Presentation of the Financial Planning Process (August 30, 2018)


From the event planning activity, you were able to experience an actual planning process. Identify what are
the steps they did in planning for their event.
The events you presented are a result of the planning process.
1) Set goals or objectives.



For the activity done, the objective was to increase awareness of (chosen issue).
For corporations, long term and short term objectives are usually identified. These can be seen in the
company’s vision and mission statements. The vision statement states where the company wants to be while
the mission statement states the plans on how to achieve the vision.
Examples of a company’s Vision-Mission statements are as follows:
Jollibee Foods Corporation (JFC)
Vision: To excel in providing great tasting food that meets local preferences better than anyone; To become
one of the three largest and most profitable restaurant companies in the world by 2020.
Mission: To serve great tasting food, bringing the joy of eating to everyone.
McDonalds Philippines
Vision: First to respond to the fast changing needs of the Filipino family; First choice when it comes to food
and dining experience; First mention as the ideal employer and socially responsible company; First to respond
to the changing lifestyle of the Filipino family
Mission: To serve the Filipino community by providing great-tasting food and the most relevant customer
delight experience.
2) Identify Resources
For the activity done, the resources the learners have are the following:

PHP 300,000

Man power
Resources include production capacity, human resources who will man the operations and financial resources
(Borja & Cayanan, 2015).
3) Identify goal-related tasks
For the activity done, the goal-related task is to prepare an event to increase awareness of (whatever issue
you want).
4) Establish responsibility centers for accountability and timeline.
For the activity done, there were different responsibilities formed as follows:






Event Chairperson
Budgeting Team
Production Team
Marketing Team
Creatives Team
Administrative Team
Also, there must be a timeline for the activities, especially since they were allotted a specific time to do the activity.
5) Establish the evaluation system for monitoring and controlling

For the activity done, the learners were given an expectation of their output and the teacher will
grade them based on a predetermined criteria. Other evaluation for awareness events may be
number of attendees, feedback, etc.

For corporations, the management must establish a mechanism which will allow plans to be
monitored. This can be done through quantified plans such as budgets and projected financial
statements. The management will then compare the actual results to the planned budgets and
projected financial statements. Any deviations from the budgets should be investigated.
6) Determine contingency plans


In planning, contingencies must be considered as well.
Budgets and projected financial statements are anchored on assumptions. If these assumptions do
not become realities, management must have alternative plans to minimize the adverse effects on
the company (Borja & Cayanan, 2015).
Give one of the most important activities you have done in the previous exercise.
Answers:
Financial Planning Process.
Questions:
- What is a budget?
- What is the importance of a budget?
- What will happen if the budget is not met?
• A plan is useless if it is not quantified. A quantified plan is represented through budgets and projected or pro-forma
financial statements.
• These budgets and pro-forma financial statements are useful for controlling. They serve as the bases for monitoring
actual performance.
• meeting the plans is good. However, failing to meet the plans is not equivalent to failure if the reasons for not
meeting such plans can be justified especially when the reasons are fortuitous in nature and are beyond the control of
management.
- Measuring actual performance vis a vis the plans even at the early start of the year allows the management to
assess the company’s performance and come up with remedial actions if warranted (Cayanan, 2015).
1. SALES BUDGET
• Discuss how a sales budget is formulated.
- The most important account in the financial statement in making a forecast is sales since most of
the expenses are correlated with sales.
- Recall from Lesson 2: Financial Statement analysis that cost of sales ratio, gross profit ratio, and variable operating
expenses ratio are based on the sales figure.
- Given the importance of the sales forecast, the financial manager must be able to support this figure with reasonable
assumptions. The following external and internal factors should be considered in forecasting sales:
External

