0 Tutorial 9 : Long-Term Financial Planning Conducted by : Mr Chong Lock Kuah, CFA
1 Revisit some important concepts • Steps in financial forecasting are 1. Forecast sales 2. Project the assets needed to support sales 3. Project internally generated funds 4. Project external funds needed 5. Decide how to raise funds
2 Cont’d square4 The sales forecast is the most crucial element in the financial plan. square4 Some methods of obtaining sales forecasts: – Sales force estimates – Customer surveys – Time series methods – Regression models square4 After obtaining the forecasted sales, we can then use the following methods to arrive at additional funds needed (AFN) or external funds needed (EFN): – Percentage of Sales Approach; or – AFN Equation Method
3 % of Sales Method: Key Assumptions square4 Some items tend to vary directly with sales, while others do not. square4 If costs are assumed to vary directly with sales, then the profit margin is constant. square4 Dividends are a management decision and generally do not vary directly with sales – the amount of dividends paid would affect the RE on the B/S. Addition to RE = Net income – dividend square4 On the liabilities side of the B/S, only accounts payables and accruals generally vary directly with sales. square4 Notes payable, long-term debt and equity (unless otherwise stated in the question) generally do not vary directly with sales because they depend on management decisions about capital structure. square4 The change in the retained earnings portion of equity will depend on the dividend decision. square4 External fund needed is the plug figure that makes the pro forma balance sheet.
4 % of Sales Method: Steps Begin with Income Statement square4 Projected sales = current sales (1 + sales growth rate) square4 For each spontaneous item compute projected figure (Note that costs are assumed to vary directly with sales square4 If the amount of dividends to be paid are known, we could work out the amount of retained earnings On the Balance Sheet square4 Projected sales = current sales (1 + sales growth rate) square4 For each spontaneous item (e.g. all assets, accounts payable and accruals) compute projected figure. square4 If the amount of dividends to be paid are known, we could work out the amount of retained earnings square4 Compute the change in retained earnings using the formula Δ RE = NI – Div. EFN is the plug figure to make the B/S balance.
5 AFN Equation Method • AFN (or EFN) Key Assumptions –
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