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 • The sales forecast is the most crucial element in the financial plan. • Some methods of obtaining sales forecasts: – Sales force estimates – Customer surveys – Time series methods – Regression models • 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 Percentage of Sales Method • Percentage of Sales Method - Key Assumptions – Some items tend to vary directly with sales, while others do not. – If costs are assumed to vary directly with sales, then the profit margin is constant. – 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 – On the liabilities side of the B/S, only accounts payables and accruals generally vary directly with sales. – 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. – The change in the retained earnings portion of equity will depend on the dividend decision. – External fund needed is the plug figure that makes the pro forma balance sheet.
4 Cont’d • The Percentage of Sales Approach – Begin with IS • Projected sales = current sales (1 + sales growth rate) • For each spontaneous item compute projected figure (Note that costs are assumed to vary directly with sales ) • If the amount of dividends to be paid are known, we could work out the addition to retained earnings and this is reflected on the B/S – On B/S • For each spontaneous item (e.g. all assets including fixed assets, accounts payable and accruals) compute projected figure • Compute the change in retain earnings using the formula ∆RE = NI – Div.
- Winter '14
- Balance Sheet, Generally Accepted Accounting Principles