Sld04 Fin Forecasting

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Financial Forecasting

McGraw-Hill Ryerson McGraw-Hill Ryerson Limited 2000

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McGraw-Hill Ryerson Limited 2000

Foundations of FinancialManagement CANADIAN

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Figure 4-1Development of pro forma statements

Cashbudget

Salesprojection

Productionplan

Pro formaincomestatement

Pro formabalancesheet

Prior balancesheet

Othersupportivebudgets

Capital budget

1

2

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Wheels Casters

Quantity

Sales price

Sales revenueTotal

. . . . . .

. . . . .. . . .

1,000 2,000 $30 $35$30,000 $70,000

. . . . . . . . . . . . . . $100,000

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Table 4-1Projected wheel and caster sales (first six months, 2000)

Goldman Corporation

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Table 4-2Stock of beginning inventory

Wheels Casters

Quantity . . . 85 180

Cost . . . . $16 $20

Total value . . $1,360 $3,600

Total . . . . . . . . . . . . $4,960

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Table 4-3Production requirements for six months

Wheels Casters

Projected unit sales (Table 4-1) . . . +1,000 +2,000

Desired ending inventory (assumed to

represent 10% of unit sales for the

time period) . . . . . . . . +100 +200

Beginning inventory (Table 4-2). . . 85 180

Units to be produced . . . . . . 1,015 2,020

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Table 4-4Unit costs

Wheels Casters

Materials . . . . $10 $12

Labour . . . . . 5 6

Overhead . . . . 3 4

Total . . . . $18 $22

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Wheels Casters

Units to be produced (Table 4-3) . . 1,015 2,020

Cost per unit (Table 4-4) . . . . $18 $22

Total cost . . . . . . . $18,270 $44,440 $62,710

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Table 4-5Total production costs

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Table 4-6Allocation of manufacturing costs and determination of grossprofits

Wheels Casters Combined

Quantity sold (Table 4-1) . . 1,000 2,000 3,000Sales price . . . . . $ 30 $ 35Sales revenue . . . . $30,000 $70,000 $100,000Cost of goods sold:

Old inventory (Table 4-2)Quantity (units) . . . 85 180Cost per unit . . . $16 $20

Total . . . . . $1,360 $ 3,600New inventory (the remainder)

Quantity (units) . . . 915 1,820Cost per unit (Table 4-4) $18 $22

Total . . . . . 16,470 40,040Total cost of goods sold . 17,830 43,640 $61,470

Gross profit . . . . . $12,170 $26,360 $38,530

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Table 4-7Value of ending inventory

Beginning inventory (Table 4-2) . . . $ 4,960

+ Total production costs (Table 4-5) . . 62,710

Total inventory available for sales . . 67,670

- Cost of goods sold (Table 4-6) . . . 61,740

Ending inventory . . . . . $ 6,200

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Table 4-8Pro Forma Income Statement

June 30, 2000Sales revenue . . . . . . . $100,000Cost of goods sold . . . . . . 61,470

Gross profit . . . . . . . 38,530Selling, general and administrative expense 12,000

Operating profit (EBIT) 26,530Interest expense . . . . . . 1,500

Earnings before taxes (EBT) . . . . 25,030Taxes (20%) . . . . . . . 5,006

Earnings after taxes (EAT) . . . . 20,024Common stock dividends . . . . 1,500

Increase in retained earnings. . . . $ 18,524

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Table 4-9Monthly sales pattern

January February March April May June

$15,000 $10,000 $15,000 $25,000 $15,000 $20,000

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December January FebruarySales . . . . . . . $12,000 $15,000 $10,000Collections:

(20% of current sales) . . $ 3,000 $ 2,000Collections:

(80% of previousmonths sales) . . . . 9,600 12,000

Total cash receipts . . $12,600 $14,000

March April May JuneSales . . . . . . . $15,000 $25,000 $15,000 $20,000Collections:

(20% of current sales) . . $ 3,000 $ 5,000 $ 3,000 $ 4,000Collections:

(80% of previousmonths sales . . . . 8,000 12,000 20,000 12,000

Total cash receipts . . $11,000 $17,000 $23,000 $16,000

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Table 4-10Monthly cash receipts

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Table 4-11Component costs of manufactured goods

Materials . . . 1,015 $10 $10,150

Labor . . . . 1,015 5 5,075

Overhead . . . 1,015 3 3,045

Casters Units Cost Total CombinedProduced per Unit Cost Cost

Materials . . . 2,020 $12 $24,240 $34,390

Labor . . . . 2,020 6 12,120 17,195

Overhead . . . 2,020 4 8,080 11,125

$62,710

Wheels

Units Cost Total

Produced per Unit Cost

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Total Time AverageCosts Frame Monthly Cost

