Financial Planning &

Forecasting
Ravi Agarwal
FRA & BV

The Ingredients of a Financial

Plan

A financial plan consists of several

ingredients

Expectations about the economic environment

A sales forecast
Pro forma (forecasted) financial statements
Asset requirements
Required new financing
Cash Budget

We will focus on developing the pro forma

financial statements
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Forecasting: The % of Sales

Method

The most basic method of forecasting financial

statements (income statements and balance
sheets) is the percent of sales method
This method assumes that certain expenses,
assets, and liabilities maintain a constant
relationship to the level of sales
There are two inputs to this method:
A sales forecast (exogenous)
The percentages which are assumed to be constant

Forecasting the Income

Statement
Elvis Products International
Pro-forma Income Statement
For the Year Ended Dec. 31, 1997 ($ 000's)
Sales
Cost of Goods Sold
Gross Profit
No change Selling and G&A Expenses
Fixed Expenses
Depreciation Expense
EBIT
Interest Expense
Earnings Before Taxes
Taxes @ 40%
Net Income

1998%*
1998* 1997%
100.00% 4,300.00 100.00%
83.93% 3,609.11 84.42%
690.89 15.58%
7.79%
334.80
8.58%
100.00
2.60%
20.00
0.52%
236.09
3.89%
76.00
1.97%
160.09
1.91%
64.04
0.77%
96.05
1.15%

1997 1996%
3,850.00 100.00%
3,250.00 83.45%
600.00 16.55%
330.30
6.99%
100.00
2.91%
20.00
0.55%
149.70
6.09%
76.00
1.82%
73.70
4.27%
29.48
1.71%
44.22
2.56%

1996
3,432.00
2,864.00
568.00
240.00
100.00
18.90
209.10
62.50
146.60
58.64
87.96

*Forecasted

Types of Assets and

Liabilities

There are two types of assets:

Current assets are the firms short-term assets and
can generally be expected to vary directly with sales
Fixed assets are the firms long-term assets and
generally do not vary directly with sales

There are two types of liabilities:

Spontaneous liabilities are those that occur
naturally during the ordinary course of doing
business. These sources vary directly with sales
Discretionary liabilities are those that require a
special effort for the firm to obtain. These sources
do not vary directly with sales
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Forecasting the Balance

Sheet
Elvis Products International
Balance Sheet
As of Dec. 31, 1997

Assets
Cash and Equivalents
Accounts Receivable
Inventory
Total Current Assets
Plant & Equipment
Accumulated Depreciation
Net Fixed Assets
Total Assets
Liabilities and Owner's Equity
Accounts Payable
Short-term Notes Payable
Other Current Liabilities
Total Current Liabilities
Long-term Debt
Total Liabilities
Common Stock
Retained Earnings
Total Shareholder's Equity
Total Liabilities and Owner's Equity
Discretionary Financing Needed
* Forecasted
Other Information
Sales
Dividend

1998*
52.00
444.51
914.90
1411.40
527.00
186.20

1997
52.00
402.00
836.00
1290.00
527.00
166.20

1752.20

1997%
1.35%
10.44%
21.71%
33.51%
13.69%
4.32%
9.37%
42.88%

189.05
225.00
163.38
577.43
424.61
1002.04
460.00
300.04
760.04
1762.08

4.55%
5.84%
3.64%
14.03%
11.03%
25.06%
11.95%
5.87%
17.82%
42.88%

340.80

-9.88
Forecast
4300.00
22.00

1996
57.60
351.20
715.20
1124.00
491.00
146.20

1650.80

1996%
1.68%
10.23%
20.84%
32.75%
14.31%
4.26%
10.05%
42.80%

175.20
225.00
140.00
540.20
424.61
964.81
460.00
225.99
685.99
1650.80

4.24%
5.83%
3.96%
14.03%
9.42%
23.46%
13.40%
5.94%
19.34%
42.80%

145.60
200.00
136.00
481.60
323.43
805.03
460.00
203.77
663.77
1468.80

360.80

344.80
1468.80

Surplus
Actual
3850.00

Actual
3432.00

Discretionary Financing
Needed

Ordinarily, the pro-forma balance sheet will

not balance!
This is intentional, and the amount needed to
make it balance is referred to as the
Discretionary Financing Needed, DFN (or
External Financing Needed, EFN)
This is a plug figure that represents the
amount of discretionary financing that the firm
will need to obtain in order to support its
forecasted level of sales
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The Cash Budget

