Session 5-Forecasting & cash budgets

Session 5-Forecasting & cash budgets - Ch. 4:...

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Unformatted text preview: Ch. 4: Forecasting and Budgeting—Part B BM 301 Introduction to Finance Nashville Warbler Nashville Warbler A Few Reminders Always check with the online syllabus regarding schedule, closing times, etc. Changes have been made since the Bookstore packet was assembled. Remember the BB Quiz on Chapter 5 for Wednesday (closes 9 am) Blackboard has been down. “We’re working on it.” (Reply from company) Make a Friend Make a Friend Last year, a firm had $10 million in sales, but expects $15 million this year. Net margin is expected to be 6% and the firm pays out 75% of earnings in dividends. The next slide contains the balance sheet from last year. Calculate this firms discretionary financing need (aka external financing need). Balance Sheet Balance Sheet Assets Cash 500,000 A/R 2,000,000 PP&E 5,000,000 Total 7,500,000 Liabilities and Equity A/P 1,000,000 Notes/P 2,000,000 Bonds 3,000,000 STK+RE 1,500,000 TL+OE 7,500,000 Retained Earnings Calculation Retained Earnings Calculation Addition to RE = Sales x net margin x retention =15,000,000 x.06 x .25 = 225,000 NEW RE = Old RE + Addition =$1,500,000 + $225,000 =$1,725,000 Pro Forma Balance Sheet Pro Forma Balance Sheet As a % of $15 million Assets Cash(5%) 750,000 A/R(20%) 3,000,000 PPE(50%) 7,500,000 Total 11,250,000 Liabilities and Equity A/P (10%) 1,500,000 N/P(NA) 2,000,000 Bond(NA) 3,000,000 Stk+RE(calc) 1,725,000 TL+OE 8,225,000 Pro Forma Balance Sheet Pro Forma Balance Sheet As a % of $15 million Assets Cash(5%) 750,000 A/R(20%) 3,000,000 PPE(50%) 7,500,000 Total 11,250,000 Liabilities and Equity A/P (10%) 1,500,000 N/P(NA) 2,000,000 Bond(NA) 3,000,000 Stk+RE(calc) 1,725,000 TL+OE 8,225,000 DFN 3,025,000 New TL+OE 11,250,000 How Could This Firm How Could This Firm Reduce DFN? Slow sales growth Reduce PPE Lower dividend payout Increase net margin (lower CGS, operating costs) HOW FAST CAN A FIRM GROW? HOW FAST CAN A FIRM GROW? Financial planning is more than pro formas The planner must understand the interaction among key variables The ONLY growth rate which allows the firm to maintain its present financial ratios and avoid the sale of new equity is called the SUSTAINABLE GROWTH RATE ROE ­­ the Du Pont Formula ROE ­­ the Du Pont Formula ROE = NI/Equity x 1 x 1 ROE=NI/Equity x sales/sales x assets/assets Grouping terms yields: ROE =NI/sales x sales/assets x assets/equity ROE ­­ the Du Pont Formula ROE ­­ the Du Pont Formula So, ROE is a function of: NI/sales = net margin (operating efficiency) sales/asset= asset turnover (asset efficiency) assets /equity = equity multiplier (financing) Sustainable Rate of Growth Sustainable g* = ROE (1 ­ b) , where b = dividend payout ratio (dividends / net income) ROE = return on equity (net income / common equity) or net income sales assets ROE = x x sales assets equity So, sustainable growth is a So, sustainable growth is a function of: Profitability (net margin) Asset usage efficiency (asset turnover) Leverage (assets/equity) Plowback (dividend policy) NOTE: This assumes that assets and ALL liabilities vary directly with sales and that the plowback and debt ratio are constant. THE MORAL OF THE THE MORAL OF THE STORY Must all firms grow at the sustainable rate? NO!! But,... Planners must remember that any deviation from the sustainable rate MUST CHANGE AT LEAST ONE OF THE KEY VARIABLES!! Don’t make inconsistent assumptions!! Job Search Minute Job Search Minute Start early! Take advantage of extracurricular opportunities (clubs, visitors to campus, recruiter nights, speakers) What will your resume look like when you are in the