9
Foundations of Financial
Management
NINTH
th
EDITION
Financial Forecasting
Block
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Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc. 2000
9
NINTH
th
EDITION
What is Financial Forecasting?
Foundations of Financial
Management
LT 4-2
• Financial forecasting is looking ahead to develop a financial plan for
the future
• Very important for the strategic growth of a firm
Block
Hirt Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc. 2000
9
NINTH
th
EDITION
Foundations of Financial
Management
2 Methods of Financial Forecasting:
LT 4-3
– Using Pro Forma, or Projected, Financial Statements (more exact,
time consuming)
– Percent-of-Sales Method (less precise, easier to calculate)
A short-cut, less exact, easier method of determining financing
needs (The “quick and dirty” approach)
Assumes that B/S accounts will maintain a constant percentage
relationship to sales
Often times these statements are required by lenders
Block
Hirt Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc. 2000
NINTH
9
Foundations of Financial
Management
th
EDITION
T 4-1
Figure 4-1
Development of pro forma statements
Prior balance
sheet
1
Sales
projection
3
Pro forma
income
statement
Production
plan
Pro forma
balance
sheet
2
Cash
budge
t
Block
Hirt Irwin/McGraw-Hill
Other
supportiv
e
budgets
Capital budget
©The McGraw-Hill Companies, Inc. 2000
NINTH
9
Foundations of Financial
Management
th
EDITION
T 4-2
Table 4-1
Projected wheel and caster sales (first six months, 2000)
Wheels
Quantity . . . .
Sales price . . .
Sales revenue . .
Total . . .
Block
Hirt Irwin/McGraw-Hill
.
.
1,000
. .
$30
$30,000
. .
. . . . . . .
Casters
2,000
$35
$70,000
. . . . $100,000
©The McGraw-Hill Companies, Inc. 2000
NINTH
9
Foundations of Financial
Management
th
EDITION
T 4-3
Table 4-2
Stock of beginning inventory
Wheels
Quantity . . .
85
Cost
. . . .
$16
Total value . .
$1,360
Total . . . . . . . . .
Block
Hirt Irwin/McGraw-Hill
Casters
180
$20
$3,600
. . . $4,960
©The McGraw-Hill Companies, Inc. 2000
NINTH
9
Foundations of Financial
Management
th
EDITION
T 4-3
Table 4-3
Production requirements for six months
Projected unit sales (Table 4-1) . . .
Desired ending inventory (assumed to
represent 10% of unit sales for the
time period) . . . . . . . .
Beginning inventory (Table 4-2). . .
Units to be produced . . . . . .
Block
Hirt Irwin/McGraw-Hill
Wheels
+1,000
Casters
+2,000
+100
– 85
1,015
+200
–180
2,020
©The McGraw-Hill Companies, Inc. 2000
NINTH
9
Foundations of Financial
Management
th
EDITION
T 4-3
Table 4-4
Unit costs
Materials
Labor .
Overhead
Total
Block
Hirt Irwin/McGraw-Hill
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Wheels
Casters
$10
5
3
$18
$12
6
4
$22
©The McGraw-Hill Companies, Inc. 2000
NINTH
9
Foundations of Financial
Management
th
EDITION
T 4-3
Table 4-5
Total production costs
Units to be produced (Table 4-3)
Cost per unit (Table 4-4) .
.
Total cost .
.
.
.
Block
Hirt Irwin/McGraw-Hill
.
.
.
.
.
.
Wheels
Casters
1,015
$18
$18,270
2,020
$22
$44,440 $62,710
©The McGraw-Hill Companies, Inc. 2000
NINTH
9
Foundations of Financial
Management
th
EDITION
T 4-3
Table 4-6 / Allocation of manufacturing costs and determination
of gross profits
Wheels
Quantity sold (Table 4-1) .
.
Sales price .
.
.
.
.
Sales revenue
.
.
.
.
Cost of goods sold:
Old inventory (Table 4-2)
Quantity (units) .
.
.
Cost per unit
.
