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Financial Forecasting and Planning - Coggle Diagram
Financial Forecasting and Planning
Financial Planning
important aspect of the firm’s operations it provides a road maps for guiding, coordinating and controlling the firm’s actions to achieve its objectives
Key aspects of financial planning process are:
Cash planning- involves preparation of the firm’s cash budget
Profit planning – is usually done by means of pro-forma financial statements
Cash Budget
Is a statement of the firm’s planned inflows and outflows of cash
used by the firm to estimate its short-term cash requirement, with particular attention to planning for surplus cash and for cash shortages.
surplus of cash - the firm can plan for short term investments
cash shortages – the firm must arrange for short term financing
Cash budget gives the financial manager a clear views of the timing of the firm’s expected cash inflows & outflows over a given period
Steps in preparing Cash Budget
Determine the amount and timing of cash receipts
Determine the amount and timing of cash disbursement
Determine the net cash flow
Prepare the cash reconciliation accounts
Cash
cash receipts
i) Forecasted sales
Cash Sales
Collection of Account Receivable eg:
Lagged (After)1 month
Lagged (After)2 month & etc
ii) Other cash receipts-dividend receipts & etc
cash disbursement
i) Purchases
Cash Purchases
Payment of Accounts Payable
Lagged (After)1 month
Lagged (After)2 month & etc
ii) Rent payments
iii) Wages and salaries
iv) Tax payment
v) Fixed asset (payment)
vi) Interest payment
vii) Dividend payment
viii) Loan
ix) Renovation
x) Other cash disbursement
point to remember
1) Non cash expenses such depreciation does not actually involve any actual cash flows and exclude in cash budget
2) If have deficit amount – normally we have to borrow
We only can borrow if in the question stated that the interest on short term loan is given eg: 12%
If no info given in the question therefore leave the answer as deficit amount!
Financial Forecasting
financial planning of a corporation as it is the basis for budgeting activities and estimating future financing needs.
involves forecasting sales and expenses incurred to generate those sales.
The most widely used method for making such projections is the percent-of-sales method.
Why Need Forecasting?
1) To determine the future financing needs of the firms
2) Basic steps:
Project’s the firm sales revenues and expenses
Estimate the levels of investment in current and fixed assets that are necessary to support the projected sales
Determine the firm's financing needs throughout the planning period
Percent of sales method of financial forecasting
In the percent of sales method, assets, liabilities & total expenses are estimated as a percentage of sales that are then compared with projected sales.
These numbers are then used to design a pro forma (planned or projected) income statement and balance sheet.
Pro-forma Balance sheet
Spontaneous item
Is the items that vary directly with sales activity (sales increase, spontaneous item also increase)
Retained earnings* - (refer to step 4 to compute proforma b’ce sheet)
ASSET
All current assets are spontaneous
Other assets – pattern & goodwill
Fixed asset will only spontaneous if the firm is operating FULL CAPACITY
LIABILITY
Account Payable
Accruals (taxes payable)
Non- Spontaneous item
Any items that do not vary directly with sales and remain constant
ASSET
Fixed asset are regarded as non- spontaneous if the firm operating BELOW ITS CAPACITY
LIABILITY
Notes payable
Long term debt
Equity
The item above is non spontaneous because the firms must negotiate and arrange for more borrowings and issues respectively
Important
Full Capacity – Fixed asset will change
Below Capacity - Fixed asset will not change
If question not mentioned either full or below capacity, student should assumed FULL CAPACITY
If question mentioned to prepare proforma financial statement, students must prepared both i.e proforma income statement & proforma balance sheet
The steps necessary to compute a pro forma balance sheet
Determine the additional fund needed (AFN).HOW?
The difference between total assets and total liabilities and equity = AFN
This shortfall indicates the total external financing needed (EFN) that is required to keep the company running at present operational levels.
External financing (EFN) a.k.a additional fund needed (AFN) , discretionary financing (DFN)
3) Project the pro-forma balance sheet values- all non spontaneous item remained unchanged as per balance sheet value
2) Determine the spontaneous item-adjust the item by a factor of 1 + sales growth(%)
1) Determine the sales growths (in %)
Sales Growth = (Sales Year 1-Sales Year 0) / Sales Year 0
4) Calculate the new level (projected) of retained earnings
*NPM = Net Income0/Sales0
*DPR = dividend0/Net Income0
New R/E = R/E0 + [(S1)(NPM)(1-DPR*)]