Financial Forecasting, Planning and Budgeting

Financial Forecasting
 1)

Project sales revenues and expenses.

Financial Forecasting
Project sales revenues and expenses.  2) Estimate current assets and fixed assets necessary to support projected sales.
 1)

Financial Forecasting
Project sales revenues and expenses.  2) Estimate current assets and fixed assets necessary to support projected sales.
Percent of sales forecast
 1)

Percent of Sales Method

this years sales will total Rs32 million. million.  Next year, we forecast sales of Rs40 million. million.  Net income should be 5% of sales.  Dividends should be 50% of earnings.
 Suppose

Rs32m Assets Current Assets Fixed Assets Total Assets Liab. and Equity Accounts Payable Accrued Expenses Notes Payable Long Term Debt Total Liabilities Common Stock Retained Earnings Equity Total Liab & Equity

This year

% of

Rs8m Rs16m Rs24m Rs4m Rs4m Rs1m Rs6m Rs15m Rs7m Rs2m Rs9m Rs24m

25% 50%

12.5% 12.5% n/a n/a n/a

Next year Rs40m Assets Current Assets Fixed Assets Total Assets Liab. and Equity Accounts Payable Accrued Expenses Notes Payable Long Term Debt Total Liabilities Common Stock Retained Earnings Equity Total Liab & Equity

% of

25% 50%

12.5% 12.5% n/a n/a n/a

Next year Rs40m Assets Current Assets Fixed Assets Total Assets Liab. and Equity Accounts Payable Accrued Expenses Notes Payable Long Term Debt Total Liabilities Common Stock Retained Earnings Equity Total Liab & Equity

% of

Rs10m 50%

25%

12.5% 12.5% n/a n/a n/a

Next year Rs40m Assets Current Assets Fixed Assets Total Assets Liab. and Equity Accounts Payable Accrued Expenses Notes Payable Long Term Debt Total Liabilities Common Stock Retained Earnings Equity Total Liab & Equity

% of

Rs10m Rs20m

25% 50%

12.5% 12.5% n/a n/a n/a

Next year Rs40m Assets Current Assets Fixed Assets Total Assets Liab. and Equity Accounts Payable Accrued Expenses Notes Payable Long Term Debt Total Liabilities Common Stock Retained Earnings Equity Total Liab & Equity

% of

Rs10m Rs20m Rs30m

25% 50%

12.5% 12.5% n/a n/a n/a

Next year Rs40m Assets Current Assets Fixed Assets Total Assets Liab. and Equity Accounts Payable Accrued Expenses Notes Payable Long Term Debt Total Liabilities Common Stock Retained Earnings Equity Total Liab & Equity

% of

Rs10m Rs20m Rs30m Rs5m

25% 50%

12.5% 12.5% n/a n/a n/a

Next year Rs40m Assets Current Assets Fixed Assets Total Assets Liab. and Equity Accounts Payable Accrued Expenses Notes Payable Long Term Debt Total Liabilities Common Stock Retained Earnings Equity Total Liab & Equity

% of

Rs10m Rs20m Rs30m Rs5m Rs5m

25% 50%

12.5% 12.5% n/a n/a n/a

Next year Rs40m Assets Current Assets Fixed Assets Total Assets Liab. and Equity Accounts Payable Accrued Expenses Notes Payable Long Term Debt Total Liabilities Common Stock Retained Earnings Equity Total Liab & Equity

% of

Rs10m Rs20m Rs30m Rs5m Rs5m Rs1m

25% 50%

12.5% 12.5% n/a n/a n/a

Next year Rs40m Assets Current Assets Fixed Assets Total Assets Liab. and Equity Accounts Payable Accrued Expenses Notes Payable Long Term Debt Total Liabilities Common Stock Retained Earnings Equity Total Liab & Equity

% of

Rs10m Rs20m Rs30m Rs5m Rs5m Rs1m Rs6m

25% 50%

12.5% 12.5% n/a n/a n/a

Next year Rs40m Assets Current Assets Fixed Assets Total Assets Liab. and Equity Accounts Payable Accrued Expenses Notes Payable Long Term Debt Total Liabilities Common Stock Retained Earnings Equity Total Liab & Equity

% of

Rs10m Rs20m Rs30m Rs5m Rs5m Rs1m Rs6m Rs17m n/a

25% 50%

12.5% 12.5% n/a n/a

Next year Rs40m Assets Current Assets Fixed Assets Total Assets Liab. and Equity Accounts Payable Accrued Expenses Notes Payable Long Term Debt Total Liabilities Common Stock Retained Earnings Equity Total Liab & Equity

% of

Rs10m Rs20m Rs30m Rs5m Rs5m Rs1m Rs6m Rs17m Rs7m n/a

25% 50%

12.5% 12.5% n/a n/a

Predicting Retained Earnings:



Next years projected retained earnings = last years Rs2 million, plus: million,

Predicting Retained Earnings:



