H14 - CHAPTER 14 Short-Term Financial Planning Orientation...

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CHAPTER 14 Short-Term Financial Planning Orientation : In this chapter, we develop predictions of the firm’s future financing needs based on a sales forecast. This entails construction of a pro forma income statement and balance sheet. The chapter also reviews the preparation and use of the cash budget as an essential tool of financial planning. I. Financial forecasting and planning A. The need for forecasting in financial management arises whenever the future financing needs of the firm are being estimated. There are three basic steps involved in predicting financing requirements. 1. Project the firm’s sales revenues and expenses over the planning period. 2. Estimate the levels of investment in current and fixed assets, which are necessary to support the projected sales level. 3. Determine the financing needs of the firm throughout the planning period. B. The key ingredient in the firm’s planning process is the sales forecast. This forecast should reflect (l) any past trend in sales that is expected to continue and (2) the effects of any events, which are expected to have a material effect on the firm’s sales during the forecast period. C. The traditional problem faced in financial forecasting begins with the sales forecast and involves making forecasts of the impact of predicted sales on the firm’s various expenses, assets, and liabilities. The technique we use to make these forecasts is the percent of sales method. This involves projecting the financial variable as a percent of projected sales. 227
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II. Profitability, Dividend Policy, and Discretionary Financing Needs (DFN) A. A firm’s Discretionary Financing Needs (DFN) is the amount of financing the firm needs to obtain from discretionary (non-spontaneous) sources in order to finance its assets. B. Spontaneous sources of financing include accounts payable and other liabilities (e.g., wages payable) that arise “spontaneously” as the firm conducts its business plus the firm’s net income less any dividends it pays. Consequently, the firm’s dividend policy has a direct impact on its sources of spontaneous financing and consequently the firm’s needs for discretionary financing, (i.e., discretionary financing needs or DFN). III. Revenue Growth and DFN A. Revenue growth has two effects on DFN. First, as revenues grow this requires that the firm invest in additional working capital (current assets less current liabilities). Furthermore, with growing revenues the firm’s profits generally increase with the effect of increasing the availability of funds to be retained and reinvested in the business. VI.
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This note was uploaded on 04/16/2008 for the course FIN 100 taught by Professor N/a during the Spring '08 term at Baylor.

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H14 - CHAPTER 14 Short-Term Financial Planning Orientation...

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