hunt? Start looking for a real internship now! Job Search Minute Job Search Minute Case: Ryan was a returned missionary, married with a child, great test scores, looked good in a suit, and had a 3.9 GPA Many interviews – no flybacks, no serious prospects Why? He had a “Tanner­Only” resume Success story! He changed his approach – multiple offers!! Remember: its never too late to be the person you can become Horizon: Your First Real Case Study Horizon: This is your first real case; welcome to the business school. Key insight: you must look inside the ratios. This case will turn on big issues Look for fundamental differences. Don’t get bogged down in small details. Most importantly, be thorough and professional! Budgeting—A Useful Application of Forecasting Budget: a forecast of future events. BUDGETS BUDGETS Budgets can indicate the amount and intra­year 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. CASH BUDGET ­ THREE STEPS CASH BUDGET ­ THREE STEPS First: Estimate Cash Receipts Second: Estimate Cash Disbursements This usually involves sales projections and historical data on the collection of receivables Requires careful analysis of production, etc. Third: Create the Cash Budget Net CF +beginning cash Borrowing/repayment REMEMBER: Keep a minimum cash amount CASH BUDGETS ­ RECEIPTS CASH BUDGETS ­ RECEIPTS Example Assume that all sales are on credit Actual sales for December: $120,000 Projected sales 50% collected in the month of sale 50% collected in the following month Jan $60,000 Feb $80,000 Estimate cash receipts for Jan and Feb CASH RECEIPTS CASH RECEIPTS Recall: Dec = 120k, Jan = 60k, Feb =80k Month of Sale Sales January February December 120,000 60,000 January 60,000 30,000 30,000 February 80,000 -- 40,000 90,000 70,000 Total Cash Inflow -- CASH DISBURSEMENTS CASH DISBURSEMENTS Monthly labor is $50,000 Monthly materials purchases = $35,000 Paid in month incurred Paid one month after purchase (level production) Estimate total monthly outflows CASH DISBURSEMENTS CASH DISBURSEMENTS January Labor $50,000 payments Materials $35,000 payments Dec Dec Total outflows Total inflows Total Net cash flow Net $85,000 $90,000 $ 5,000 February $50,000 Jan $35,000 $85,000 $70,000 -$15,000 Monthly Cash Budget Monthly Cash Budget Net cash flow + Beginning cash (example $25,000) = Cumulative cash Also consider: Minimum cash (maintain $25,000) Borrowing (or repayment) Cumulative loan balance (say, $0 to start) = Ending cash balance Putting It All Together Jan 25,000 Beginning cash Net cash flow 5,000 = Cumulative cash 30,000 Need to borrow (min 25K) 0 Cum. loan balance 0 Ending cash 30,000 Feb 30,000 ­15,000 15,000 10,000 10,000 25,000 MAKE A FRIEND MAKE A FRIEND and a cash budget Actual sales for January, February, and March were $100, $160, and $200. Collections: 50% month after, 25% two months after, and 25% three months after Projected sales for April, May, and June are $120, $200, $160. (so, Apr collect = 100+40+25) Planned disbursements: monthly materials of $50 and labor $75; April taxes of $70. March ending cash of $25 (min. cash $25) CASH INFLOWS CASH INFLOWS April May June 1 mo Last ago $100 month 2 mo Prev. ago $40 month rd 3 mo ago $25 3 month $60 $100 $50 $30 $40 $50 INFLOW $165 $150 $180 CASH OUTFLOWS CASH OUTFLOWS APRIL MAY JUNE Materials $50 $50 $50 Labor $75 $75 $75 Tax $70 $0 $0 Outflows Inflows Net Net $195 $165 $165 -$ 30 -$ $125 $150 $ 25 $125 $180 $ 55 THE WHOLE ENCHILADA THE WHOLE ENCHILADA APRIL APRIL Net CF +Beg cash Cum. cash Min. cash Loan Cum. loan End cash MAY JUNE -$30 $25 -$5 $25 $30 $30 $25 $25 $25 $50 $25 -$25 $5 $25 $55 $25 $80 $25 -$5 $0 $75 THE WHOLE ENCHILADA THE WHOLE ENCHILADA APRIL APRIL Net CF +Beg cash Cum. cash Min. cash Loan Cum. loan