Gross Domestic Product (GDP) growth rate

Inflation

Interest Rate

Foreign Exchange Rate

Income Tax Rates

Developments in the industry

Competition

Economic Crisis

Regulatory Environment

Political Crisis
Table 1: Factors
Internal

production capacity

man power requirements

management style of managers

reputation and network of the
stockholders

financial resources of the company
controlling
that Influence Sales
• Discuss the following external and internal factors influencing sale, among others:
- Macroeconomic Variables (external)
Macroeconomic variables such as the GDP rate, inflation rate, and interest rates, among others play an important role
in forecasting sales because it tells us how much the consumers are willing to spend. A low GDP rate coupled by a
high inflation rate means that consumers are spending less on their purchases of goods and services. This means that
we should not forecast high sales of the periods
of low GDP.
- Developments in the Industry (external)
Products and services which have more developments in its industry would likely have a higher sales forecast than a
product or service in slow moving industry. Consumer trends are always changing, thus the industry should be
competitive to be able to appeal to more customers and stay in the market.
- Competition (external)
Suppose you are selling bread and you know that each person in your community eats an average of one loaf of bread
a day. The population of your community is 500 people. If you are the only person selling bread in your town, then
your sales forecast is 500 units of bread. However, you also have to take account your competition. What if there are
4 other sellers of bread? You will need to have to
divide the sales between the 5 of you. Does this mean your new forecast should be 100 units of bread? Not necessary.
You should also know the preference of your consumers. If more of them would prefer to buy more bread from you,
then you should increase your sales forecast.
- Production Capacity and man power (internal)
Suppose that you have already evaluated the macroeconomic factors and identified that there is a very strong market
for your product and consumers are very likely to buy from you. You forecasted that you will be able to sell 1,000
units of your product. However, you only have 20 employees who are able to produce 20 units each. Your capacity
cannot cover your expected demand hence, you are limited by it. To be able to increase capacity, you should be able
to expand your operations.
• Discuss the implications if sales budget is not correct. If understated, there can be lost opportunities in the form of
forgone sales. If it is too optimistic, the management may decide to unnecessarily increase capacity or hire more
employees and end up with more inventories.
2. PRODUCTION BUDGET
• Discuss what a production budget is and how it is formulated.
- A production budget provides information regarding the number of units that should be produced over a given
accounting period based on expected sales and targeted level of ending inventories.
- It is computed as follows
Required production in units = Expected Sales + Target Ending Inventories - Beginning Inventories
Note: Ending inventory of current period is beginning inventory of next period.
Situation
- [A] Company forecasts sales in units for January to May as follows:
Jan
Units
2,000
Feb
Mar
2,200
2,500
April
2,800
May
3,000
Moreover, [A] Company would like to maintain 100 units in its ending inventory at the end of each month.
- Beginning inventory at the start of January amounts to 50 units.
- How many units should [A] Company produce in order to fulfill the expected sales of the company?
MONTH
Jan
Feb
Mar
April
May
Total
Projected Sales
2,000
2,200
2,500
2,800
3,000
12,500
Target level of ending inventories
100
100
100
100
100
100
Total
2,100
2,300
2,600
2,900
3,100
12,600
Less: beginning inventories
50
100
100
100
100
50
Required production
2,050
2,200
2,500
2,800
3,000
12,500
3. BUDGETING CASH (OPERATIONS BUDGET)
• What an Operation Budget is and how it is formulated.
- Operations budget refers to the variable and fixed costs needed to run the operations of the company but are not
directly attributable to the generation of sales.
- Examples of this are the following:
•
•
•
•
•
•
•
Rent payments
Wages and Salaries of selling and administrative personnel