Materials . . . $34,390 6 months $5,732Labor . . . . 17,195 6 months 2,866Overhead . . . 11,125 6 months 1,854

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Table 4-12Average monthly manufacturing costs

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Table 4-13aSummary of all monthly cash payments (first part)

December January February

From Table 4-12:Monthly material purchase. . $4,500 $ 5,732 $ 5,732Payment for material

(prior months purchase). . $ 4,500 $ 5,732Monthly labor cost . . . . 2,866 2,866Monthly overhead . . . . 1,854 1,854

From Table 4-8:Selling, general and administrative

expense ($12,000 over6 months) . . . . . 2,000 2,000

Interest expense . . . . .Taxes (two equal payments) .Cash dividend . . . . .

Also:New equipment purchases . . 8,000Total payments . . . . . $11,220 $20,452

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Table 4-13bSummary of all monthly cash payments (final part)

March April May JuneFrom Table 4-12:

Monthly material purchase . . $ 5,732 $ 5,732 $ 5,732 $ 5,732Payment for material

(prior months purchase) . . $ 5,732 $ 5,732 $ 5,732 $ 5,730*Monthly labor cost . . . . 2,866 2,866 2,866 2,866Monthly overhead . . . . 1,854 1,854 1,854 1,854

From Table 4-8:Selling, general and administrative

expense ($12,000 over6 months) . . . . . . 2,000 2,000 2,000 2,000

Interest expense . . . . . 1,500Taxes (two equal payments) . . 2,503 2,503Cash dividend. . . . . . 1,500

Also:New equipment purchases . . 10,000Total payments . . . . . $14,955 $12,452 $12,452 $27,953

*Adjusted for rounding.

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January February March

Total receipts (Table 4-10) . . $12,600 $14,000 $11,000

Total payments (Table 4-13) . 11,220 20,452 14,955

Net cash flow . . . . . $ 1,380 ($ 6,452) ($ 3,955)

April May June

Total receipts (Table 4-10) . . $17,000 $23,000 $16,000

Total payments (Table 4-13) . 12,452 12,452 27,953

Net cash flow . . . . . $ 4,548 $10,548 ($11,953)

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Table 4-14Monthly cash flow

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Table 4-15Cash budget with borrowing and repayment provisions

1. Net cash flow . . . . . . $1,380 ($6,452.) ($3,955.) $4,548 $10,548 ($11,953.)

2. Beginning cash balance . . 5,000.* 6,380 5,000 5,000 5,000 11,069

3. Cumulative cash balance. . 6,380 (72.) 1,045 9,548 15,548 (884.)

4. Monthly loan or (repayment) 5,072 3,955 (4,548.) (4,479.). 5,884

5. Cumulative loan balance . . 5,072 9,027 4,479 5,884

6. Ending cash balance . . . 6,380 5,000 5,000 5,000 11,069 5,000

Jan. Feb. March April May June

* We assume the Goldman Corporation has a beginning cash balance of $5,000 on January 1, 2000, and itdesires a minimum monthly ending cash balance of $5,000.

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Table 4-16Balance Sheet

December 31, 1999

AssetsCurrent assets:

Cash . . . . . . . . . . . . . $ 5,000Marketable securities . . . . . . . . 3,200Accounts receivable . . . . . . . . . 9,600Inventory . . . . . . . . . . . . 4,960 Total current assets . . . . . . . . 22,760

Plant and equipment. . . . . . . . . . 27,740

Total assets . . . . . . . . . . . . $50,500

Liabilities and Shareholders EquityAccounts payable . . . . . . . . . . $ 4,500Long-term debt . . . . . . . . . . . 15,000Common stock . . . . . . . . . . . 10,500

Retained earnings . . . . . . . . . . 20,500

Total liabilities and shareholders' equity . . . . $50,500

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Figure 4-2Development of a Pro Forma Balance Sheet

Pro formabalance sheet

Prior balance sheet

(Unchanged items)Marketable securitiesLong-term debtCommon stock

Pro forma income statement analysis

InventoryRetained earnings

Cash budget analysis

CashAccounts receivablePlant and equipment Accounts payableNotes payable

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Table 4-17Pro Forma Balance Sheet

June 30, 2000Assets

Current assets:1. Cash . . . . . . . . . . . . $ 5,0002. Marketable securities . . . . . . . . 3,2003. Accounts receivable. . . . . . . . . 16,0004. Inventory. . . . . . . . . . . . 6,200

Total current assets . . . . . . . 30,4005. Plant and equipment . . . . . . . . 45,740