End cash MAY JUNE -$30 $25 -$5 $25 $30 $30 $25 $25 $25 $50 $25 -$25 $5 $25 $55 $25 $80 $25 -$5 $0 $75 THE WHOLE ENCHILADA THE WHOLE ENCHILADA APRIL APRIL Net CF +Beg cash Cum. cash Min. cash Loan Cum. loan End cash MAY JUNE -$30 $25 -$5 $25 $30 $30 $25 $25 $25 $50 $25 -$25 $5 $25 $55 $25 $80 $25 -$5 $0 $75 How Could a Year’s Worth of This Kind of Budget Help You? Plan a credit line (esp. in seasonal firms) What’s a credit line? Why know in advance? How is pricing determined? Know when collections and/or disbursements are going off track Establish incentive program THREE WEEKS INVESTED THREE WEEKS INVESTED WHAT CAN YOU TALK INTELLIGENTLY ABOUT? Your boss says, “I just discovered that our major competitor (who has sales 25% smaller and less profitable than us) borrows money at the prime rate. Why are we paying prime + 1?” You respond, “Uh….uh…Well…It might be that the additional growth we’ve achieved has required lots of cash which has caused a deterioration in our liquidity ratios.” THREE WEEKS INVESTED THREE WEEKS INVESTED WHAT CAN YOU TALK INTELLIGENTLY ABOUT? Your husband says, “Your business has grown so much and your income statement tells me that you are making lots of money, so why are we still so poor?” To which you respond, “After you finish the dishes I’ll explain the basics of accrual accounting to you. BTW, did you pick up my clothes from the THREE WEEKS INVESTED THREE WEEKS INVESTED WHAT CAN YOU TALK INTELLIGENTLY ABOUT? You are trying to convince your company to expand its sales force to capture market share during the current economic expansion. Your are planning for a sales increase of 30%. How do you convince the boss? Among other things, you show pro forma financial statements projecting DFN and profits. THREE WEEKS INVESTED THREE WEEKS INVESTED WHAT CAN YOU TALK INTELLIGENTLY ABOUT? Two years ago you started your own business. After 24 months of struggles, you finally land a big contract with a large local company. However, you need additional financing in order to increase capacity. What have you learned that would help? Bankers respond to pro forma and cash budgets. You can speak their language. THREE WEEKS INVESTED THREE WEEKS INVESTED WHAT CAN YOU TALK INTELLIGENTLY ABOUT? You want to convince potential investors to trust you with $5,000,000. What do know that will help? Very little. Some pro forma projection stuff will help, but most of the story is yet to come. But we’re getting there. THREE WEEKS INVESTED THREE WEEKS INVESTED WHAT CAN YOU TALK INTELLIGENTLY ABOUT? Your boss asks, “ how high must our return be in order for an investment to be good for the company.” You don’t know anything about this. That’s why this is not a three week class. Stay tuned. Thought for the Day Q: Who said: “Everybody can be great. Because anybody can serve. You don’t have to have a college degree to serve. You don’t have to make your subject and your verb agree to serve. You don’t have to know the second theory of thermodynamics in physics to serve.” A: Martin Luther King, Jr. Academy for Creating Enterprise Stephen and Bette Gibson founded ACE. It has helped Stephen over 2,000 returned Filipino missionaries start and run a small business. Blessed over 10,000 with better lives. Now expanding into Mexico, Brazil. Now A Few Reminders Always check with the online syllabus regarding schedule, closing times, etc. Changes have been made since the Bookstore packet was assembled. Remember the BB Quiz on Chapter 5 for Wednesday (closes 9 am) ...
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This note was uploaded on 04/05/2012 for the course BUS M 301 taught by Professor Jimbrau during the Fall '11 term at BYU.

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