Administrative Costs
Travel and representation expenses
Professional fees
Interest Payments
Tax Payments
4. CASH BUDGET
• Discuss the importance of a Cash Budget and how it is formulated.
• Recall from the college budget exercise you did that at the end of the activity, they were able to identify
target expenditures and source of funds..
• Relate that this is what the cash budget aims to do.
- For a business enterprise, having the right amount of cash is important since cash is used to make payments
for purchases, for operational expenses, to creditors, and for other transactions.
- The cash budget forecasts the timing of these cash outflows and matches them with cash inflows from sales
and other receipts. The cash budget is also a control tool to monitor the way the company handles cash.
• The following are the steps in formulating a cash budget:
A. Form the sales forecast, identify how much would be collected in the cash budget period. Sales may be
made in cash or for credit. Cash sales are translated to cash at the point of sale while credit sales are collected
depending on the credit period. Credit periods may range from 10 days to more than a month depending on the
strategy of the company. Recall from Lesson 2: Financial Statement Analysis the implications of the company’s credit
policy.
- Continuing from previous example, assume selling price is PHP100/unit. Sales for each month are expected to be
collected as follows:
‣ Month of sales : 20%
‣ A month after sales: 50%
‣ 2 months after sales: 30%
- How much is total receipts from sales
MONTH
Jan
Feb
Units (Projected Sales)
Sales in Pesos
Mar
May
Total
2,000
2,200
2,500
2,800
3,000
12,500
200,000
220,000
250,000
280,000
300,000
1,250,000
40,000
44,000
50,000
56,000
60,000
250,000
100,000
110,000
125,000
140,000
150,000
60,000
66,000
75,000
84,000
40,000 144,000 220,000 247,000 275,000
926,000
Collection from current months sales
Collection from previous months sales
Collection from two months prior sales
Total Collections from Sales
April
B. (Identify )other receipts.
- Examples:
‣
‣
‣
‣
‣
interest received
return on principal investments
proceeds from sale of non-operating assets
issuance of capital stock
proceeds from borrowings
- Add these receipts to the collections from sales to get to total receipts.
C. From the Production Budget, identify how much of the purchases made will be paid by the company on
the cash budget period. Like sales, purchases may be made in cash or on credit depending on the supplier’s credit
terms.
- Continuing from previous example:
‣ Assume that cost per unit is PHP50.
‣ All purchases this month are paid the following month. How much is total cash disbursements for purchases?
Jan
Required production
Cost in Peso
Feb
Mar
April
May
Total
2,050
2,200
2,500
2,800
3,000
12,500
102,500
110,000
125,000
140,000
150,000
627,500
102,500
110,000
125,000
140,000
477,500
Payment from current months sales
Payment from previous months sales
150,000
Payment from two months prior sales
Total Payments for Purchases
0
102,500
110,000
125,000
140,000
477,500
D. From the operations budget, identify which expenses will be paid in cash during the cash budget
period.
- The following expense items will be paid based on the following periods:
‣ Rent payments: Rent of PHP5,000 will be paid each month.
‣ Wages and salaries: Fixed salaries for the year are PHP96,000, or PHP8,000 per month. Wages are estimated as
10% of monthly sales.
‣ Tax payments: Taxes of PHP25,000 must be paid in April.
E. Identify all other cash payments to be made.
- Examples:
‣
‣
‣
‣
‣
-
Fixed-asset purchases in cash
Cash dividend payments
Principal Payments
Repurchase of common stock
Purchase of stock/bond investments
It is important to recognize that depreciation and other non cash charges are NOT included in the cash budget.
- The following items will be paid based on the following periods:
‣
‣
‣
‣
Fixed-asset outlays: New machinery costing PHP130,000 will be purchased and paid for in April.
Interest payments: An interest payment of PHP10,000 is due in May.
Cash dividend payments: Cash dividends of PHP20,000 will be paid in January.
Principal payments (loans): A PHP20,000 principal payment is due in February.
Jan
Feb
Total Payments for Purchases
Rent Payments
Wages
Mar
April
May
Total
102,500
110,000
125,000
140,000
477,500
5,000