Total assets . . . . . . . . . . . . $76,140

Liabilities and Shareholders' Equity6. Accounts payable . . . . . . . . . $ 5,7327. Notes payable . . . . . . . . . . 5,8848. Long-term debt . . . . . . . . . 15,0009. Common stock. . . . . . . . . . 10,50010. Retained earnings . . . . . . . . . 39,024

Total liabilities and shareholders' equity . . . . $76,140

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HOWARD CORPORATIONBalance Sheet and Percent-of-Sales Table

Assets Liabilities and Shareholders' Equity

Cash . . . . . . $ 5,000 Accounts payable . . . $ 40,000Accounts receivable . . 40,000 Accrued expenses . . . 10,000Inventory . . . . . 25,000 Notes payable . . . . 15,000

Total current assets . 70,000 Common stock . . . . 10,000Equipment . . . . 50,000 Retained earnings . . . 45,000Total assets . . . . $120,000 Total liabilities and

shareholders' equity. . $120,000

$200,000 salesPercent of Sales

Cash . . . . . . 2.5% Accounts payable . . . 20.0%Accounts receivable . . 20.0 Accrued expenses . . . 5.0Inventory . . . . . 12.5 25.0%

Total current assets . 35.0Equipment . . . . 25.0

60.0%

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Table 4-18

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Table 4-19Balance sheet with sales increase

HOWARD CORPORATIONSales $200,000

Sales increase 50.00% $100,000

Assets Before Increase AfterCash $ 5,000 $ 2,500 $ 7,500Accounts receivable 40,000 20,000 60,000Inventory 25,000 12,500 37,500

Total current assets $ 70,000 35,000 105,000Equipment 50,000 25,000 75,000

Total assets $120,000 $60,000 $180,000

Liabilities and Shareholders Equity

Accounts payable $ 40,000 $20,000 $ 60,000Accrued expenses 10,000 5,000 15,000Notes payable 15,000 15,000Required new funds 26,000

Total current liabilities $ 65,000 $116,000Common stock 10,000 10,000Retained earnings 45,000 9,000 54,000

Total liabilities and shareholdersequity $120,000 $34,000 180,000

Selected ratios

Debt/Total assets 65/120 =.054 116/180 =.064Debt/Equity 65/(10+45) =1.18 116(10+54) =1.81Current ratio 70/65 =1.08 105/116 =0.91

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Table 4-20Balance sheet with sustainable sales increase

HOWARD CORPORATIONSales $200,000

Sales increase 12.24% $ 24,480

Assets Before Increase AfterCash $ 5,000 $ 612 $ 5,612Accounts receivable 40,000 4,896 44,896Inventory 25,000 3,060 28,060

Total current assets $ 70,000 8,568 78,568Equipment 50,000 6,120 56,120

Total assets $120,000 $14,688 $134,688

Liabilities and Shareholders Equity

Accounts payable $ 40,000 $ 4,896 $ 44,896Accrued expenses 10,000 1,224 11,224Notes payable 15,000 15,000Required new funds 1,834

Total current liabilities $ 65,000 6,120 $ 72,954Common stock 10,000 10,000Retained earnings 45,000 6,734 51,734

Total liabilities and shareholdersequity $120,000 $12,854 $134,688

Selected ratios

Debt/Total assets 65/120 =0.54 73/135 =0.54Debt/Equity 65/(10+45) =1.18 73/(10+52) =1.18Current ratio 70/65 =1.08 79/73 =1.08

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Chapter 4 - Outline LT 4-1

What is Financial Forecasting?

3 Financial Statements for Forecasting

Determining Production Requirements

2 Methods of Financial Forecasting

Percent-of-Sales Method

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What is Financial Forecasting? LT 4-2

Financial forecasting is looking ahead to develop afinancial plan for the future

Provides lead time to make necessary adjustments beforeactual events occur

Helps to plan for significant growth in firm

Can be used as a target for measuring performance

Often required by bankers and other lenders

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3 Financial Statements for Forecasting LT 4-3

Pro Forma Income Statement (I/S)

Cash Budget

Pro Forma Balance Sheet (B/S)

The first step is to develop a sales projection

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Determining Production Requirements LT 4-4

Projected Units Sales PLUS

Desired Ending Inventory (EI) MINUS

Beginning Inventory (BI) EQUALS

Production Requirements

(or Units to be Produced)

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2 Methods of Financial Forecasting: LT 4-5

Using Pro Forma, or Projected, FinancialStatements (more exact, time consuming)

Percent-of-Sales Method for the pro formaBalance Sheet

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Percent-of-Sales Method LT 4-6

A short-cut, less exact, easier method of determiningfinancing needs

(The quick and dirty approach)

Assumes that B/S accounts will maintain a constantpercentage relationship to sales

More sales will mean more assets which will require morefinancing

Can be summarized by using the Required New Fundingformula

Sld04 Fin Forecasting

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