MASTER IN GLOBAL
ENTREPRENEURIAL MANAGEMENT
UNIT 4 - FINANCIAL PLANNING AND FORECASTING
Professor: Francesc Prior
Preliminary Financial Forecast:
Balance Sheets (Assets)
Cash and equivalents
Accounts receivable
Inventories
Total current assets
Net fixed assets
Total assets
2008
$
20
240
240
$ 500
500
$1,000
2009E
$
25
300
300
$ 625
625
$1,250
17-2
Preliminary Financial Forecast: Balance Sheets
(Liabilities and Equity)
Accts payable & accrued liab.
Notes payable
Total current liabilities
Long-term debt
Common stock
Retained earnings
Total liabilities & equity
2008
2009E
$ 100 $ 125
100
190
200
315
100
190
500
500
200
245
$1,000 $1,250
17-3
Preliminary Financial Forecast:
Income Statements
Sales
Less: Variable costs
Fixed costs
EBIT
Interest
EBT
Taxes (40%)
Net income
Dividends (30% of NI)
Addition to retained earnings
2008
$2,000.0
1,200.0
700.0
$ 100.0
16.0
$ 84.0
33.6
$ 50.4
$15.12
$35.28
2009E
$2,500.0
1,500.0
875.0
$ 125.0
16.0
$ 109.0
43.6
$ 65.40
$19.62
$45.78
17-4
Key Financial Ratios
Basic earning power
Profit margin
Return on equity
Days sales outstanding
Inventory turnover
Fixed assets turnover
Total assets turnover
Debt/assets
Times interest earned
Current ratio
Payout ratio
2008
10.00%
2.52%
2009E
10.00%
2.62%
Ind Avg
20.00%
4.00%
Comment
Poor
Poor
7.20%
8.77%
15.60%
Poor
43.8 days 43.8 days 32.0 days
8.33x
8.33x
11.00x
4.00x
4.00x
5.00x
2.00x
2.00x
2.50x
30.00%
40.40%
36.00%
6.25x
7.81x
9.40x
2.50x
1.99x
3.00x
30.00%
30.00%
30.00%
Poor
Poor
Poor
Poor
OK
Poor
Poor
OK
17-5
Key Assumptions in Preliminary
Financial Forecast for NWC
▪
▪
Operating at full capacity in 2008.
▪
Payables and accruals grow proportionally with
sales.
▪
▪
Each type of asset grows proportionally with
sales.
2008 profit margin (2.52%) and payout (30%)
will be maintained.
Sales are expected to increase by $500 million.
(%DS = 25%)
17-6
Determining Additional Funds Needed
Using the AFN Equation
AFN = (A0*/S0)DS – (L0*/S0)DS – M(S1)(RR)
= ($1,000/$2,000)($500)
– ($100/$2,000)($500)
– 0.0252($2,500)(0.7)
= $180.9 million
17-7
Management’s Review of the Financial
Forecast
▪
Consultation with some key managers has
yielded the following revisions:
▪ Firm expects customers to pay quicker next year,
▪
▪
thus reducing DSO to 34 days without affecting
sales.
A new facility will boost the firm’s net fixed
assets to $700 million.
New inventory system to increase the firm’s
inventory turnover to 10x, without affecting
sales.
17-8
Management’s Review of the Financial
Forecast
▪
These changes will lead to adjustments in the
firm’s assets and will have no effect on the
firm’s liabilities and equity section of the
balance sheet or its income statement.
17-9
Revised (Final) Financial Forecast:
Balance Sheets (Assets)
Cash and equivalents
Accounts receivable
Inventories
Total current assets
Net fixed assets
Total assets
2008
$
20
240
240
$ 500
500
$1,000
2009F
$
67
233
250
$ 550
700
$1,250
17-10
Key Financial Ratios – Final Forecast
Basic earning power
Profit margin
Return on equity
Days sales outstanding
Inventory turnover
Fixed assets turnover
Total assets turnover
Debt/assets
Times interest earned
Current ratio
Payout ratio
2008
10.00%
2.52%
2009F
10.00%
2.62%
Ind Avg
20.00%
4.00%
Comment
Poor
Poor
7.20%
8.77%
15.60%
Poor
43.8 days 34.0 days 32.0 days
8.33x
10.00x
11.00x
4.00x
3.57x
5.00x
2.00x
2.00x
2.50x
30.00%
40.40%
36.00%
6.25x
7.81x
9.40x
2.50x
1.98x
3.00x
30.00%
30.00%
30.00%
OK
OK
Poor
Poor
OK
Poor
Poor
OK
17-11
What was the net investment in capital?
Capital2009 = NWC + Net FA
= $625 − $125 + $625
= $1,125
Capital2008 = $900
Net investment in capital = $1,125 − $900
= $225
17-12
How much free cash flow is expected to be
generated in 2009?
FCF =
=
=
=
EBIT(1 – T) – Net investment in capital
$125(0.6) – $225
$75 – $225
-$150
17-13
Suppose Fixed Assets Had Been Operating
at Only 85% of Capacity in 2008
▪
The maximum amount of sales that can be
supported by the 2008 level of assets is:
Capacity sales = Actual sales/% of capacity
= $2,000/0.85 = $2,353
▪
2009 forecast sales exceed the capacity sales,
so new fixed assets are required to support
2009 sales.
17-14
How can excess capacity affect the
forecasted ratios?
▪
▪
Sales wouldn’t change but assets would be
lower, so turnovers would improve.
Less new debt, hence lower interest and
higher profits
▪ EPS, ROE, debt ratio, and TIE would improve.
17-15
How would the following items affect
the AFN?
▪
Higher dividend payout ratio?
▪
Higher profit margin?
▪ Increase AFN: Less retained earnings.
▪ Decrease AFN: Higher profits, more retained
earnings.
▪
Higher capital intensity ratio?
▪
Pay suppliers in 60 days, rather than 30 days?
▪ Increase AFN: Need more assets for given sales.
▪ Decrease AFN: Trade creditors supply more
capital (i.e., L0*/S0 increases).
17-16