Financial Planning
and Forecasting
Ing. Zuzana Čierna, PhD.
Department of Finance
SPU – FEM, Nitra
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From an investor’s standpoint, predicting the future is
what financial statement analysis is all about, while
from management’s standpoint, financial statement
analysis is useful both to help anticipate future
conditions and, more important, as a starting point for
planning actions that will improve the firm’s future
performance.
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Projected financial statements are used to estimate
future free cash flows, which determine the company’s
overall value. Thus, managers forecast free cash flows
under different operating plans, forecast their capital
requirements, and then choose the plan that maximizes
shareholder value.
Operating plans provide detailed implementation
guidance, based on the corporate strategy, to help
meet the corporate objectives. These plans can be
developed for any time horizon.
Financial plan – a document which involves current
and future needs of funds and currently existing and
expected future resources to cover.
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• long-term financial plan
• short-term financial plan
Content of short-term FP
- profit plan,
- financial statement,
- cash flow plan,
- plan distribution of profit
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Five-Year Operating
Plan Outline
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Percent of Sales Method
A method of forecasting future financial statements that
expresses each account as a percentage of sales.
Once sales have been forecasted, we must forecast
future balance sheets and income statements.
•
•
•
•
FORECASTED INCOME STATEMENT
FORECAST THE BALANCE SHEET
RAISING THE ADDITIONAL FUNDS NEEDED
FORECASTING FREE CASH FLOW
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Percent of Sales Method
1.step:
2.step:
3.step:
(steps)
Financial analysis of current period
Aims formulation for time horizon of FP
Assessment of basic requirements:
a) balance sheet items is most closely linked to sales
b) structure of assets and liabilities of current period
are adequate to the level of sales
4.step:
If 3.b) is not fulfill there is necessary to make
correction of balance sheet items of current
period. It can be made by Financial ratios
method.
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Percent of Sales Method
5.step:
6.step:
(steps)
Identification of those balance sheet items,
which are changed in dependence on the
sales changes. Share quantification of
sheet balance items on sales.
Calculation of planned balance sheet
items. Share of balance sheet items on
sales times planned sales. Balance sheet
items without dependence on sales changes
are taken from current balance sheet.
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Percent of Sales Method
(steps)
7.step:
Calculation of additional funds needed.
Disparity between higher assets and lower
liabilities.
8.step:
Structure of additional funds needed in
accordance with aims of financial plan.
New plan of balance sheet and plan of
cash flow.
Control if aims of FP were fulfill.
9.step:
10.step:
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Financial ratios method
Selected financial ratios are used as „model values“.
Firm wants to reach these values in future.
These values can be formulated as:
• specific aims of firm
• average values of firms in the same sector
• values of competitive firm
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Example:
We want to make a financial plan for year 2013.
Expected Balance sheet 31.12.2012
Fixed assets
Inventories
Receivables
Financial Accounts
Current Assets
375
300
215
25
540
Registered Capital
475
Retained Profit
52
Liabilities to suppliers
130
Short-term bank loans
35
Wages, taxes and other liabilities 105
Short-term liabilities
270
Long-term bank loans
118
Total Assets
915
Total capital and liabilities
915
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(1., 2.step)
Expected sales in year 2012 = 1600 euro; Net income =
80 euro; Dividends = 20 euro.
Expected growth of sales in 2013 is 25% in compare
with sales in year 2012.
Aims formulation for year 2013:
1.) 5% profitability of sales.
2.) Dividends 50% from net income.
3.) Debts from total assets – no more than 40%.
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(3.step)
Structure of assets (Expected Balance sheet
31.12.2012) are not adequate to the level of sales!
We have to make correction by Financial ratios method:
Selected financial ratios values of competitive firm:
Inventories turnover ratio = 6
DSO = 40
Inventories turnover ratio = sales/inventories
Days sales outstanding = (receivables * 365)/sales
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(4.step)
Correction of balance sheet items of current period.
Model values:
Inventories turnover ratio = 6
DSO = 40
We have to make correction in inventories and
receivables.