Next years projected retained earnings = last years Rs2 million, plus: million,

projected sales

net income x sales

(1

cash dividends - net income )

Predicting Retained Earnings:



Next years projected retained earnings = last years Rs2 million, plus: million,

projected sales

net income x Sales

(1
x

cash dividends - net income )

Rs40 million x

.05

(1 - .50)

Predicting Retained Earnings:



Next years projected retained earnings = last years Rs2 million, plus: million,

projected sales

net income x sales

(1
x

cash dividends - net income )

Rs40 million x

.05

(1 - .50)

= Rs2 million + Rs1 million = Rs3million

Next year Rs40m Assets Current Assets Fixed Assets Total Assets Liab. and Equity Accounts Payable Accrued Expenses Notes Payable Long Term Debt Total Liabilities Common Stock Retained Earnings Equity Total Liab & Equity

% of

Rs10m Rs20m Rs30m Rs5m Rs5m Rs1m Rs6m Rs17m Rs7m Rs3m n/a

25% 50%

12.5% 12.5% n/a n/a

Next year Rs40m Assets Current Assets Fixed Assets Total Assets Liab. and Equity Accounts Payable Accrued Expenses Notes Payable Long Term Debt Total Liabilities Common Stock Retained Earnings Equity Total Liab & Equity

% of

Rs10m Rs20m Rs30m Rs5m Rs5m Rs1m Rs6m Rs17m Rs7m Rs3m Rs10m n/a

25% 50%

12.5% 12.5% n/a n/a

Next year Rs40m Assets Current Assets Fixed Assets Total Assets Liab. and Equity Accounts Payable Accrued Expenses Notes Payable Long Term Debt Total Liabilities Common Stock Retained Earnings Equity Total Liab & Equity

% of

Rs10m Rs20m Rs30m Rs5m Rs5m Rs1m Rs6m Rs17m Rs7m Rs3m Rs10m Rs27m n/a

25% 50%

12.5% 12.5% n/a n/a

Next year Rs40m Assets Current Assets Fixed Assets Total Assets Liab. and Equity Accounts Payable Accrued Expenses Notes Payable Long Term Debt Total Liabilities Common Stock Retained Earnings Equity Total Liab & Equity

% of

Rs10m Rs20m Rs30m Rs5m Rs5m Rs1m Rs6m Rs7m Rs3m

25% 50%

How much 12.5% 12.5% Discretionary n/a Financing n/a will we Rs17m Need?
n/a Rs10m Rs27m

Next year Rs40m Assets Current Assets Fixed Assets Total Assets Liab. and Equity Accounts Payable Accrued Expenses Notes Payable Long Term Debt Total Liabilities Common Stock Retained Earnings Equity Total Liab & Equity

% of

Rs10m Rs20m Rs30m Rs5m Rs5m Rs1m Rs6m Rs7m Rs3m

25% 50%

How much 12.5% 12.5% Discretionary n/a Financing n/a will we Rs17m Need?
n/a Rs10m Rs27m

Next year Rs40m Assets Current Assets Fixed Assets Total Assets Liab. and Equity Accounts Payable Accrued Expenses Notes Payable Long Term Debt Total Liabilities Common Stock Retained Earnings Equity Total Liab & Equity

% of

Rs10m Rs20m Rs30m Rs5m Rs5m Rs1m Rs6m Rs7m Rs3m

25% 50%

How much 12.5% 12.5% Discretionary n/a Financing n/a will we Rs17m Need?
n/a Rs10m Rs27m

Predicting Discretionary Financing Needs

Discretionary Financing Needed =

Predicting Discretionary Financing Needs

Discretionary Financing Needed = projected total assets projected total liabilities projected owners equity

Predicting Discretionary Financing Needs

Discretionary Financing Needed = projected total assets Rs30 million million projected total liabilities projected owners equity

Rs17 million - Rs10

Predicting Discretionary Financing Needs

Discretionary Financing Needed = projected total assets Rs30 million million projected total liabilities projected owners equity

Rs17 million - Rs10

= Rs3 million in discretionary financing

Sustainable Rate of Growth

g* = ROE (1 - b)
where

Sustainable Rate of Growth

g* = ROE (1 - b)
where

b = dividend payout ratio (dividends / net income)

Sustainable Rate of Growth

g* = ROE (1 - b)
where

b = dividend payout ratio (dividends / net income) ROE = return on equity (net income / common equity) or

Sustainable Rate of Growth

g* = ROE (1 - b)
where

b = dividend payout ratio (dividends / net income) ROE = return on equity (net income / common equity) or net income sales ROE = sales x assets common equity x assets

Budgets
 Budget:

a forecast of future events.

Budgets
indicate the amount and timing of future financing needs. needs.  Budgets provide a basis for taking corrective action if budgeted and actual figures do not match.  Budgets provide the basis for performance evaluation. evaluation.
 Budgets