50 euro Retained profit of planned period= 52 + 50 = 102 euro

  18. (7.step) Calculation of additional funds needed. Disparity between higher assets and lower liabilities. Total assets - Total capital and liabilities: 1144 – 1024 = 120 euro (8.step) Structure of additional funds needed in accordance with aims of financial plan : 3.) Debts from total assets – no more than 40%. Maximal Debts = 0,4 * Total assets (planned) = 0,4 * 1144 = 458 euro Short-term liabilities (planned) 329 Long-term bank loans 118 Total debts (planned) 447 Maximal debts – Total debts (planned) = 458 – 447 = 11 euro(maximal additional debts)

  19. (8.step) Structure of additional funds needed: New long-term debt 11 New share issue (shareholder's investment)109 Total additional funds needed102 euro (9.step) Plan of Balance sheet 31.12.2013 Fixed assets 468Registered Capital (475+109)=584 Inventories 338Retained Profit 102 Receivables 226Liabilities to suppliers 162 Financial Accounts 112Short-term bank loans 35 Current Assets 676Wages, taxes and other liabilities 132 Short-term liabilities 329 Long-term bank loans (118+11)=129 Total Assets 1144 Total capital and liabilities 1144

  20. Plan of Cash flow (9.step) 1.Operating activities Net income ..................................................... + 100 increase in Liabilities to suppliers ..................... + 32 increase in Receivables ..................................... - 46 increase in Wages, taxes and other liabilities ..... +27 increase in Inventories ..................................... - 68 resources from Operating activities ..................... + 159 use of resources ..................................... - 114 Total operating activities ..................................... + 45 2. Investment activities increase in Fixed assets ..................................... - 93 3. Financial activities increase in Long-term bank loans ..................... - 11 New share issue ..................................... + 109 Dividends ..................................................... - 50 resources from Financial activities ..................... + 120 use of resources ..................................... - 50 Total financial activities ..................................... + 70

  21. Plan of Cash flow (9.step) 1.Operating activities+ 45 2. Investment activities- 93 3. Financial activities+ 70 CASH FLOW + 22

  22. Than you for your attention!