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Financial Forecasting, Planning, and Budgeting

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 $15m $7m $2m $9m $24m

% of $32m 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

% 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 $17m

% 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 $17m $7m

% of $40m 25% 50%

12.5% 12.5% n/a n/a 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 )

Predicting Retained Earnings


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

net income x sales

(1
x

cash dividends - net income )

$40 million x

.05

(1 - .50)

Predicting Retained Earnings


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

net income x sales

(1
x

cash dividends - net income )

$40 million x

.05

(1 - .50)

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

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 $17m $7m $3m

% 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 $17m $7m $3m $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 $30m $5m $5m $1m $6m $17m $7m $3m $10m $27m

% 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 $17m $7m $3m $10m $27m

% of $40m 25% 50%

12.5% How much 12.5% Discretionary n/a Financing n/a

will we n/a Need?

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 $17m $7m $3m $10m $27m

% of $40m 25% 50%

12.5% How much 12.5% Discretionary n/a Financing n/a

will we n/a Need?

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 $17m $7m $3m $10m $27m

% of $40m 25% 50%

12.5% How much 12.5% Discretionary n/a Financing n/a

will we n/a Need?

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 $30 million projected total liabilities projected owners equity

$17 million - $10 million

Predicting Discretionary Financing Needs


Discretionary Financing Needed = projected total assets $30 million projected total liabilities projected owners equity

$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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