Chapter 4

Financial Forecasting &Planning

 Financial Forecasting (i.e. Percent of Sales

Method)
 Financial Planning (i.e. cash budget)
Learning Objectives
After going through this chapter, you should
be able to:
1. Use the percent of sales method to
construct Pro Forma financial statements.
2. Prepare cash budget and to use it to evaluate
the cash demand in the future.
3. Determine financial needs for a firm on the
short term as well as intermediate terms.
What is Financial Forecasting?
 Future projection of revenues and costs
 Determine the funds needed to finance
future operations (i.e. to buy assets)
 To achieve financial goals (e.g. for the next 5
years)
 Use Financial Statement to forecast
What is Financial Forecasting?
Reasons:
 To estimate funds (i.e. additional fund
needed) for future operations
 To estimate firm’s cash standing (i.e. cash
management)
 To compare actual performance data against
forecasted data
 Developing contingency plans
 How to Forecast
& Planning?

Financial forecasting
(i.e. Percent to Sales)
Pro – forma Financial planning
Balance Sheet Cash budget
and
Income Statement
Funds Forecasting
Percent of Sales Method

 To estimate additional funds needed (i.e. changes in

assets, liabilities & equities) to support an increase in
sales

 Funds are from Internal Sources (i.e. Retained

Earnings and Current Liabilities) or from External
Sources (i.e. Debt & Stock)

AFN = AssetP - (LiabilityP + EquityP)

Funds Forecasting
Pro-forma Balance Sheet
 To estimate Increase in Assets due to increase in
sales
 To estimates Additional Fund Needed (i.e. Internal or
External)
Pro-forma Income Statement
 To estimate the Changes of Sales
 Determine the forecasted Net Profit
 To use assumptions given
Example:
Given below is the Balance Sheet of Mekar Inc
in 2005.
The company expects the sales next year (i.e.
2006) will increase by 25% from the current
one of RM 1,200 mill
Prepare:
 Pro-forma Income Statement

 Pro-forma Balance Sheet

Assumptions:
The Pro-Forma Income Statement is based
on
 Net Profit Margin (NPM) of 12%
 Tax rate of 40%
 Dividend Payout Ratio (DPR) of 60%
 Operating cost is 80% of sales
By looking at Pro-forma Balance Sheet;
 The company needs additional funds of RM 325
for investment in new Assets
(i.e. 25% Multiply with Total Assets of RM 1,300)
The Firm plans to Increase the Sales by 25% next year

Mekar Inc Bhd

Balance Sheet as at 31 December 2005
Current Assets Current Liabilities Balance
Cash 50 Account Payable 50 Sheet
Account
Items
Receivable 110 Notes Payable 75 Need to be
Inventories 440 Accrued Expenses 75 Multiplied
With
25%
Total Current Total Current
Assets 600 Liabilities 200 Except for
L/Term Debt,
Notes Payable &
Long Term Debt 540
Common Stock
Fixed Assets Common Equity
(External Funds)
Net Fixed Assets 700 Common Stock 160
Retained Earnings 400
TOTAL ASSETS 1,300 TOTAL CLAIMS 1,300
 The Firms Initial Sales is RM 1,200 (i.e. 2005)

Mekar Inc Bhd

Pro-Forma
Income Statement for the year ended 31 December 2006
Estimation Pro-Forma
Revenue/Net Sales 1500 1,200 X (1.25) Income Statement
Total cost 1200 1500 X 0.80 Need to use
Earnings Before Taxes (EBT) 300
Financial Ratios to
estimate IS items
less: Taxes 120
Earnings After Taxes 180 1500 X 0.12
less: Dividend 108 180 X 0.60
Retained Earnings 72
 Mekar Inc Bhd
Pro-Forma Balance Sheet as at 31 December 2006
Initial Forecasted Changes AFN (i.e. External Sources)
Cash 50 62.50 12.50
Investment – Internal Sources
325 – 103.25
Account Receivable 110 137.50 27.50
Inventories 440 550.00 110.00
Total Current Assets 600 750.00 150.00
Net Fixed Assets 700 875.00 175.00 Retained Earnings
TOTAL ASSETS 1,300 1625.00 325.00 RE0 + (S1)(NPM)(1-DPR)
Account Payable 50 62.50 12.50
Notes Payable 75 75.00
Accrued Expenses 75 93.75 18.75
Total Current Liabilities 200 231.25
Long Term Debt 540 540.00 Internal Sources
Common Stock 160 160.00
RM 103.25
Retained Earningsa 400 472.00 72.00
AFNb 221.75
TOTAL CLAIMS 1,300 1625.00
Financial Planning (Cash Budget)
 Important tool in Cash Management
 Show projected Cash Inflow & Cash Outflow
 Projected – Monthly, Weekly or Daily
 Determine Cash Management Strategy
 Borrowings – Cash Deficit
 Investment – Cash Surplus
Cash Budget
Steps To Develop Cash Budget

