CHAPTER 17
Financial Planning and Forecasting
Outline
• AFN: Additional funds needed
• Income statement: from sales to net income
–
–
–
–
Sales
COGS and Gross Margin
Expense and Operating Margin
Net income and EPS
• Balance sheet:
– Increased assets to support increased sales
– Increased liability and equity to fund increased assets
Key Assumptions in Preliminary
Financial Forecast for NWC
• Operating at full capacity in 2012.
• Each type of asset grows proportionally
with sales.
• Payables and accruals grow proportionally
with sales.
• 2012 profit margin (2.52%) and payout
(30%) will be maintained.
• Sales are expected to increase by $500
million. (%DS = 25%)
17-3
Preliminary Financial Forecast:
Balance Sheets (Assets)
Cash and equivalents
Accounts receivable
Inventories
Total current assets
Net fixed assets
Total assets
17-4
2012
$ 20
240
240
$ 500
500
$1,000
2013E
$ 25
300
300
$ 625
625
$1,250
Preliminary Financial Forecast: Balance
Sheets (Liabilities and Equity)
A/P & accrued liabilities
Notes payable
Total current liabilities
Long-term debt
Common stock
Retained earnings
Total liabilities & equity
17-5
2012
$ 100
100
$ 200
100
500
200
$1,000
2013E
$ 125
190
$ 315
190
500
245
$1,250
Preliminary Financial Forecast:
Income Statements
Sales
Variable costs
Fixed costs
EBIT
Interest
EBT
Taxes (40%)
Net income
Dividends (30% of NI)
Addition to retained earnings
17-6
2012
$2,000.0
1,200.0
700.0
$ 100.0
16.0
$ 84.0
33.6
$ 50.4
2013E
$2,500.0
1,500.0
875.0
$ 125.0
16.0
$ 109.0
43.6
$ 65.4
$15.12
$35.28
$19.62
$45.78
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
17-7
2012
10.00%
2.52%
2013E
10.00%
2.62%
Ind Avg
20.00%
4.00%
Comment
Poor
Poor
7.20%
8.77%
15.60%
Poor
43.8 days
8.33x
4.00x
2.00x
30.00%
6.25x
2.50x
30.00%
43.8 days
8.33x
4.00x
2.00x
40.40%
7.81x
1.99x
30.00%
32.0 days
11.00x
5.00x
2.50x
36.00%
9.40x
3.00x
30.00%
Poor
Poor
Poor
Poor
OK
Poor
Poor
OK
Determining Additional Funds Needed
Using the AFN Equation
AFN = projected increase in assets-Spontaneous
increase in liabilities-increase in retailed earnings
(A0*/S0)DS – (L0*/S0)DS – M(S1)(1 – Payout)
= ($1,000/$2,000)($500)
– ($100/$2,000)($500)
– 0.0252($2,500)(0.7)= $180.9 million
Notes: ΔS –change in sales, M-Net Profit margin. A0*/S0:
asset to sales ratio(capital intensity ratio), at full capacity, A0
is total assets. L0*: spontaneously generated liability
An example-WMT
2014Jan
Sales
$500B
Total asset
$200
AP
$35
AR
$15
Profit margin 3%
Payout
40%
2015Jan
$550
3%
40%
Determining Additional Funds Needed
Using the AFN Equation
AFN = projected increase in assets-Spontaneous
increase in liabilities-increase in retailed earnings
(A0*/S0)DS – (L0*/S0)DS – M(S1)(1 – Payout)=?