Financial Planning and Forecasting
Chapter 16
Forecasting Sales Projecting the Assets and
Internally Generated Funds Projecting Outside Funds Needed Deciding How to Raise Funds
16-1
Preliminary Financial Forecast:Balance Sheets (Assets)
2008 2009E
Cash and equivalents $ 20 $ 25Accounts receivable 240 300Inventories 240 300Total current assets $ 500 $ 625Net fixed assets 500 625Total assets $1,000 $1,250
16-2
Preliminary Financial Forecast: Balance Sheets (Liabilities and Equity)
2008 2009E
Accts payable & accrued liab.
$ 100 $ 125
Notes payable 100 190
Total current liabilities 200 315
Long-term debt 100 190
Common stock 500 500
Retained earnings 200 245
Total liabilities & equity $1,000 $1,25016-3
Preliminary Financial Forecast: Income Statements
2008 2009ESales $2,000.0$2,500.0Less: Variable costs 1,200.0 1,500.0 Fixed costs 700.0 875.0EBIT $ 100.0$ 125.0Interest 16.0 16.0EBT $ 84.0$ 109.0Taxes (40%) 33.6 43.6Net income $ 50.4$ 65.40Dividends (30% of NI) $15.12 $19.62Addition to retained earnings
$35.28 $45.7816-4
Key Financial Ratios
2008 2009E Ind Avg Comment
Basic earning power 10.00% 10.00% 20.00% PoorProfit margin 2.52% 2.62% 4.00% PoorReturn on equity 7.20% 8.77% 15.60% PoorDays sales outstanding
43.8 days
43.8 days
32.0 days
Poor
Inventory turnover 8.33x 8.33x 11.00x PoorFixed assets turnover
4.00x 4.00x 5.00x Poor
Total assets turnover
2.00x 2.00x 2.50x Poor
Debt/assets 30.00% 40.40% 36.00% OKTimes interest earned
6.25x 7.81x 9.40x Poor
Current ratio 2.50x 1.99x 3.00x PoorPayout ratio 30.00% 30.00% 30.00% OK
16-5
Key Assumptions in Preliminary Financial Forecast for NWC
Operating at full capacity in 2008.
Each type of asset grows proportionally with sales.
Payables and accruals grow proportionally with sales.
2008 profit margin (2.52%) and payout (30%) will be maintained.
Sales are expected to increase by $500 million. (%S = 25%)
16-6
Determining Additional Funds Needed Using the AFN Equation
AFN = (A0*/S0)S – (L0*/S0)S – M(S1)(RR)
= ($1,000/$2,000)($500)
– ($100/$2,000)($500)
– 0.0252($2,500)(0.7)
= $180.9 million
16-7
Management’s Review of the Financial Forecast
16-8
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.
16-9
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.
Revised (Final) Financial Forecast:Balance Sheets (Assets)
2008 2009F
Cash and equivalents $ 20 $ 67
Accounts receivable 240 233
Inventories 240 250
Total current assets $ 500 $ 550
Net fixed assets 500 700
Total assets $1,000 $1,250
16-10
Key Financial Ratios – Final Forecast
2008 2009F Ind Avg Comment
Basic earning power 10.00% 10.00% 20.00% PoorProfit margin 2.52% 2.62% 4.00% PoorReturn on equity 7.20% 8.77% 15.60% PoorDays sales outstanding
43.8 days
34.0 days
32.0 days
OK
Inventory turnover 8.33x 10.00x 11.00x OKFixed assets turnover
4.00x 3.57x 5.00x Poor
Total assets turnover
2.00x 2.00x 2.50x Poor
Debt/assets 30.00% 40.40% 36.00% OKTimes interest earned
6.25x 7.81x 9.40x Poor
Current ratio 2.50x 1.98x 3.00x PoorPayout ratio 30.00% 30.00% 30.00% OK
16-11
What was the net investment in capital?
16-12
$1,125
625$125$$625
FANet NWC Capital2009
900$ Capital2008
225$
900$$1,125 capital in investmentNet
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
16-13
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:
16-14
$2,3535$2,000/0.8
capacity of %sales/ ActualsalesCapacity
2009 forecast sales exceed the capacity sales, so new fixed assets are required to support 2009 sales.
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.
16-15
How would the following items affect the AFN?
Higher dividend payout ratio? Increase AFN: Less retained earnings.
Higher profit margin? Decrease AFN: Higher profits, more retained
earnings. Higher capital intensity ratio?
Increase AFN: Need more assets for given sales. Pay suppliers in 60 days, rather than 30
days? Decrease AFN: Trade creditors supply more
capital (i.e., L0*/S0 increases).
16-16