LO3
Financial Planning Model
Ingredients 4.2
• Sales Forecast – many cash flows depend
directly on the level of sales (often
estimated using a growth rate in sales)
• Pro Forma Statements – setting up the
financial plan in the form of projected
financial statements allows for consistency
and ease of interpretation
• Asset Requirements – how much
additional fixed assets will be required to
meet sales projections
© 2013 McGraw-Hill Ryerson Limited
4-0
LO3
Ingredients Continued
• Financial Requirements – how much
financing will we need to pay for the
required assets
• Plug Variable – management decision
about what type of financing will be used
(makes the Statement of Financial Position
balance)
• Economic Assumptions – explicit
assumptions about the coming economic
environment
© 2013 McGraw-Hill Ryerson Limited
4-1
LO3
Example 1 – Historical Financial
Statements
Gourmet Coffee Inc.
Statement of Financial Position
December 31, 2011
Assets
1000 Debt
Equity
Total
1000 Total
400
600
1000
© 2013 McGraw-Hill Ryerson Limited
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LO3
Example 1 continued – Historical
Statement of Comprehensive Income
Gourmet Coffee Inc.
Statement of Comprehensive Income
For Year Ended
December 31, 2011
Revenues
2000
Costs
1600
Net Income
400
© 2013 McGraw-Hill Ryerson Limited
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LO3
Example 1 continued - Pro Forma
Statement of Comp. Income
• Initial Assumptions
• Revenues will grow at
15% (2000*1.15)
• All items are tied
directly to sales and
the current
relationships are
optimal
• Consequently, all other
items will also grow at
15%
Gourmet Coffee Inc.
Pro Forma Statement of
Comprehensive Income
For Year Ended 2012
Revenues
2,300
Costs
Net Income
1,840
460
© 2013 McGraw-Hill Ryerson Limited
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LO3
Example 1 continued - Pro Forma
Statement of Financial Position
• Case I
Gourmet Coffee Inc.
• Dividends are the plug
Pro Forma Stmt. of Fin. Position
variable, so debt and
Case 1
equity increase at 15%
• Dividends = 460 NI –
Assets
1,150 Debt
460
90 increase in equity =
370
Equity
690
Total
1,150 Total
1,150
© 2013 McGraw-Hill Ryerson Limited
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LO3
Example 1 continued - Pro Forma
Statement of Financial Position
• Case II
Gourmet Coffee Inc.
• Debt is the plug
variable and no
dividends are paid
• Debt = 1,150 –
(600+460) = 90
• Repay 400 – 90 = 310
in debt
Pro Forma Stmt. of Fin. Position
Case 1
Assets
1,150 Debt
Equity
Total
1,150 Total
90
1,060
1,150
© 2013 McGraw-Hill Ryerson Limited
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LO3
Percent of Sales Approach 4.3
• Some items tend to vary directly with
sales, while others do not
• Statement of Comprehensive Income
• Costs may vary directly with sales
• If this is the case, then the profit margin is
constant
• Dividends are a management decision and
generally do not vary directly with sales – this
affects the retained earnings that go on the
Statement of Financial Position
© 2013 McGraw-Hill Ryerson Limited
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LO3
Percentage of Sales Approach
Continued
• Statement of Financial Position
• Initially assume that all assets, including fixed,
vary directly with sales
• Accounts payable will also normally vary
directly with sales
• Notes payable, long-term debt and equity
generally do not vary with sales because they
depend on management decisions about
capital structure
• The change in the retained earnings portion of
equity will come from the dividend decision
© 2013 McGraw-Hill Ryerson Limited
4-8
Example 2 – Percentage of
Sales Method
LO3
Tasha’s Toy Emporium
Tasha’s Toy Emporium
Statement of Comp. Income, 2011
Pro Forma Statement of Comp.
% of
Income, 2012
Sales
Sales
5,500
Sales
5,000
Costs
3,300
Costs
3,000
60% EBT
2,200
EBT
Taxes
(40%)
2,000
800
Net Income
1,200
Dividends
600
Add. To RE
600
40% Taxes
880
16% Net Income
24%
Dividends
1,320
660
Add. To RE
660
Assume Sales grow at 10%
Dividend Payout Rate = 50%
© 2013 McGraw-Hill Ryerson Limited
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LO3
Example 2 – Percentage of Sales
Method continued
Tasha’s Toy Emporium – Statement of Financial Position
Current
% of
Pro
Current % of
Pro
Sales Forma
Sales Forma
ASSETS
LIABILITIES & OWNERS’ EQUITY
Current Assets
Current Liabilities
Cash
$500
10%
A/R
2,000
40
Inventory
3,000
5,500
Total
$550
A/P
$900
18%
$990
2,200 N/P
2,500
n/a
2,500
60
3,300
Total
3,400
n/a
3,490
110
6,050 LT Debt
2,000
n/a
2,000
C Shares
2,000
n/a
2,000
RE
2,100
n/a
2,760
4,100
n/a
4,760
Owners’ Equity
Fixed Assets
Net PP&E
4,000
80
4,400
Total Assets
9,500
190
10,450
Total
Total L & OE
9,500
10,250
© 2013 McGraw-Hill Ryerson Limited
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