Unit 2: Financial Planning and Forecasting
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Procedures of Strategic Plan
Defining the mission
Assessing the Situation
Developing goal, objectives and strategies
Operational Plan
Financial plan
Sales Forecast
Reviews of past sales
Estimating Annual growth rate
Return on assets(ROA) = Net income
Total assets
Return on equity(ROE) = Net income
Total equity
Dividend payout ratio(D/P ratio) = Dividend
Net income
Retention ratio(RR) = 1 – D/P ratio
Internal growth rate(g) = ROA * RR
1- ROA * RR
Sustainable growth rate(gs) = ROE * RR
1- ROE * RR
Methods of Financial Forecasting
Percent of Sales Methods ljlqmsf] k|ltzt
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Additional Fund Needed(AFN) Equation
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Percentage of External Fund
Requirement(PEFR) afXo sf]if cfjZostfsf]
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Percent of Sales Methods ljlqmsf] k|ltzt ljlw
Forecasting Income Statement cfo ljj/0fsf] k"jf{g'dfg
Forecasting Balance sheet
Forecasted Income Statement of ........... company for the year......
Actual of Forecast Forecast for
Particulars …..Rs Basis …. Rs
Slaes xxx 1+g xxx
Less: COGS xxx 1+g xxx
Gross profit xxx xxx
Less:Fixed
cost xxx 1+g xxx
EBIT xxx xxx
Less : interest xxx xxx
EBT xxx xxx
Less: tax @40
% xxx xxx
Net income xxx xxx
Less:
dividend xxx xxx
Retained
earning xxx xxx
Forecasting Balance Sheet
Calculation of Spontaneous assets to Sales Ratio
Spontaneous assets Spontaneous
assets to Sales Ratio
Cash cash/sales * 100
Receivable receivable/sales *
100
Inventory Inventory/sales *100
Fixed assets(If full capacity used) Fixed
assets/sales *100
Calculation of Spontaneous liabilities to sales ratio
Spontaneous Liabilities Spontaneous liabilities
to sales ratio
Account/bills/creditors Account/bills/creditors
/sales*100
Accrued/outstanding
Spontaneous Liabilities Non Spontaneous Liabilities
Account payable Notes payable
Bills payable Long term debt
Creditors Preferred stock
Accrued, outstanding expenses Common Stock
Retained earnings
Calculation of additional to Retained Earnings
Additional to Retained Earnings = S1 * PM * RR
……. Company
Projected balance sheet for the year
Liabilities &
equity Rs Assets Rs
Account payable(..
%*S1) xxx Cash (….% * S1) xxx
Account receivable(…
Accruals(…% * S1) xxx % *S1) xxx
Notes payable xxx Inventory (….% * S1) xxx
Net fixed assets (….%
Long term debt xxx * S1) xxx
Common stock xxx
Retained
earnings(+Rs..) xxx
Total Liabilities &
equity xxx Total Assets xxx
Alternatively
……. Company
Actual of ….. And Forecasted Balance Sheet for….
Forecast
Particulars Actual of.. Basis Forecast for..
Cash xxx 1+g xxx
Account Receivable xxx 1+g xxx
Inventory xxx 1+g xxx
Net Fixed Assets xxx 1+g xxx
Total Assets (A) xxx xxx
Account payable xxx 1+g xxx
Accruals xxx 1+g xxx
Notes payable xxx xxx
Long term debt xxx xxx
Common stock xxx xxx
Retained earnings xxx xxx
Total Liabilities and
equity(B) xxx xxx
Additional Fund Needed (AFN) Equation
Growth rate in sales
S1 = So (1+g)
∆s = S1 – So
Where,
S1 = projected or new sales
So = Current or old sales
g = growth rate
∆s = change in sales
Capital Intensity Ratio = A*
So
Where,
A* = Spontaneous assets = current assets + fixed assets(if fixed assets
utilized fully)
L* = Spontaneous liabilities = Account payable+ Bills payable+ Creditors+
Spontaneous Liability to Sales Ratio = L*
So
Profit margin( PM) = Net profit / So
Retention Ratio(RR) = Net income – Dividend
Net income
= 1 – D/P ratio
Additional Fund Needed(AFN) = Increase in assets – Increase in
liabilities – additional retained earnings
AFN = A* - L* ∆s – S1 * PM * RR
So So
= A* - L* ∆s - S1 * PM * (1-D/P ratio)
So So
Percentage of External Fund
Requirement(PEFR)
AFN = Increase in sales * PEFR
PEFR = A* - L* - PM x ( 1+g) x RR
So So g
PEFR = Percentage of External Financial Requirement
Increase in sales = S1 - So
Capacity adjustment
Full capacity sales = Actual Sales/Actual Capacity %
% of assets to which excess capacity exist (A1) = Actual
Assets/Full Capacity sales
% of assets to which excess capacity does not exist (A2) = Actual
Assets/ Actual sales
% of liabilities varying with sales (L) = Actual liabilities/Actual sales
Additional Retained earning = S1 * PM (1 – D/P ratio)
Financial Forecasting Using Regression Method
Y = a + bX
b = N∑XY - ∑X . ∑Y
N ∑X2 - (∑X)2
a = ∑X - (b ∑X)
N N
Where,
Y = level of inventories or receivable or any other assets and
liabilities
X = Level of sales
a = Intercept of the line representing the relationship between X
and Y
b = Coefficient of sales