Inventories turnover ratio = sales/inventories = 1600/300 = 5,33
New value of inventories = 1600/6 = 266,6  270
Days sales outstanding = (receivables * 365)/sales = (215 * 365)/1600 = 41,9
New value of receivables = (40 * 1600)/365 = 175,3  180
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(4.step)
Expected Balance sheet (after correction) 31.12.2012
Fixed assets
Inventories
Receivables
Financial Accounts
Current Assets
375
270
180
90
540
Registered Capital
475
Retained Profit
52
Liabilities to suppliers
130
Short-term bank loans
35
Wages, taxes and other liabilities 105
Short-term liabilities
270
Long-term bank loans
118
Total Assets
915
Total capital and liabilities
915
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(5., 6.step)
Expected growth of sales in 2013 is 25%: 1600 + 25% = 2000 euro
(1)
(2)
Share on sales (in current period)
Planned balance sheet
(% from 1600 euro)
(planned sales * column 1)
Financial accounts
(90/1600) * 100 = 5,6
2000 * 0,056 = 112
Receivables
(180/1600)*100 = 11,3
2000 * 0,113 = 226
Inventories
(270/1600)*100 = 16,9
2000 * 0,169 = 338
Current assets
(540/1600)*100 = 33,8
2000 * 0,338 = 676
Fixed assets
(373/1600)*100 = 23,4
2000 * 0,234 = 468
Total assets
(915/1600)*100 = 57,1
2000 * 0,571 = 1144
Liabilities to suppliers
(130/1600)*100 = 8,1
2000 * 0,081 = 162
Short-term bank loans without dependence on sales changes are taken from current balance sheet: 35
Wages, taxes and other liabilities
(105/1600)*100 = 6,6
2000 * 0,066 = 132
Short-term liabilities
––
329
Long-term bank loans without dependence on sales changes are taken from current balance sheet: 118
Registered Capital
without dependence on sales changes are taken from current balance sheet: 475
Retained Profit
102
Total capital and liabilities
––
1024
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Calculation of Retained Profit:
(5.,6.step)
Change in Retained profit = Net income – Dividends
Retained profit
of planned period
=
Retained profit
of current period
+
Change in
Retained profit
Net income (from aims formulation: 1.) 5% profitability of sales):
100 euro (5% from planned sales 2000 euro)
Dividends (from aims formulation: 2.) 50% from net income):
50 euro (50% from net income 100 euro)
Change in Retained profit = 100 – 50 = 50 euro
Retained profit of planned period = 52 + 50 = 102 euro
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(7.step)
Calculation of additional funds needed.
Disparity between higher assets and lower liabilities.
Total assets - Total capital and liabilities: 1144 – 1024 = 120 euro
(8.step)
Structure of additional funds needed in accordance with
aims of financial plan : 3.) Debts from total assets – no more than 40%.
Maximal Debts = 0,4 * Total assets (planned) = 0,4 * 1144 = 458 euro
Short-term liabilities (planned) 329
Long-term bank loans
118
Total debts (planned)
447
Maximal debts – Total debts (planned) = 458 – 447 = 11 euro
(maximal additional
debts)
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(8.step)
Structure of additional funds needed:
New long-term debt
11
New share issue (shareholder's investment) 109
Total additional funds needed
102 euro
(9.step)
Plan of Balance sheet 31.12.2013
Fixed assets
Inventories
Receivables
Financial Accounts
Current Assets
468
338
226
112
676
Registered Capital
(475+109)=584
Retained Profit
102
Liabilities to suppliers
162
Short-term bank loans
35
Wages, taxes and other liabilities 132
Short-term liabilities
329
Long-term bank loans (118+11)=129
Total Assets
1144
Total capital and liabilities
1144 19
Plan of Cash flow
(9.step)
1. Operating activities
Net income
.....................................................
increase in Liabilities to suppliers
.....................
increase in Receivables .....................................
increase in Wages, taxes and other liabilities .....
increase in Inventories
.....................................
resources from Operating activities .....................
use of resources
.....................................
Total operating activities .....................................
+ 100
+ 32
- 46
+27
- 68
+ 159
- 114
+ 45
2. Investment activities
increase in Fixed assets
.....................................
- 93
3. Financial activities
increase in Long-term bank loans
.....................
New share issue
.....................................
Dividends
.....................................................
resources from Financial activities .....................
use of resources
.....................................
Total financial activities
.....................................
- 11
+ 109
- 50
+ 120
- 50
+ 70
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Plan of Cash flow
1. Operating activities
2. Investment activities
3. Financial activities
CASH FLOW
(9.step)
+ 45
- 93
+ 70
+ 22
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Than you for your attention!
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