CHAP4 LECTURE - Chapter 4 Financial Forecasting, Planning,...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Chapter 4 Financial Forecasting, Planning, and Budgeting 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 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. This year Assets Current Assets Fixed Assets Total Assets Liab. and Equity Accounts Payable Accrued Expenses Notes Payable Long Term Debt Total Liabilities Common Stock Retained Earnings Equity Total Liab. & Equity $8m $16m $24m $4m $4m $1m $6m $15m $7m $2m $9m $24m % of $32m 25% 50% 12.5% 12.5% n/a n/a n/a Next year Assets Current Assets Fixed Assets Total Assets Liab. and Equity Accounts Payable Accrued Expenses Notes Payable Long Term Debt Total Liabilities Common Stock Retained Earnings Equity Total Liab. & Equity % of $40m 25% 50% 12.5% 12.5% n/a n/a n/a Next year Assets Current Assets Fixed Assets Total Assets Liab. and Equity Accounts Payable Accrued Expenses Notes Payable Long Term Debt Total Liabilities Common Stock Retained Earnings Equity Total Liab. & Equity $10m % of $40m 25% 50% 12.5% 12.5% n/a n/a n/a Next year Assets Current Assets Fixed Assets Total Assets Liab. and Equity Accounts Payable Accrued Expenses Notes Payable Long Term Debt Total Liabilities Common Stock Retained Earnings Equity Total Liab. & Equity $10m $20m % of $40m 25% 50% 12.5% 12.5% n/a n/a n/a Next year Assets Current Assets Fixed Assets Total Assets Liab. and Equity Accounts Payable Accrued Expenses Notes Payable Long Term Debt Total Liabilities Common Stock Retained Earnings Equity Total Liab. & Equity $10m $20m $30m % of $40m 25% 50% 12.5% 12.5% n/a n/a n/a Next year Assets Current Assets Fixed Assets Total Assets Liab. and Equity Accounts Payable Accrued Expenses Notes Payable Long Term Debt Total Liabilities Common Stock Retained Earnings Equity Total Liab. & Equity $10m $20m $30m $5m % of $40m 25% 50% 12.5% 12.5% n/a n/a n/a Next year Assets Current Assets Fixed Assets Total Assets Liab. and Equity Accounts Payable Accrued Expenses Notes Payable Long Term Debt Total Liabilities Common Stock Retained Earnings Equity Total Liab. & Equity $10m $20m $30m $5m $5m % of $40m 25% 50% 12.5% 12.5% n/a n/a n/a Next year Assets Current Assets Fixed Assets Total Assets Liab. and Equity Accounts Payable Accrued Expenses Notes Payable Long Term Debt Total Liabilities Common Stock Retained Earnings Equity Total Liab. & Equity $10m $20m $30m $5m $5m $1m % of $40m 25% 50% 12.5% 12.5% n/a n/a n/a Next year Assets Current Assets Fixed Assets Total Assets Liab. and Equity Accounts Payable Accrued Expenses Notes Payable Long Term Debt Total Liabilities Common Stock Retained Earnings Equity Total Liab. & Equity $10m $20m $30m $5m $5m $1m $6m % of $40m 25% 50% 12.5% 12.5% n/a n/a n/a Next year Assets Current Assets Fixed Assets Total Assets Liab. and Equity Accounts Payable Accrued Expenses Notes Payable Long Term Debt Total Liabilities Common Stock Retained Earnings Equity Total Liab. & Equity $10m $20m $30m $5m $5m $1m $6m $17m % of $40m 25% 50% 12.5% 12.5% n/a n/a n/a Next year Assets Current Assets Fixed Assets Total Assets Liab. and Equity Accounts Payable Accrued Expenses Notes Payable Long Term Debt Total Liabilities Common Stock Retained Earnings Equity Total Liab. & Equity $10m $20m $30m $5m $5m $1m $6m $17m $7m % of $40m 25% 50% 12.5% 12.5% n/a n/a n/a Predicting Retained Earnings Next year's projected retained earnings = last year's $2 million, plus: projected sales net income x sales cash dividends - net income ) x (1 x $40 million x .05 (1 - .50) = $2 million + $1 million = $3 million Next year Assets Current Assets Fixed Assets Total Assets Liab. and Equity Accounts Payable Accrued Expenses Notes Payable Long Term Debt Total Liabilities Common Stock Retained Earnings Equity Total Liab. & Equity $10m $20m $30m $5m $5m $1m $6m $17m $7m $3m $10m $27m % of $40m 25% 50% 12.5% 12.5% n/a n/a n/a Next year Assets Current Assets Fixed Assets Total Assets Liab. and Equity Accounts Payable Accrued Expenses Notes Payable Long Term Debt Total Liabilities Common Stock Retained Earnings Equity Total Liab. & Equity $10m $20m $30m $5m $5m $1m $6m $17m $7m $3m $10m $27m % of $40m 25% 50% 12.5% How much 12.5% Discretionary n/a Financing n/a will we n/a Need? Predicting Discretionary Financing Needs Discretionary Financing Needed = projected total assets $30 million projected total liabilities projected owners' equity $17 million - $10 million = $3 million in discretionary financing 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 ROE = sales x assets assets x common equity Budgets Budget: a forecast of future events. 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. Example: 4-11A (Harrizon Printing) Harrison Printing Cash Budget For the Six Months Ended June 30, 2004 Cash Receipts Sales Cash Sales (20% of sales) Collection of AR: One-month lag (50%) Two-months lag (30%) Total Cash Receipts Cash Disbursements Purchases (two months in advance of its sales equal to 65% of sales Payment of AP: One-month lag (100%) Rent Other expenditures Tax prepayments Total Cash Disbursements Cash Budget Cash Receipts Less: Cash Disbursements Net monthly change Add: Beginning cash balance Less: Interest on short-term borrowing (1%) Ending cash balance before short-term borrowing Financing needed Ending cash balance Cumulative borrowing Nov 220,000 44,000 44,000 Dec 175,000 35,000 110,000 145,000 Jan 100,000 20,000 87,500 66,000 173,500 Feb 120,000 24,000 50,000 52,500 126,500 Mar 150,000 30,000 60,000 30,000 120,000 Apr 300,000 60,000 75,000 36,000 171,000 May 275,000 55,000 150,000 45,000 250,000 Jun 200,000 40,000 137,500 90,000 267,500 Jul 200,000 40,000 100,000 82,500 222,500 Aug 180,000 36,000 100,000 60,000 196,000 65,000 78,000 65,000 10,000 20,000 95,000 97,500 78,000 10,000 20,000 108,000 195,000 97,500 10,000 20,000 127,500 178,750 195,000 10,000 20,000 22,500 247,500 130,000 178,750 10,000 20,000 208,750 130,000 130,000 10,000 20,000 160,000 117,000 130,000 10,000 20,000 22,500 182,500 117,000 10,000 20,000 147,000 10,000 20,000 30,000 10,000 20,000 30,000 173,500 126,500 120,000 171,000 250,000.00 108,000 127,500 247,500 208,750 160,000.00 65,500 (1,000) (127,500) (37,750) 90,000.00 22,000 87,500 86,500 20,000 20,000.00 0 0 0 610 993.60 87,500 0 87,500 0 86,500 0 86,500 0 (41,000) 61,000 20,000 61,000 267,500.00 182,500.00 85,000.00 20,000.00 103.54 (18,360) 109,006.40 104,896.46 38,360 (89,006.40) (10,353.60) 20,000 20,000.00 94,542.86 99,360 10,353.60 0 ...
View Full Document

Ask a homework question - tutors are online