Sie sind auf Seite 1von 28

FINANCIAL PLANNING

• What is financial Planning?


It provides a roadmap for guiding,
coordinating, and controlling firms actions to
achieve goals.

Two Key aspects of financial planning:-


1) Cash Planning
2) Profit Planning
Financial Planning Process
• Long Term or Strategic financial Plan
Lays out a company’s action plan ranging
over a period of 2 to 10 years.

• Short Term or Operating financial Plan


Specify plan that covers financial actions
to be taken over a 1to 2 years time period.
Long term or Strategic Plan
•Proposed outlays for purchase of Fixed Asset
•Research & Development Activities
•Making a Product development action
•Major sources of financing
•Termination of existing projects products or
line of business
•Repayment or retirement of debts
•Any planned acquisition
Operating Plan
Sales
Forecast

Production Long term


Plan financial plan

Pro Forma
Fixed asset
income Cash Budget
outlay plan
statement

Current period
Balance sheet

Pro Forma
Balance
Sheet
Proforma or Projected Financial
Statements
1.For assessing whether the firm’s anticipated
performance is in line with the firm’s own target or
investor expectations.

2.To estimate the effect of proposed operating


changes. Doing “what if” analysis.

3.To anticipate the firm’s future financing needs

4.To estimate future free cash flows


Sales Forecasts
•Monthly cash flows resulting from projected
sales receipts
•Outlays related to production , inventory and
sales

It can be derived from external forecast


or Internal Forecast or both.
Financial Statement Forecasting
• The Percent of Sales Method
Many items on the income statement and
balance sheets are assumed to increase
proportionally with sales.

Constant Ratio Method


2004 Forecasted Income Statement
2004
2003 Factor 1st Pass
Sales $2,000 g=1.25 $2,500.0
Less: COGS Pct=60% 1,500.0
SGA Pct=35% 875.0
EBIT $125.0
Interest 0.1(Debt03 ) 20.0
EBT $105.0
Taxes (40%) 42.0
Net. income $63.0
Div. (40%) $25.2
Add. to RE $37.8
2004 Balance Sheet (Assets)
Forecasted assets are a percent of forecasted sales.

2004 Sales = $2,500


Factor 2004
Cash Pct= 1% $25.0
Accts. rec. Pct=12% 300.0
Inventories Pct=12% 300.0
Total CA $625.0
Net FA Pct=25% 625.0
Total assets $1,250.0
2004 Preliminary Balance Sheet (Claims)
2004 Sales = $2,500 2004
2003 Factor Without AFN
AP/accruals Pct=5% $125.0
Notes payable 100 100.0
Total CL $225.0
L-T debt 100 100.0
Common stk. 500 500.0
Ret. earnings 200 +37.8* 237.8
Total claims $1,062.8

*From forecasted income statement.


What are the additional funds
needed (AFN)?

• Required assets = $1,250.0


• Specified sources of fin. = $1,062.8
• Forecast AFN = $ 187.2
Implications of AFN
• If AFN is positive, then you must secure
additional financing.

• If AFN is negative, then you have more


financing than is needed.
– Pay off debt.
– Buy back stock.
– Buy short-term investments.
Assumptions about How AFN Will
Be Raised

• No new common stock will be issued.


• Any external funds needed will be
raised as debt, 50% notes payable,
and 50% L-T debt.
How will the AFN be financed?

Additional notes payable =


0.5 ($187.2) = $93.6.

Additional L-T debt =


0.5 ($187.2)= $93.6.
2004 Balance Sheet (Claims)

w/o AFN AFN With


AFN
AP/accruals $ 125.0 $ 125.0
Notes payable 100.0 +93.6 193.6
Total CL $ 225.0 $ 318.6
L-T debt 100.0 +93.6 193.6
Common stk. 500.0 500.0
Ret. earnings 237.8 237.8
Total claims $1,071.0 $1,250.0
2002 2nd Pass Income Statement

1st Pass Feedback 2nd Pass


Sales $2,500 $2,500
Less: COGS 1,500 1,500
SGA 875 875
EBIT $ 125 $ 125
Interest 20 +18.72 38.72
EBT $ 105 $ 86.28
Taxes (40%) 42 34.5
Net income $ 63 $ 54.78
Div. (40%) $ 21.91
Add. to RE $ 32.87
2002 2nd Pass Balance Sheet (Assets)

1st Pass AFN 2nd Pass


Cash $25 $25
Accts. rec. 300 300
Inventories 300 300
Total CA $625 $625
Net FA 625 625
Total assets $1,250 $1,250

No change in asset requirements.


2002 2nd Pass Balance Sheet (Claims)

1st Pass Feedback 2nd Pass


AP/accruals $ 125 $ 125
Notes payable 193.6 193.6
Total CL $ 318.6 $ 318.6
L-T debt 193.6 193.6
Common stk. 500 500
Ret. earnings 237.8 232.82
Total claims $1,250 $ 1,245
Results After the Second Pass

 Forecasted assets = $1,250 (no change)


 Forecasted claims = $1,245 (higher)
 2nd pass AFN =$ 5 (short)

The $5 shortfall came from the $5 reduction in


retained earnings. Additional passes could be
made until assets exactly equal claims.

$5(0.10) = $0.50 interest on 3rd pass.


AFN Equation
Additional= Required - Spontaneous - Inc
Funds Inc in assets Liabilities in RE
Needed

AFN = (A*/S0)∆ S - (L*/S0)∆ S - M(S1)(RR)


Definitions of Variables in AFN
• A*/S0: assets required to support sales;
called capital intensity ratio.
∀ ∆ S: increase in sales.
• L*/S0: spontaneous liabilities ratio
• M: profit margin (Net income/sales)
• RR: retention ratio; percent of net
income not paid as dividend.
Assets must increase by $250
million. What is the AFN, based on
the AFN equation?
AFN = (A*/S0)∆ S - (L*/S0)∆ S - M(S1)(RR)
= ($1,000/$2,000)($500)
- ($100/$2,000)($500)
- 0.0270($2,500)(1 - 0.4)
= $184.5 million.
Equation AFN = $184.5
vs.
Pro Forma AFN = $187.2
Why are they different?

 Equation method assumes a constant


profit margin.
 Pro forma method is more flexible.
More important, it allows different items
to grow at different rates.
Factors that affect External
Financial Requirements
• Sales Growth ( increase in sales)
• Capital intensity ( A*/ S0)
• Spontaneous liabilities to sales ratio
(L*/S0)
• Profit Margin (M)
• Retention Ratio (RR)
How would increases in these
items affect the AFN?
Higher sales:
Increases asset requirements, increases AFN.
Higher capital intensity ratio, A*/S0?
Increases AFN: Need more assets for given sales increase.

Higher dividend payout ratio?


• Increase AFN: Less retained earnings.
Higher profit margin?
• Decrease AFN: Higher profits, more retained earnings.
Pay suppliers in 60 days rather than 30
days?
Decrease AFN: Trade creditors supply
more capital, i.e., L*/S0 increases.
Higher profit margin:
Increases funds available internally,
decreases AFN
Higher Retention Ratio:
Decreases AFN: Due to increase in
retained earnings.
Relationship between Sales Growth
and Financial Requirements
1. Financial Feasibility
2. Effect of Dividend Policy on financing
needs
3. Capital Intensity
4. Profit Margin
When Balance Sheet Ratios are
subject to change
Three such conditions are:-

1.Economies of Scale
2.Lumpy Assets
3.Excess assets due to forecasting errors