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Financial Forecasting, Planning, and Budgeting

The document discusses financial forecasting, planning, and budgeting. It provides an example of projecting the income statement, balance sheet, and cash flows for a company using the percent of sales method. The company forecasts sales to increase to $40 million next year from $32 million currently. It shows how to estimate accounts based on percentages of forecasted sales and how to calculate retained earnings. The document also discusses determining discretionary financing needs and sustainable growth rates using return on equity and dividend payout ratios. Finally, it defines budgets as forecasts that indicate financing needs and provide a basis for evaluation.

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86 views38 pages

Financial Forecasting, Planning, and Budgeting

The document discusses financial forecasting, planning, and budgeting. It provides an example of projecting the income statement, balance sheet, and cash flows for a company using the percent of sales method. The company forecasts sales to increase to $40 million next year from $32 million currently. It shows how to estimate accounts based on percentages of forecasted sales and how to calculate retained earnings. The document also discusses determining discretionary financing needs and sustainable growth rates using return on equity and dividend payout ratios. Finally, it defines budgets as forecasts that indicate financing needs and provide a basis for evaluation.

Uploaded by

jawadzaheer
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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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.
2) Estimate current assets and fixed
assets necessary to support projected
sales.

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

Percent of Sales Method

Suppose this years 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.

This year
Assets
Current Assets
Fixed Assets
Total Assets
Liab. and Equity
Accounts Payable
Accrued Expenses
Notes Payable
Long Term Debt
Total Liabilities
Common Stock
Retained Earnings
Equity
Total Liab. & Equity

$8m
$16m
$24m
$4m
$4m
$1m
$6m

% of $32m
25%
50%

12.5%
12.5%
n/a
n/a
$15m

$7m
$2m

n/a
$9m
$24m

Next year
Assets
Current Assets
Fixed Assets
Total Assets
Liab. and Equity
Accounts Payable
Accrued Expenses
Notes Payable
Long Term Debt
Total Liabilities
Common Stock
Retained Earnings
Equity
Total Liab. & Equity

% of $40m
25%
50%

12.5%
12.5%
n/a
n/a
n/a

Next year
Assets
Current Assets
Fixed Assets
Total Assets
Liab. and Equity
Accounts Payable
Accrued Expenses
Notes Payable
Long Term Debt
Total Liabilities
Common Stock
Retained Earnings
Equity
Total Liab. & Equity

$10m

% of $40m
25%
50%

12.5%
12.5%
n/a
n/a
n/a

Next year
Assets
Current Assets
Fixed Assets
Total Assets
Liab. and Equity
Accounts Payable
Accrued Expenses
Notes Payable
Long Term Debt
Total Liabilities
Common Stock
Retained Earnings
Equity
Total Liab. & Equity

$10m
$20m

% of $40m
25%
50%

12.5%
12.5%
n/a
n/a
n/a

Next year
Assets
Current Assets
Fixed Assets
Total Assets
Liab. and Equity
Accounts Payable
Accrued Expenses
Notes Payable
Long Term Debt
Total Liabilities
Common Stock
Retained Earnings
Equity
Total Liab. & Equity

$10m
$20m
$30m

% of $40m
25%
50%

12.5%
12.5%
n/a
n/a
n/a

Next year
Assets
Current Assets
Fixed Assets
Total Assets
Liab. and Equity
Accounts Payable
Accrued Expenses
Notes Payable
Long Term Debt
Total Liabilities
Common Stock
Retained Earnings
Equity
Total Liab. & Equity

$10m
$20m
$30m
$5m

% of $40m
25%
50%

12.5%
12.5%
n/a
n/a
n/a

Next year
Assets
Current Assets
Fixed Assets
Total Assets
Liab. and Equity
Accounts Payable
Accrued Expenses
Notes Payable
Long Term Debt
Total Liabilities
Common Stock
Retained Earnings
Equity
Total Liab. & Equity

$10m
$20m
$30m
$5m
$5m

% of $40m
25%
50%

12.5%
12.5%
n/a
n/a
n/a

Next year
Assets
Current Assets
Fixed Assets
Total Assets
Liab. and Equity
Accounts Payable
Accrued Expenses
Notes Payable
Long Term Debt
Total Liabilities
Common Stock
Retained Earnings
Equity
Total Liab. & Equity

$10m
$20m
$30m
$5m
$5m
$1m

% of $40m
25%
50%

12.5%
12.5%
n/a
n/a
n/a

Next year
Assets
Current Assets
Fixed Assets
Total Assets
Liab. and Equity
Accounts Payable
Accrued Expenses
Notes Payable
Long Term Debt
Total Liabilities
Common Stock
Retained Earnings
Equity
Total Liab. & Equity

$10m
$20m
$30m
$5m
$5m
$1m
$6m

% of $40m
25%
50%

12.5%
12.5%
n/a
n/a
n/a

Next year
Assets
Current Assets
Fixed Assets
Total Assets
Liab. and Equity
Accounts Payable
Accrued Expenses
Notes Payable
Long Term Debt
Total Liabilities
Common Stock
Retained Earnings
Equity
Total Liab. & Equity

