Sales forecast Assets required to support sales Required assets -Existing assets = Required...
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![Page 1: Sales forecast Assets required to support sales Required assets -Existing assets = Required investment Investment Module Total assets > Total liabilities.](https://reader036.fdocuments.us/reader036/viewer/2022082506/56649f445503460f94c64e1e/html5/thumbnails/1.jpg)
Sales forecast Assets required to support sales Required assets
-Existing assets= Required investment
Investment Module
Total assets >Total liabilities
and equity?
Total assets >Total liabilities
and equity?
Total assets – Total liabilities & equity
=Required financing
Generate pro formas with new investment and financing
Generate pro formas with new investment and financing No
Yes
New financing composition
New financing composition
Financing Module
![Page 2: Sales forecast Assets required to support sales Required assets -Existing assets = Required investment Investment Module Total assets > Total liabilities.](https://reader036.fdocuments.us/reader036/viewer/2022082506/56649f445503460f94c64e1e/html5/thumbnails/2.jpg)
Modeling Sales Forecasts
• Simple Method: Assume average or different growth rate for each period
• Develop detail forecast by product, business unit, customer or geographic market and aggregate forecasts
• Forecast the unit price and volume
• Forecast size of market and estimate market share
• Forecast costs and apply a margin assumption to derive sales
![Page 3: Sales forecast Assets required to support sales Required assets -Existing assets = Required investment Investment Module Total assets > Total liabilities.](https://reader036.fdocuments.us/reader036/viewer/2022082506/56649f445503460f94c64e1e/html5/thumbnails/3.jpg)
Financial Planning Model Assumptions
• Items that are functional relationships of sales– Percent of sales
• Operating expenses• Working capital and fixed assets
• Items that are functional relationships of other financial statement items– Interest, depreciation, dividends, marketable
securities, cashflows• Items that involve policy decisions (e.g. long-term
debt, equity, capital expenditures)
![Page 4: Sales forecast Assets required to support sales Required assets -Existing assets = Required investment Investment Module Total assets > Total liabilities.](https://reader036.fdocuments.us/reader036/viewer/2022082506/56649f445503460f94c64e1e/html5/thumbnails/4.jpg)
The “Plug”
• The balance-sheet item which will “close” or balance the balance sheet model so that Total Assets will always equal Total Liabilities & Equity
• Models the assumption of how the firm finances itself
• Examples are cash & marketable securities, debt, debt & equity
![Page 5: Sales forecast Assets required to support sales Required assets -Existing assets = Required investment Investment Module Total assets > Total liabilities.](https://reader036.fdocuments.us/reader036/viewer/2022082506/56649f445503460f94c64e1e/html5/thumbnails/5.jpg)
Circular References
• Created when Additions to Retained Earnings is added into the balance sheet, resulting in modified values for the plug which then impact the income statement
• Iterative process is required to produce a consistent and correct final set of financial statements
• To solve, use Tool Options Calculation Iteration (2003) or MS Office Button>Excel Options> Formulas> Iteration (2007)
• Not all circularities are convergent. Make sure to verify accuracy!