Financial Forecasting,Planning, and Budgeting :Financial Forecasting,Planning, and Budgeting


Financial Forecasting :Financial Forecasting 1) Project sales revenues and expenses.


Financial Forecasting :Financial Forecasting 1) Project sales revenues and expenses. 2) Estimate current assets and fixed assets necessary to support projected sales.


Financial Forecasting :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 :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.


Slide 6: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


Slide 7: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


Slide 8: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


Slide 9: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


Slide 10: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


Slide 11: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


Slide 12: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


Slide 13: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


Slide 14: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


Slide 15: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


Slide 16: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 :Predicting Retained Earnings Next year’s projected retained earnings = last year’s $2 million, plus:


Predicting Retained Earnings :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 :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 :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 - )


Slide 21: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


Slide 22: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


Slide 23: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


Slide 24: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?


Slide 25: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?


Slide 26: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


Predicting Discretionary Financing Needs :Predicting Discretionary Financing Needs Discretionary Financing Needed =


Predicting Discretionary Financing Needs :Predicting Discretionary Financing Needs Discretionary Financing Needed = projected projected projected total - total - owners’ assets liabilities equity


Predicting Discretionary Financing Needs :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 :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


Sustainable Rate of Growth :Sustainable Rate of Growth g* = ROE (1 - b) where


Sustainable Rate of Growth :Sustainable Rate of Growth g* = ROE (1 - b) where b = dividend payout ratio (dividends / net income)


Sustainable Rate of Growth :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 :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 :Budgets Budget: a forecast of future events.


Budgets :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.