5,000
5,000
5,000
5,000
25,000
20,000
22,000
25,000
28,000
30,000
125,000
8,000
8,000
8,000
8,000
40,000
Salaries
Tax Payment
Fixed Asset Outlay
25,000
25,000
130,000
130,000
Interest Payment
10,000
Cash Divident
20,000
20,000
Principal Payment
20,000
Total Cash Disbursements
10,000
53,000
157,500
20,000
148,000
321,000
193,000
872,500
F. Match the receipts and disbursements on the periods they become collectible and payable, respectively.
G. Set a minimum required cash balance. This balance is maintained in case contingencies arise. Recall from the
steps in planning that we should also plan for contingencies.
If the net cash flow is above the minimum cash balance, the company is in excess cash and may consider putting it in
short term investments. If it is below, the company should make a short term borrowing during that period.
- Moreover, [A] Company has a beginning cash balance of PHP80,000 and would like to maintain an ending cash
balance of PHP100,000 per month. Prepare [A] Company’s Cash Budget for January to May. Prepare a cash budget .
Jan
Cash Receipts
Feb
Mar
April
May
Total
40,000
144,000
220,000
247,000
275,000
926,000
Less: Cash Disbursements
-53,000
-157,500
-148,000
-321,000
-193,000
-872,500
Net Cash Flow
-13,000
-13,500
72,000
-74,000
82,000
53,500
Add: Beginning Cash
80,000
67,000
53,500
125,500
51,500
80,000
Ending Cash Balance
67,000
53,500
125,500
51,500
133,500
133,500
Less: Minimum Cash Balance
-100,000
-100,000
-100,000
-100,000
-100,000
-100,000
Cumulative excess cash
balance (Cumulative
required financing)
-33,000
-46,500
25,500
-48,500
33,500
33,500
Evaluating the Cash Budget:
‣ If the ending cash balance after payment of all required disbursements is less than the required ending balance, the
company needs to borrow additional cash from short term borrowings to meet its required ending balance. Should the
ending cash balance exceed the company’s minimum cash requirement the next period, the company may be able to
repay the loan plus accrued interest.
‣ Should the Company have excess cash above its required maintaining cash balance, the company may invest this
cash on short term investments so that it will have an opportunity to earn additional profits. If the company’s cash
balance would then fall below its minimum cash requirement, the company may withdraw the investment to be able
to meet the required cash balance.
September 17,2018
cash budget: A series of monthly or quarterly budgets that indicate cash receipts, cash payments, and the borrowing
requirements for meeting financial requirements. It is constructed from the pro forma income statement and other
supportive schedules.
percent-of-sales method: A method of determining future financial needs that is an alternative to the development
of pro forma financial statements. We first determine the percentage relationship of various asset and liability
accounts to sales, and then we show how that relationship changes as our volume of sales changes.
pro forma balance sheet: A projection of future asset, liability, and shareholders' equity levels. Notes payable or
cash is used as a plug, or balancing figure, for the statement.
pro forma income statement: A projection of anticipated sales, expenses, and income.
sustainable growth rate: That level of growth in sales that can be maintained by a corporation without seeking
additional debt or equity financing to support the increasing investment in assets.
Projected Financial Statement:
For the purposes of this chapter, the financial statement method will be used in projecting financial statement. Based
on this approach, the following steps will be followed:
1. Forecast sales. In making financial projections, always start with the statement of profit or loss and the most
important account to forecast first is sales.
2. Forecast cost of sales and operating expenses. For the cost of sales, the average cost of sales over the
historical data analyzed can be used. If there are plans to improve cost efficiency, then such improved cost
efficiency can also be considered. For example, if the average cost of sales for the past five years is 60% but the
management feels that given their plans to improve production efficiency, cost of sales can be reduced to 58%. In
the projection, this 58% cost of sales percentage can be used.