A cash budget is a document which shows

the expected cash inflows and outflows for
a chosen time period (say, 6 or 9 months).
The benefits of the cash budget are:
It provides an estimate of the ending cash
balance in each month
It provides estimates and sources of the cash
inflows and outflows
It provides a basis of comparison against which
managers can be evaluated
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Parts of the Cash Budget

In a simple cash budget, there are three parts:

The Worksheet Area
The Inflows and Outflows
The calculation of the ending cash balance

Essentially, a cash budget starts with the

beginning cash balance, adds expected cash
inflows, and subtracts any expected cash
outflows. The result is the expected ending cash
balance.
The students have already done number of
exercises on Cash Budgets in their FM course in
2nd and 3rd Trimester.
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Cash Budget: An Example

Here is the information required to assemble the cash

budget for Bithlo Barbecues:
Expected sales are on the next slide
40% of sales are for cash. Of the remainder, 75% is collected
the following month, and 25% is collected two months after
the sale.
Inventory purchases are equal to 50%of the next months
sales. 60% of purchases are paid for the following month, and
the remainder one month later.
Wages are 20% of sales. Leasing expenses is $10,000 per
month. Interest payments of $30,000 are due in June and
September. A $50,000 dividend payment will be made in June.
Taxes of $25,000 are due in June and September. A $200,000
capital improvement will be paid for in July.
The company must keep a minimum cash balance of $15,000.

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Cash Budget: Worksheet

Area

The worksheet area is where we gather certain

key numbers which will be used in the rest of
the cash budget.

Sales
Collections:
Cash
First Month
Second Month
Total Collections
Purchases
Payments:
First Month
Second Month
Total Payments

Bithlo Barbeques
Cash Budget
For the Period June to September 1998
April
May
June
July
August September October
291,000 365,000 387,000 329,000 238,000
145,000
92,000
40%
45%
15%
50% 182,500 193,500
60%
40%

154,800 131,600
95,200
164,250 174,150 148,050
43,650
54,750
58,050
362,700 360,500 301,300
164,500

119,000

58,000
107,100
49,350
214,450

72,500

46,000

116,100
98,700
71,400
73,000
77,400
65,800
189,100 176,100 137,200

43,500
47,600
91,100

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Cash Budget: Inflows &

Outflows

This section shows all of the cash

collections and disbursements. Note
that these are only cash inflows and
outflows. The cash budget is not the
same
as the income statement.
Collections
362,700 360,500 301,300
214,450
Less Disbursements:
Inventory Payments
Wages
Lease Payment
Interest
Dividend (Common)
Taxes
Capital Outlays
Total Disbursement

20%

189,100 176,100 137,200

77,400
65,800
47,600
10,000
10,000
10,000
30,000
0
0
50,000
0
0
25,000
0
0
0 200,000
0
381,500 451,900 194,800

91,100
29,000
10,000
30,000
0
25,000
0
185,100

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Cash Budget: The Ending Cash

Balance

This section is where we calculate the ending

cash balance and determine if we will need to
borrow for each month.
Beginning Cash Balance
Collections - Disbursement
Unadjusted Cash Balance
Current Borrowing Needed
Ending Cash Balance

20,000
0
20,000

20,000
15,000
15,000
(18,800) (91,400) 106,500
1,200 (76,400) 121,500
13,800
91,400
0
15,000 15,000 121,500

121,500
29,350
150,850
0
150,850

Notes:
Minimum Acceptable Cash 15,000

Note that Bithlo Barbecues will need to borrow in June and July, and
will have excess cash in August and September.

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