.
.
Total .
.
.
.
.
New inventory (the remainder)
Quantity (units) .
.
.
Cost per unit (Table 4-4)
Total .
.
.
.
.
Total cost of goods sold .
Gross profit .
.
.
.
.
Block
Hirt Irwin/McGraw-Hill
Casters
1,000
$30
$30,000
85
$16
2,000
$35
$70,000
Combined
3,000
$100,000
180
$20
$1,360
915
$18
$3,600
1,820
$22
16,470
17,830
$12,170
40,040
43,640
$26,360
$61,470
$38,530
©The McGraw-Hill Companies, Inc. 2000
NINTH
9
Foundations of Financial
Management
th
EDITION
T 4-4
Table 4-8
Pro Forma Income Statement
June 30, 2001
Sales revenue .
.
.
.
.
.
.
Cost of goods sold .
.
.
.
.
.
Gross profit .
.
.
.
.
General and administrative expense
Operating profit (EBIT)
Interest expense
.
.
.
.
$100,000
61,470
.
.
38,530
12,000
.
.
.
.
26,530
1,500
Earnings before taxes (EBT) .
Taxes (20%)* .
.
.
.
.
.
.
.
.
.
25,030
5,006
Earnings after taxes (EAT)
Common stock dividends
.
.
.
.
.
.
.
.
20,024
1,500
Increase in retained earnings .
.
.
.
$ 18,524
Block
*20 percent is applied for simplicity.
Hirt Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc. 2000
NINTH
9
Foundations of Financial
Management
th
EDITION
T 4-5
Table 4-9
Monthly sales pattern (first part)
January
$15,000
Block
Hirt Irwin/McGraw-Hill
February
$10,000
March
$15,000
April
$25,000
May
$15,000
June
$20,000
©The McGraw-Hill Companies, Inc. 2000
NINTH
9
Foundations of Financial
Management
th
EDITION
T 4-5
Table 4-10
Monthly cash receipts (final part)
Sales . . . . . .
Collections:
(20% of current sales) .
Collections:
(80% of previous
month’s sales) . . .
Total cash receipts .
Sales . . . . . .
Collections:
(20% of current sales) .
Collections:
(80% of previous
month’s sales . . .
Total cash receipts .
Block
Hirt Irwin/McGraw-Hill
January
$15,000
February
$10,000
.
$ 3,000
$ 2,000
.
.
9,600
$12,600
12,000
$14,000
.
December
$12,000
.
March
$15,000
April
$25,000
May
$15,000
June
$20,000
.
$ 3,000
$ 5,000
$ 3,000
$ 4,000
.
.
8,000
$11,000
12,000
$17,000
20,000
$23,000
12,000
$16,000
©The McGraw-Hill Companies, Inc. 2000
NINTH
9
Foundations of Financial
Management
th
EDITION
T 4-6
Table 4-11
Component costs of manufactured goods
Materials
Labor .
Overhead
Materials
Labor .
Overhead
Block
Hirt Irwin/McGraw-Hill
.
.
.
.
.
.
.
.
.
.
.
.
Wheels
Cost
per Unit
$10
5
3
.
.
.
Units
Produced
1,015
1,015
1,015
.
.
.
Casters
Units
Cost
Total
Produced per Unit Cost
2,020
$12
$24,240
2,020
6
12,120
2,020
4
8,080
Total
Cost
$10,150
5,075
3,045
Combined
Cost
$34,390
17,195
11,125
$62,710
©The McGraw-Hill Companies, Inc. 2000
NINTH
9
Foundations of Financial
Management
th
EDITION
T 4-6
Table 4-12
Average monthly manufacturing costs
Materials
Labor .
Overhead
Block
Hirt Irwin/McGraw-Hill
.
.
.
.
.
.
.
.
.
Total
Costs
Time
Frame
$34,390
17,195
11,125
6 months
6 months
6 months
Average
Monthly Cost
$5,732
2,866
1,854
©The McGraw-Hill Companies, Inc. 2000
NINTH
9
Foundations of Financial
Management
th
EDITION
T 4-6
Table 4-13
Summary of all monthly cash payments (first part)
From Table 4-12:
Monthly material purchase .
