Finansal Yönetim Financial Forecasting Chapter McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. Financial Forecasting 44- 2 Chapter Outline Financial forecasting in a firm’s strategic • growth Three financial statements • Percent-of-sales method • Methods to determine the amount of new • funds required in advance Factors that affect cash flow •4- 3 Financial Forecasting Ability to plan ahead and make necessary • changes before actual events occur Outcome of a firm through external events • might be a function of both: Risk-taking desires – Ability to hedge against risk with planning – No growth or a decline - not the primary • cause of shortage of funds A comprehensive financing plan must be • developed for a significant growth4- 4 Constructing Pro Forma Statements A systems approach to develop pro forma • statements consists of: Constructing it based on: – Sales projections • Production plans • Translating it into a cash budget – Assimilating all materials into a pro forma – balance sheet4- 5 Development of Pro Forma Statements4- 6 Pro Forma Income Statement Provides a projection on the anticipation of • profits over a subsequent period Four important steps include: • Establishing a sales projection • Determining production schedule and the associated • use of new material, direct labor, and overhead to arrive at gross profit Computing other expenses • Determining profit by completing actual pro forma • statement4- 7 Establish a Sales Projection Let us assume Goldman Corporation has • two primary products: wheels and casters4- 8 Stock of Beginning Inventory Number of units produced will depend on • beginning inventory4- 9 Determine a Production Schedule and the Gross Profit To determine the production requirements: • Units + Projected sales + Desired ending inventory – Beginning inventory = Production requirements4- 10 Production Requirements for Six Months4- 11 Unit Costs Cost to produce each unit: •4- 12 Total Production Costs4- 13 Cost of Goods Sold Costs associated with units sold during the • time period Assumptions for the illustration: – FIFO accounting is used • First allocates the cost of current sales to beginning • inventory Then to goods manufactured during the period •4- 14 Allocation of Manufacturing Cost and Determination of Gross Profits4- 15 Value of Ending Inventory4- 16 Other Expense Items Must be subtracted from gross profits to • arrive at net profit Earning before taxes – General and administrative expenses, and interest • expenses are subtracted from gross profit Aftertax income – Taxes are deducted from the earning before taxes • Contribution to retained earnings – Dividends are deducted from the aftertax income •4- 17 Actual Pro Forma Income Statement4- 18 Cash Budget Pro forma income statement must be • translated into cash flows The long-term is divided into short-term pro – forma income statement More precise time frames set to help anticipate – patterns of cash inflows and outflows4- 19 Monthly Sales Pattern4- 20 Cash Receipts In the case of Goldman Corporation: • The pro forma income statement is taken for the – first half year: Sales are divided into monthly projections • A careful analysis of past sales and collection – records show: 20% of sales is collected in the month • 80% in the following month •4- 21 Monthly Cash Receipts4- 22 Cash Payments Monthly costs associated with: • Inventory manufactured during the period – Material • Labor • Overhead • Disbursements for general and administrative – expenses Interest payments, taxes, and dividends – Cash payments for new plant and equipment –4- 23 Component Costs of Manufactured Goods4- 24 Cash Payments (cont ’ d) Assumptions for the next two tables: • Costs are incurred on an equal monthly basis – over a six-month period Sales volume varies each month – Employment of level monthly production to – ensure maximum efficiency Payment for material, once a month after – purchases have been made4- 25 Average Monthly Manufacturing Costs4- 26 Summary of All Monthly Cash Payments4- 27 Actual Budget Difference between monthly receipts and • payments is the net cash flow for the month Allows the firm to anticipate the need for funding – at the end of each month4- 28 Monthly Cash Budget4- 29 Cash Budget with Borrowing and Repayment Provisions4- 30 Pro Forma Balance Sheet Represents the cumulative changes over • time Important to examine the prior period’s balance – sheet Some accounts will remain unchanged, while – others will take new values Information is derived from the pro forma income • statement and cash budget4- 31 Development of a Pro Forma Balance Sheet4- 32 Development of a Pro Forma Balance Sheet (cont ’ d)4- 33 Explanation of Pro Forma Balance Sheet4- 34 Analysis of Pro Forma Statement The growth ($25,640) was financed by • accounts payable, notes payable, and profit As reflected by the increase in retained earnings – Total assets (June 30, 2005) …… $76,140 Total assets (Dec 31, 2004) …… .$50,500 Increase ………………………… ...$25,640 4- 35 Percent-of-Sales Method Based on the assumption that: • Accounts on the balance sheet will maintain a – given percentage relationship to sales Notes payable, common stock, and retained – earnings do not maintain a direct relationship with sales volume Hence percentages are not computed •4- 36 Balance Sheet of Howard Corporation4- 37 Percent-of-Sales Method (cont ’ d) Funds required is ascertained • Financing is planned based on: • Notes payable – Sale of common stock – Use of long-term debt –4- 38 Percent-of-Sales Method (cont ’ d) Company operating at full capacity – needs to buy new plant • and equipment to produce more goods to sell: Required new funds: – (RNF) = A (S) – L (S) – PS 2 (1 – D) S S Where: A/S = Percentage relationship of variable assets to sales; S • = Change in sales; L/S = Percentage relationship of variable liabilities to sales; P = Profit margin; S 2 = New sales level; D = Dividend payout ratio RNF = 60% ($100,000) – 25% ($100,000) – 6% ($300,000) (1 – .50) = $60,000 - $25000 - $18,000 (.50) = $35,000 - $9000 = $26,000 required sources of new funds 4- 39 Percent-of-Sales Method (cont ’ d) Company not operating at full capacity - needs to add more • current assets to increase sales: RNF = 35% ($100,000) – 25% ($100,000) – 6% ($300,000) (1 – .50) = $35,000 - $25,000 - $18,000 (.50) = $35,000 - $25,000 - $9,000 = $1,000 required sources of new funds