For the operating expenses, try to figure out which are variable and which are fixed. Variable operating expenses
include commissions. Fixed operating expenses include depreciation of office building, salaries, and some
maintenance expenses.
3. Forecast net income and retained earnings. To forecast net income, there should be information on income
taxes and how much financing cost a company will have. Financing costs
will be based on the amount of loans
the company has and the payment terms for these loans. There should also be assumptions on the interest rates
for the projection period.
4. Determine balance sheet items that will vary with sales or whose balances will be highly correlated
with sales. Balance sheet items that may vary with sales or will be highly correlated with sales are cash,
accounts receivable, inventories, accounts payable, and accrued expenses payable.
5. Determine payment schedule for loans. The payment schedule for loans can be based on the disclosures
provided in the notes to financial statements or the plans of management on how to pay the loans if no details
about payment terms are provided in the notes to financial statements.
6. Determine external funds needed (EFN). This amount is more of a balancing figure or a squeeze figure. The
balance sheet has to balance. Therefore, after assumptions are made to project different balance sheet accounts,
the projected statement of financial position has to balance. The formula for this EFN is shown below:
EFN = Change in Total Assets- (Change in Total Liabilities+ Total Change in Stockholders Equity)
If the EFN is put on the liabilities and stockholders equity section and the amount is positive, this means that
there will be additional financing. However, if the amount is negative, this means that there will be excess cash.
Both negative and positive balance can be disposed later on by management. They do not have to be resolved in
the first iteration of the projected statement of financial position For the purpose of this book, it is enough to
determine the interpretation of a negative and a positive balance.
7. Determine how external funds needed will be financed. Once EFN is computed, the management decides
how to Finance it. it can all be through debt or equity or a Combination of debt and equity.
Illustrative Example: Before the end of 2014, the president of ]SC Foods Corporation had instructed the Vice
President for Finance to prepare the 2015 projected financial statements based on their most recent planning
workshop, the following assumptions were prepared for the 2015 projected financial statements.
a.
Sales are expected to increase by 10% in 2015 from the 2014 sales level. This growth assumption is based on
the assessment of the external and internal factors related to JSC Foods Corporation and the historical growth of
the company. The company's sales grew by 10.4% annually from 2010 to 2014 (Refer to Chapter 2 data below
on the historical financial statements of JSC Foods
Corporation).
b.
The following financial statement accounts are expected to vary with sales based on the 2014 financial
statements:
i. Cost of sales
ii. Cash
iii. Trade accounts receivable
iv. Inventories
v. Other current assets
vi. Trade accounts payable
Variable operating expense is 7.5% of sales. Depreciation expense is 10% of the gross beginning balance of property,
plant, and equipment. As of December 31, 2014, the gross balance of PPE is Php 26, 000, 000. For January 2015, Php
5, 000, 000 new PPE will be acquired. It is the policy of the company that PPE acquired in the first half of the year will
be depreciated for one full year.
c.
As of December 31, 2014, there are two long-term loans. Both have annual interest rate of 8%.
i.
The first loan will mature on June 30, 2015 and the remaining principal balance to be paid on June 30, 2015 is
Php 1,250,000.
ii. The second loan amounting to Php 3,000 000 which was incurred on December 31, 2014 is paid at the rate of
Php500, 000 principal balance every June 30 and December 31.
New loans of Php 3,500, 000 will be incurred on December 31, 2015 payable at the rate of 9,500,000 every June 30
and December 31. Annual interest rate is expected at 8%.
This annual growth rate is known in finance as compounded annual growth rate or CAGR. For JSC Foods Corporation, the formula for computing it
from 2010 to 2014 is as follows:
CAGR = (2014 sales / 2010 sales)(1/4) - 1) x 100%
CAGR = (52,501, 085 / 35, 336,643) (1/4) - 1) ) x 100%
CAGR = 10.4% .
¼ - There are four years from 2010 to 2014. If the period covered is from 2009 to 2014 which covers five years, then the superscript will be (1/5).
d.
Other non-current assets and other current liabilities will remain unchanged.
e.
Income tax rate is 30% of the income before taxes. Seventy-five percent of the income tax expense will be paid
in 2015 while the balance will be paid in 2016.
f.
Cash dividends of P2,000,000 will be paid for 2015.
Found in Table 3.2 to 3.4 are the projected financial statements of JSC Foods Corporation in 2015.
Table 3.2: SC Foods Corporation
Projected Statement of Profit or Loss
For the Year Ending December 31, 2015
Net Sales
Cost of Sales
Gross Profit
Operating Expenses
Operating Income
Interest Expense
Income before Taxes
Taxes
Net Income
57,751,194
46,148, 979
11,602,215
7, 431,340
4,170,875
270,000
3,900,875
1,170,262
2,730,613
This is how the cost of sales was computed:
Cost of Sales Percentage in 2014
Cost of Sales Percentage in 2014
Projected Cost of Sales in 2015
Projected Cost of Sales in 2015
= (41,954,730 + 52,501,085) x 100%
= 79.91%
= 79.91% x 57,751,194
= 46,148,979
The operating expenses were computed as follows:
Variable (7.5% x Sales of 57,751,194)
Fixed (Depreciation Expense)
Total Operating Expenses
4,331,340
3,100,000
7,431,340
Depreciation expense is 10% of the beginning balance of gross PPE Php 26 million and the new acquisition of PPE
worth Php 5 million.
The interest expense for 2015 was computed as follows:
First Loan
Interest from January 1 to June 30, 2015
1,250, 000 x 8% x (6 months / 12 months)
Second Loan
Interest from January 1 to June 30, 2015 .
(1, 000,000 + 2,000,000 ) x 08% x ( 6 months / 12 months )
120,000
Interest from July to December 31, 2015
(500,000 + 2,000,000 )8 % X ( 6 months / 12 months )
Total interest Expense for 2015
100,000
270,000
50,000
Note that the current portion of long-term debt of Php 1 million is added to long-term portion of Php 2 million for
the second loan to determine the interest expense for the first six months of 2015. The year has to be divided
into two because there is a principal payment of Php 500,000 on June 30, 2015 which will reduce the principal
balance stating July 1, 2015 which will reduce the principal balance starting July 1, 2015. The interest expense
will also go down for the second half of 2015 because the principal balance has gone down.
The next table show the projected statement of financial position for 2015.
Table 3.3: JSC Foods Corporation
Projected Statement of Financial Position
December 31, 2015
Assets
Current Assets
Cash
Receivables
Inventories
Other Current Assets
Total Current Assets
1,166,574
2,529,502
5,336,210
1,155,024
*10,187,311
Noncurrent Assets
Property, Plant, and Equipment, Net
Other Non-current Assets
Total Non-current Asset
Total Assets
14,100,000
835,689
14,935,689
*21,123,000
Liabilities and Equity
Current Liabilities
Note Payable (External funds needed )
Trade Payable
Income Taxes Payable
Current Portion of Long-term Debt
Other Current Liabilities
479,998
5,555,665
292,566
2,000,000
85,600
*8,413,828
Noncurrent Liabilities
Long-term Debt, Net of Current Portion
Total Liabilities
3,500,000
*11,913,828
Stockholders' Equity
Capital Stock
Retained Earnings
Total Stockholdrers' Equity
Total Liabilities and Stockholders' Equity
*Rounded off to the nearest peso
8,000,000
5,209,171
13,209,171
*25,123,000
This is how the following balance sheet account were computed :
1. Cash
Cash as Percentage of Sales in 2014
Cash as a Percentage of Sales in 2014
Projected Cash in 2015
Projected Cash in 2015
=
=
=
=
(1,062,527 -:- 52,501,085) x 100%
2.02%
2.02 % x 57,751,194
1,166,574
2. Accounts Receivable
Accounts Receivable as a % of Sales in 2014
Accounts Receivable as a % of Sales in 2014
Projected Accounts Receivable in 2015
Projected Accounts Receivable in 2015
=
=
=
=
(2,300,500 + 52,501,085) X100%
4.38%
4.38% x 57,751,194
2,529,502
3. Inventories
Inventories as a % of Sales in 2014
Inventories as a % of Sales in 2014
Projected Inventories in 2015
Projected Inventories in 2015
=
=
=
=
(4,849,403 + 52,501,085) x 100%
9.24%
9.24% x 57,751,194
5,336,210
4. Other Current Assets
Other Current Asset as a % of Sales in 2014
Other Current Asset as a % of Sales in 2014