•Determine $ and Timing of Cash Receipts

•Determine $ and Timing of Cash Disbursements
•Determine the Net Cash Flow
•Prepare the Cash Reconciliation Account
Example: Cash Budget for 1Q2006
Sales Sales
Oct’05 2000 Jan’06 2000
Nov’05 2500 Feb’06 3000
Dec’05 3200 Mac’06 2500
Apr’06 3500
Additional Info:
•Cash Sales are 50% of Total Sales, Balance 60% collects One Month after
and 40% collects Two Month after Sales
•Material Purchase are made One Month Before Sales (40%), 50% in Cash,
and balance will be paid equally in next Two Months
•Fixed Expenses; Depreciation RM 300, Rent-RM400, Selling & Admin-RM200,
Interest on L/term debt-RM 100.
•Buy new machine at RM2300, pay 20% in January, and balance pay in Feb
•Cash Balance in Dec is RM 500, and Minimum Cash Balance is set at RM500
•Any Short-term borrowing cost 10%
1st Step: Cash Receipts
Mekar Inc Bhd
Cash Budget for First Quarter 2006
(RM'000) Jan Feb Mac
January
1) Receipts
Cash Sales
Sales 2000.0 3000.0 2500.0
50% X 2000

Cash Sales (50%) 1000.0 1500.0 1250.0 Credit Sales

Credit: 1M: 60% X (50%X Dec)
1 month (60%) 960.0 600.0 900.0 2M: 40% X (50%X Nov)
2 month (40%) 500.0 640.0 400.0
Other cash receipts
Total Cash Receipts 2460.0 2740.0 2550.0
1st Step: Cash Receipts

Which is for all items that we estimated to receive

in form of cash (cash inflow) for the period that fall
within the cash budget period.

 Sales receipts
 Sales proceed from fixed assets disposal
 Others (cash dividend, etc)
2nd Step: Cash Disbursements

January
2) Disbursements Jan Feb Mac Purchase Materials
Purchases of materials (40%) 1200.0 1000.0 1400.0 40% X Feb
Cash payment (50%) 600.0 500.0 700.0
Cash Payment
Credit Payment: 50% X 1200
1 month (50%) 200.0 300.0 250.0
2 month (50%) 320.0 200.0 300.0 Credit Payment
Rent 400.0 400.0 400.0 1M: (40% X Jan) X (50%)(50%)
Selling & Admin 200.0 200.0 200.0
2M: (40% X Dec) X (50%)(50%)
Interest 100.0 100.0 100.0
Rent, Selling & Admin and
Purchase of machinery 460.0 1840.0 Interest are Fixed Payment
Total Cash Disbursement 2280.0 3540.0 1950.0
  40% X Feb

 Cash Payment
 50% X 1200

Credit Payment


 1M: 0.5 X Cash Payment

 2M: (40% X Dec) X (50%)(50%)

 Rent, Selling & Admin and

 Interest are Fixed Payment
2nd Step: Cash Disbursements

It includes all the outflow of cash.

 Cash purchased
 Payments of account payable
 Rent and lease payment
 Wages and salaries
 Tax payment
 Fixed assets payments
 Interest payments
 Cash dividend payments
 Loan repayment.
3rd & 4th Step: Net Cash & Cash Recon

3) Net Cash flow 180.0 -800.0 600.0

January
4) Cash Reconciliation
Net Cash Flow
Net Cash flow 180.0 -800.0 600.0 Total Receipts – Total Payments

less: Interest on borrowingsa 5.2 Beginning Cash Balance

plus: Beginning Cash Balance 500.0 680.0 -120.0 Ending CB in Dec
Ending Cash Balance 680.0 -120.0 474.8
Minimum Cash Balance
less: Minimum Cash Balance 500.0 500.0 500.0
Fixed Amount
Excess/Deficit 180.0 -620.0 -25.2
Excess/Deficit
Ending Cash Bal – Min Cash Bal
Interest on S/term Borrowings
620 X (10%) (1/12)
End of Chapter