Payment for material
(prior month’s purchase).
Monthly labor cost . . .
Monthly overhead . . .
From Table 4-8:
General and administrative
expense ($12,000 over
6 months)
. . . .
Interest expense . . . .
Taxes (two equal payments)
Cash dividend . . . .
Also:
New equipment purchases .
Total payments . . . .
Block
Hirt Irwin/McGraw-Hill
December
January
February
$4,500
$ 5,732
$ 5,732
.
.
.
$ 4,500
2,866
1,854
$ 5,732
2,866
1,854
.
.
.
.
2,000
2,000
$11,220
8,000
$20,452
.
.
.
©The McGraw-Hill Companies, Inc. 2000
NINTH
9
Foundations of Financial
Management
th
EDITION
T 4-6
Table 4-13
Summary of all monthly cash payments (final part)
March
From Table 4-12:
Monthly material purchase
Payment for material
(prior month’s purchase)
Monthly labor cost . .
Monthly overhead . .
From Table 4-8:
General and administrative
expense ($12,000 over
6 months) . . . .
Interest expense . . .
Taxes (two equal payments)
Cash dividend . . . .
Also:
New equipment purchases
Total payments . . .
Block
Hirt Irwin/McGraw-Hill
April
May
June
.
. $ 5,732
$ 5,732 $ 5,732 $ 5,732
.
.
.
. $ 5,732
.
2,866
.
1,854
$ 5,732 $ 5,732 $ 5,732
2,866
2,866 2,866
1,854
1,854 1,854
.
.
.
.
.
.
.
.
.
.
.
. $14,955
2,000
2,503
2,000
2,000
2,000
1,500
2,503
1,500
10,000
$12,452 $12,452 $27,953
©The McGraw-Hill Companies, Inc. 2000
NINTH
9
Foundations of Financial
Management
th
EDITION
T 4-7
Table 4-14
Monthly cash flow
Total receipts (Table 4-10) .
Total payments (Table 4-13) .
Net cash flow
. . . .
Total receipts (Table 4-10) .
Total payments (Table 4-13) .
Net cash flow
. . . .
Block
Hirt Irwin/McGraw-Hill
.
.
.
.
January
February
March
$12,600
11,220
$ 1,380
$14,000
20,452
($ 6,452)
$11,000
14,955
($ 3,955)
April
May
June
$17,000
12,452
$ 4,548
$23,000
12,452
$10,548
$16,000
27,953
($11,953)
©The McGraw-Hill Companies, Inc. 2000
NINTH
9
Foundations of Financial
Management
th
EDITION
T 4-7
Table 4-15
Cash budget with borrowing and repayment
Jan.
1.
2.
3.
4.
5.
6.
Feb.
Net cash flow . . . . . . $1,380 ($6,452)
Beginning cash balance . . 5,000.*
6,380
Cumulative cash balance. . 6,380
(72)
Monthly loan or (repayment) --5,072
Cumulative loan balance . .
--5,072
Ending cash balance . . . 6,380
5,000
.
.
March April
($3,955)
5,000
1,045
3,955
9,027
5,000
.
May
June
$4,548 $10,548 ($11,953)
5,000
5,000
11,069
9,548
15,548
(884)
(4,548)
(4,479).
5,884
4,479
--5,884
5,000
11,069
5,000
.
.
.
.
* We assume the Goldman Corporation has a beginning cash balance of $5,000 on January 1, 2000, and it
desires a minimum monthly ending cash balance of $5,000.
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©The McGraw-Hill Companies, Inc. 2000
NINTH
9
Foundations of Financial
Management
th
EDITION
T 4-8
Table 4-16
Balance Sheet
December 31, 2000
Assets
Current assets:
Cash . . . . .
Marketable securities
Accounts receivable .
Inventory . . . .
