Financial Forecasting,

Planning, and Budgeting

 Financial Forecasting
- Business Plan

• Make a business plan

• Company Background
• Market Study
• Proposed Capacity
• Product Mix
• Technological arrangement
• Financial Plan .. etc
 Financial Plan

• Estimate the expected sales

• Estimate the capital requirement
• Plan your budgets
• Plan in advance for future working capital
finance
• Means of Finance
• State the Assumptions
 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 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.
 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
 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
 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
 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
 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
 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
 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
 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
 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
 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
 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
 Predicting Retained Earnings

• Next year’s projected retained earnings = last

year’s 2 million, plus:
 Predicting Retained Earnings

• Next year’s projected retained earnings = last

year’s 2 million, plus:

projected net income cash dividends

sales
x sales
x (1 - net income )
 Predicting Retained Earnings

• Next year’s projected retained earnings = last

year’s 2 million, plus:

projected net income cash dividends

sales
x sales
x (1 - net income )

40 million x .05 x (1 - .50)

 Predicting Retained Earnings

• Next year’s projected retained earnings = last

year’s 2 million, plus:

projected net income cash dividends

sales
x sales
x (1 - net income )

40 million x .05 x (1 - .50)

= 2 million + 1 million = 3million

 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
 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
 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
 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 How much
12.5%
Notes Payable 1m Discretionary
n/a
Long Term Debt 6m Financing
n/a
Total Liabilities 17m will we
Common Stock 7m Need?
n/a
Retained Earnings 3m
Equity 10m
Total Liab. & Equity 27m
 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 How much
12.5%
Notes Payable 1m Discretionary
n/a
Long Term Debt 6m Financing
n/a
Total Liabilities 17m will we
Common Stock 7m Need?
n/a
Retained Earnings 3m
Equity 10m
Total Liab. & Equity 27m
 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 How much
12.5%
Notes Payable 1m Discretionary
n/a
Long Term Debt 6m Financing
n/a
Total Liabilities 17m will we
Common Stock 7m Need?
n/a
Retained Earnings 3m
Equity 10m
Total Liab. & Equity 27m
Predicting Discretionary
Financing Needs
 Predicting Discretionary
Financing Needs

Discretionary Financing Needed =

 Predicting Discretionary
Financing Needs

Discretionary Financing Needed =

projected projected projected

total - total - owners’
assets liabilities equity
 Predicting Discretionary
Financing Needs

Discretionary Financing Needed =

projected projected projected

total - total - owners’
assets liabilities equity

30 million - 17 million - 10 million

 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

 Business Plan

• Forecast Income Statement

1. Sales Revenue
2. Direct Cost
3. Indirect Cost
4. Financial Cost and Taxes
5. Profit
 Business Plan

• Forecasting the balance Sheet - Assets

1. Planning Investment in Fixed Assets
2. Requirement of Working capital
* Planning receivable collection period
* Planning Inventory
 Business Plan

• Forecasting the balance sheet – Means of

Finance
1. Own Capital
2. Long Term Debt
3. Current Liabilities
 Sales Forecast

Exhibit 1
Products Volume Price Sales
A 1,000 300 300,000
B 5,000 100 500,000
C 10,000 120 1,200,000
Total Sales 2,000,000
 Expenses Forecast

• Direct Expenses 60%

• Indirect Expenses 15%
• Financial Expenses are expected at 12% of
the total borrowings
 Uses of Finance

• Investment in fixed assets 1,000,000

• Accounts receivable period 90 days
• Inventory required 30 days
 Sources of Finance

• 25% is own funds

• 75% is long term borrowings
• 25% of working capital is from own funds
• 75% of working capital is Bank Finance
• Creditors period is 45 days
 Making of Business Plan

• Accounts receivable period is 90 days

Accounts Receivable = Sales/360 * 90
2,000,000/360 = Per day sale = 5,555.56
Accounts Receivable = 5,555.56*90
= 500,000
 Making of Business Plan

Inventory is to be maintained for 30 days

= Cost of Production / 360 *30
Cost of Production = Direct Cost + Indirect
Cost
60% + 15% = 75%
2,000,000*75% = 1500,000
Inventory = 1500000/360*30 = 125,000
 Making of Business Plan

Creditors are for 45 days

Creditors = Cost of goods sold /360 * 45

150,000/360 * 45 = 187,500
 Making of Business Plan

Working Capital Required

Current Assets – Current Liabilities
( 500,000 + 125,000 – 187,500 ) = 437,500
Bank Working Capital Finance = 75%
= 328,125
Own Funds 25% = 109,375
 Making of Business Plan

Fixed Assets = 1000,000

Own Sources of Finance = 250,000
Long Term Bank Finance = 750,000
 Making of Business Plan

Total Own Funds = 109375 + 250,000

= 359,375

Total Borrowed Funds = 328,125 + 750,000

= 1,078,125
 Making of Business Plan
Liabilities Assets
Own Funds 359,375 Fixed Assets 1000,000
Term Loan 750,000 Accounts
Creditors 187,500 Receivable 500,000
Short Term 328,125 Inventory 125,000
Finance
Total 1,625,000 Total 1,625,000
 Making of Business Plan

Income Statement
Sales 2,000,000
Direct Expenses @ 60% 1,200,000
Gross Profit 800,000
Indirect Expenses @ 15% 300,000
Cost of Goods Sold 1,500,000
 Making of Business Plan

Financial cost @ 12 % 129,375

On (750000 + 328125)

Total Cost 1,629,375

Profit 370,625