Financial Forecasting and Planning
Cash Budget
Is a statement of the firm’s planned inflows and outflows of cash
It is used by the firm to estimate its short-term cash requirement, with particular attention to planning for surplus cash and for cash shortages.
For surplus of cash - the firm can plan for short term investments (marketable securities)
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
General Format of the Cash Budget
Financial forecasting
basis for budgeting activities and estimating future financing needs
forecasting sales and expenses incurred to generate those sales.
The most widely used method for making such projections is the percent-of-sales method.
Format for income statement
Non-Spontaneous Item
Pro-forma Balance sheet
Spontaneous Item- is the items that vary directly with sales activity (sales increase, spontaneous item also increase)
Other assets – pattern & goodwill
FULL CAPACITY LIABILITY
Retained earnings
Account payable
Accruals (taxes payable)
All current assets are spontaneous
ASSET
LIABILITY
Fixed asset are regarded as non- spontaneous if the firm operating BELOW ITS CAPACITY
Notes payable
Long term debt
Equity
Full Capacity
Fixed asset will change
Below Capacity
Fixed asset will not change
Steps necessary to compute a pro forma balance sheet
Determine the sales growths (in %)
Sales Growth = Sales Year 1-Sales Year 0
Sales Year 0
Determine the spontaneous item-adjust the item by a factor of 1 + sales growth(%)
Project the pro-forma balance sheet values- all non spontaneous item remained unchanged as per balance sheet value
Calculate the new level (projected) of retained earnings
New R/E = R/E0 + [(S1)(NPM)(1-DPR)]
NPM = Net Income0/Sales0
*DPR = dividend0/Net Income0
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.