Financial Forecasting and Pro-Forma

Statements

These pages are designed for students in Intro to Finance

and other elementary Finance courses.

These pages are not meant to replace your textbook. They are provided as an adjunct to
help you with practical problems and assignments.
The format of the balance sheet and income statement can be used as a format for planning the
next period. This form of planning is called Pro-Forma financial statements. It can be as simple
or complex as the situation and time warrants. The simplest format is the best to start the
analysis. More omplications can be added later to better simulate the real situation.
The Percent of sales method
This method simply takes the last available year and uses the balance sheet and income statement
to forecast next year by assuming that most items on the statements will have to go up if sales go
up.

Big assumption! The company is efficiently run and has just the ideal amount of assets and
liabilities for the existing situation. This assumption will have to be faced later. Keep it in mind
for now.

Some liability and equity accounts can be tapped by the financial manager for any external
financing needed. This is called negotiated sources. It is the amount that you plug in somewhere
to make the balancesheet balance. The accounts that will go up with sales are called
spontaneous.
The % of sales column is calculated based on 1996 account proportions to sales. Multiply the
Percentage by the forecasted 1997 sales.
The 1997 Sales = 1 + the sales growth rate times 1996 Sales.
External Financing Needed
External financing needed is equal to the amount of extra money needed because assets increase
minus the money provided by increased liabilities and minus the amount of increase in retained
earnings for 1997 minus less any dividends paid.
EFN= (SalesInc X Asset%) -( SalesInc X Liability%) -( Net Profit -Dividends)
EFN= (5011766 X .08) X .93)) - (5011766 X .08) X .17) - (5412707 X .02 X .5)= 252060
Using the values in the table below may differ a little because of rounding in the % of Sales
shown.
 Balance Sheet
12-31-96 %of Sales 1997 Forecast
ASSETS
Cash 175500 4 189540
Accounts Receivable 1875250 37 2025270
Inventory 146890 29 1573441
Plant and Equipment 1155250 23 1247670
Total Assets 4662890 5035921
Liabilities & Capital
Accruals 275000 5 297000
Accounts Payable 560550 11 605394
Notes Payable [current] 800000 negotiated 1052060
Mortgage Bonds 1000000 negotiated 1000000
Preferred Stock 225000 negotiated 225000
Common Stock 300000 negotiated 300000
Retained Earnings 1502340 from income statement 1556467
Total Lia. & capital 4662890 5035921

Other Data for Planning

Net profit margin on sales .02
Rate of growth in Sales .08
Dividend Payout ratio .50
1996 Sales 5011766
Assume all external financing needed is secured by new notes payable

Notice that the retained earnings go up by the amount of profit minus dividends and that
the EFN was added to the Notes Payable ,plugged. The balance sheet balances !

If the Financial manager is unable to get this full amount of financing somewhere the
company will run out of money or inventory and be unable to make the projected sales growth.
Once this simple method is used to forecast each balance sheet item the same process can be
used for the income statement. More realistic estimates will probably have to be substituted for
Plant and Equipment increases as they tend to be lumpy and not really just a percentage of sales.
For example, if there is excess manufacturing capacity, no increase in Plant and Equipment may
be necessary and this would substantially reduce the EFN requirement.

Comments and Suggestions should may be sent togramborw@tiger.uofs.edu