Total current assets
Plant and equipment. .
Total assets . . . .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Liabilities and Stockholders’ Equity
Accounts payable . . . . . . . . . .
Notes payable. . . . . . . . . . . .
Long-term debt . . . . . . . . . . .
Common stock . . . . . . . . . . .
Retained earnings . . . . . . . . . .
Total liabilities and stockholders’ equity . . . .
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Hirt Irwin/McGraw-Hill
$ 5,000
3,200
9,600
4,960
22,760
27,740
$50,500
$ 4,500
0
15,000
10,500
20,500
$50,500
©The McGraw-Hill Companies, Inc. 2000
NINTH
9
Foundations of Financial
Management
th
EDITION
T 4-9
Figure 4-2
Development of a Pro Forma Balance Sheet
Prior balance sheet
(Unchanged items)
Marketable securities
Long-term debt
Common stock
Pro froma income
statement analysis
Inventory
Retained earnings
Pro forma
balance sheet
Cash budget analysis
Block
Hirt Irwin/McGraw-Hill
Cash
Accounts receivable
Plant and equipment
Accounts payable
Notes payable
©The McGraw-Hill Companies, Inc. 2000
NINTH
9
Foundations of Financial
Management
th
EDITION
T 4-10
Table 4-17
Pro Forma Balance Sheet
June 30, 2001
Assets
Current assets:
1. Cash . . . . .
2. Marketable securities .
3. Accounts receivable. .
4. Inventory. . . . .
Total current assets .
5. Plant and equipment .
Total assets . . . . .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
$ 5,000
3,200
16,000
6,200
30,400
45,740
$76,140
Liabilities and Stockholders’ Equity
6. Accounts payable . . . . . . . . .
7. Notes payable . . . . . . . . . .
8. Long-term debt . . . . . . . . .
9. Common stock. . . . . . . . . .
10. Retained earnings . . . . . . . . .
Total liabilities and stockholders’ equity . . . .
Block
Hirt Irwin/McGraw-Hill
$ 5,732
5,884
15,000
10,500
39,024
$76,140
©The McGraw-Hill Companies, Inc. 2000
NINTH
9
Foundations of Financial
Management
th
EDITION
T 4-11
Table 4-18
HOWARD CORPORATION
Balance Sheet and Percent-of-Sales Table
Liabilities and Stockholders’ Equity
Assets
Cash . . . . .
Accounts receivable .
Inventory . . . .
Total current assets
Equipment . . .
Total assets . . .
. $ 5,000
.
40,000
.
25,000
.
70,000
.
50,000
. $120,000
Accounts payable .
Accrued expenses .
Notes payable .
Common stock
.
Retained earnings .
Total liabilities and
stockholders’ equity
.
.
.
.
.
. $ 40,000
. 10,000
. 15,000
. 10,000
. 45,000
.
. $120,000
.
.
.
.
$200,000 sales
Percent of Sales
Cash . . . . .
Accounts receivable .
Inventory . . . .
Total current assets
Equipment . . .
Block
Hirt Irwin/McGraw-Hill
.
.
.
.
.
2.5%
20.0
12.5
35.0
25.0
60.0%
Accounts payable .
Accrued expenses .
20.0%
5.0
25.0%
©The McGraw-Hill Companies, Inc. 2000
9
NINTH
th
EDITION
Foundations of Financial
Management
Percent-of-Sales Method
LT 4-6
Ex: If sales increase from $200,000 to $300,000, profit margin 6% and
dividend 50%
Required new funds = ( A / S ) ( S ) – ( L /S ) ( S )- PS2 ( 1 – D )
A/S = percentage relationship of variable assets to sales
S = change in sales
L/S = percentage relationships of variable liabilities to sales
P = profit margin S = new sales level
D = payout ratio.
RNF = 60 % ( 100,000 ) – 25 % ( 100,000 ) – 6 % ( 300,000) ( 1- 50% )
= 26,000 required sources of new fund
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©The McGraw-Hill Companies, Inc. 2000