Ch,4,Financial Forecasting,
Planning,and Budgeting
? 2002,Prentice Hall,Inc,
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 sales net income
x x ( 1 - )
Predicting Retained Earnings
? Next year’s projected retained earnings = last
year’s $2 million,plus,
projected net income cash dividends
sales sales net income
$40 million x,05 x (1 -,50)
x x ( 1 - )
Predicting Retained Earnings
? Next year’s projected retained earnings = last
year’s $2 million,plus,
projected net income cash dividends
sales sales net income
$40 million x,05 x (1 -,50)
= $2 million + $1 million = $3million
x x ( 1 - )
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 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
How much
Discretionary
Financing
will we
Need?
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
How much
Discretionary
Financing
will we
Need?
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
How much
Discretionary
Financing
will we
Need?
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
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 assets
sales assets common equity ROE = x x
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,