$10m
$20m
$30m
$5m
$5m
$1m
$6m

% of $40m
25%
50%

12.5%
12.5%
n/a
n/a
$17m
n/a

Next year
Assets
Current Assets
Fixed Assets
Total Assets
Liab. and Equity
Accounts Payable
Accrued Expenses
Notes Payable
Long Term Debt
Total Liabilities
Common Stock
Retained Earnings
Equity
Total Liab. & Equity

$10m
$20m
$30m
$5m
$5m
$1m
$6m

% of $40m
25%
50%

12.5%
12.5%
n/a
n/a
$17m

$7m

n/a

Predicting Retained Earnings


Next years projected retained earnings = last
years $2 million, plus:

Predicting Retained Earnings


Next years projected retained earnings = last
years $2 million, plus:
projected
sales

net income x
sales

( 1 - cash dividends)
net income
net income

Predicting Retained Earnings


Next years projected retained earnings = last
years $2 million, plus:
projected
sales

net income x
sales

$40 million x

.05

( 1 - cash dividends)
net income
net income

(1 - .50)

Predicting Retained Earnings


Next years projected retained earnings = last
years $2 million, plus:
projected
sales

net income x
sales

$40 million x

.05

( 1 - cash dividends)
net income
net income

(1 - .50)

= $2 million + $1 million = $3 million

Next year
Assets
Current Assets
Fixed Assets
Total Assets
Liab. and Equity
Accounts Payable
Accrued Expenses
Notes Payable
Long Term Debt
Total Liabilities
Common Stock
Retained Earnings
Equity
Total Liab. & Equity

$10m
$20m
$30m
$5m
$5m
$1m
$6m

% of $40m
25%
50%

12.5%
12.5%
n/a
n/a
$17m

$7m
$3m

n/a

Next year
Assets
Current Assets
Fixed Assets
Total Assets
Liab. and Equity
Accounts Payable
Accrued Expenses
Notes Payable
Long Term Debt
Total Liabilities
Common Stock
Retained Earnings
Equity
Total Liab. & Equity

$10m
$20m
$30m
$5m
$5m
$1m
$6m

% of $40m
25%
50%

12.5%
12.5%
n/a
n/a
$17m

$7m
$3m

n/a
$10m

Next year
Assets
Current Assets
Fixed Assets
Total Assets
Liab. and Equity
Accounts Payable
Accrued Expenses
Notes Payable
Long Term Debt
Total Liabilities
Common Stock
Retained Earnings
Equity
Total Liab. & Equity

$10m
$20m
$30m
$5m
$5m
$1m
$6m

% of $40m
25%
50%

12.5%
12.5%
n/a
n/a
$17m

$7m
$3m

n/a
$10m
$27m

Next year
Assets
Current Assets
Fixed Assets
Total Assets
Liab. and Equity
Accounts Payable
Accrued Expenses
Notes Payable
Long Term Debt
Total Liabilities
Common Stock
Retained Earnings
Equity
Total Liab. & Equity

$10m
$20m
$30m
$5m
$5m
$1m
$6m

% of $40m
25%
50%

12.5%
How
much
12.5%
Discretionary
n/a
Financing
n/a
$17m

$7m
$3m
$10m
$27m

will we
Need?
n/a

Next year
Assets
Current Assets
Fixed Assets
Total Assets
Liab. and Equity
Accounts Payable
Accrued Expenses
Notes Payable
Long Term Debt
Total Liabilities
Common Stock
Retained Earnings
Equity
Total Liab. & Equity

$10m
$20m
$30m
$5m
$5m
$1m
$6m

% of $40m
25%
50%

12.5%
How
much
12.5%
Discretionary
n/a
Financing
n/a
$17m

$7m
$3m
$10m
$27m

will we
Need?
n/a

Next year
Assets
Current Assets
Fixed Assets
Total Assets
Liab. and Equity
Accounts Payable
Accrued Expenses
Notes Payable
Long Term Debt
Total Liabilities
Common Stock
Retained Earnings
Equity
Total Liab. & Equity

$10m
$20m
$30m
$5m
$5m
$1m
$6m

% of $40m
25%
50%

12.5%
How
much
12.5%
Discretionary
n/a
Financing
n/a
$17m

$7m
$3m
$10m
$27m

will we
Need?
n/a

Predicting Discretionary
Financing Needs

Predicting Discretionary
Financing Needs
Discretionary Financing Needed =

Predicting Discretionary
Financing Needs
Discretionary Financing Needed =
projected
total
assets

projected
total
liabilities

projected
owners
equity

Predicting Discretionary
Financing Needs
Discretionary Financing Needed =
projected
total
assets

projected
total
liabilities

projected
owners
equity

$30 million -

$17 million - $10 million

Predicting Discretionary
Financing Needs
Discretionary Financing Needed =
projected
total
assets

projected
total
liabilities

projected
owners
equity

$30 million -

$17 million - $10 million

= $3 million in discretionary financing

Sustainable Rate of Growth

Sustainable Rate of Growth


g* = ROE (1 - b)

where

Sustainable Rate of Growth


g* = ROE (1 - b)

where

b = dividend payout ratio


(dividends / net income)

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

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
ROE = sales
x assets

assets
x common equity

Budgets

Budget: a forecast of future events.

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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