Projected Other Current Assets in 2015
Projected Other Current Assets in 2015
=
=
=
=
(1,050,000 + 52,501,085) x 100%
2%
2% x 57,751,194
1,155,024
5. Accounts Payable
Accounts Payable as a % of Sales in 2014
Accounts Payable as a % of Sales in 2014
Projected Accounts Payable in 2015
Projected Accounts Payable in 2015
=
=
=
=
(5,050,810 + 52,501,085) x 100%
9.62%
9.62% x 57 751 194
5,555,665
6. Current Portion of Long-term Debt and Long term Portion of Long-term Debt.
For the 2015 projected statement of financial position, this will be the breakdown of the remaining balances
Of long-term loans as to current portion and long-term portion as of December 31, 2015.
Loan
Loan of 3 million incurred on December 31, 2014
Loan of P3.5 million to be incurred on December 31,
2015
Total
Current
Portion
1,000,000
1,000,000
Long term
Portion
1,000,000
2,500,000
2,000,000
3,500,000
Total
2,000,000
3,500,000
5,500,000
7. External funds needed (EFN) is just a balancing figure. Below is the formula for computing EFN.
EFN = Change in Total Assets - (Change in Total Liabilities + Change in Total Stockholders' Equity)
EFN = 2,824,980 - (1,614,369 + 730,612)
EFN = 479, 9986
Refer to the table below for the details of the computation of EFN in 2015.
Total Assets
Total Liabilities
Total Stockholders' Equity
2015
Balances
Without EFN
25,123,000
11,433,830
13,209,171
2014 Balances
Change
22,298,020
9,819,461
12,478,559
2,824,980
1,614,369
730,612
479,998
There are rounding off differences. With two decimal numbers, these are the numbers:
Change in Total Assets = 2,824,979.53; Change in Total Liabilities = 1,614,369.08; Change in Equity = 730,612.34
EFN = 2,824,979.53 (1,614,369.08 + 730,612.34)
EFN = 479,998.11
What is the implication of a positive or negative EFN ?.
Discussion:
A positive value for EFN, means that the company needs more funds equivalent to the positive value of EFN.
As to how this will be raised depends on the management and the company’s ability to access funds. This EFN
can be raised in the form of short term borrowing, long term borrowing or equity, or a combination of all
sources. The projected balance sheet which generated this EFN is just the first iteration in preparing a proforma balance sheet.
A negative value for EFN, means that the company has excess cash.
As to how this excess cash will be distributed will be the subject of the next iteration for the pro-forma
balance sheet. This can be disposed by adding it to the projected cash balance or it can be used to retire some
of the debt if pre-termination is allowed.
Table 3.4: JSC Foods Corporation
Projected Statement of Cash Flows
For the Year Ending December 31, 2015
Cash Flows from Operating Activities
Income before Taxes
3,900,875
Adjustments:
Depreciation
3,100,000
Changes in the following accounts:
Decrease (increase) in Accounts Receivable
Decrease (increase) in Inventories
Decrease (increase) in Other Current Assets
Increase (decrease) in Accounts Payable
Increase (decrease) in Other Current Liabilities
Income Taxes Paid
Cash Flows from Operating Activities
-229,002
-486,906
-105,024
504,855
-1,310,748
5,374,049
Cash Flows from Investing Activities
Acquisition of PPE
Acquisition of Other Noncurrent Assets
Cash Flows from Investing Activities
-5,000,000
-5,000,000
Income Taxes Payable
Cash Flows from Financing Activities
Payment of Cash Dividends
Short-term Notes payable ( EFN )
Loans, Net of Payments
Cash Flows from Financing Activities
Net Change in Cash
Cash, Beginning
Cash, Ending
-2,000,000
1,250,000
-750,000
-375,951
1,062,527
686,576
Questions
1. Why is sales the most important financial statement account in forecasting?
2. Enumerate at least five external factors considered in sales forecasting.
3. Enumerate at least five internal factors considered in sales forecasting.
4. What is the meaning of a positive EFN? a negative EFN?
Working Capital Management
Working capital refers to the current assets used in the operations of the business.
This includes cash, accounts receivable, inventories, and prepaid expenses. The amount of resources that a
company sets aside to these working capital accounts can be reduced by current liabilities such as trade accounts
payable and accrued expenses payable. The difference between these current assets and current liabilities used in
the operations of the business is net working capital.