FINANCIAL FORECASTING AND PLANNING (chapter 4).pptx

7/28/2019 FINANCIAL FORECASTING AND PLANNING (chapter 4).pptx

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FINANCIAL FORECASTING

Financial forecasting is a process whereby thefirm will estimates its total needs for future

operations. By doing so, funds can be obtained at the

lowest interest cost and on the best possibleterms because management has sufficient

time for effective negotiations. Forecasting is one of the most important

management activities, regardless of its size.


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WHY DO WENEED TO DO

FORECASTING ?


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BECAUSE WEWANT TO FIND

EXTERNAL/ADDITIONAL

FUNDNEEDED BY

THE COMPANYIN ORDER TO

EXPAND THEIRBUSINESS


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METHODS OF FORECASTING

PERCENT OF SALES METHOD *

SCATTER DIAGRAM OR REGRESSION METHOD


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PERCENT OFSALES

METHOD

Under this method external fund can bedetermined by using two ways:

a) Equation

b) Pro-Forma Balance sheet

Which ever

method is usedthe answershould be the

same

When the company want to expand their business (acquireadditional assets to support new sales or purchase additional

assets) definitely more money (fund) would be needed tosupport the expansion. Funds can be generated from internal

sources (retained earning) and external source

Two situation have to be lookedat before the amount of externalfund needed is determined, they

are:a) Firm is operating at full

capacity

b) Firm has not reached fullcapacity


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By using EQUATION,STEP 1: CALCULATE RETAINED EARNING (INTERNAL SOURCES OF FUND)

RETAINED EARNING = [ Net profit margin xretention ratio x forecasted sales ]

OPERATING AT FULL CAPACITY

(EQUATION)Operating at full capacity means all assets available in the

company have been fully utilized. If the firm want to expandtheir business the only way is to increase all its assets (current

and fixed asset) and certain liabilities.

1 Dividend Payout Ratio


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STEP 2: CALCULATE FUND NEEDED BY THECOMPANY IN ORDER TO EXPAND THEIR

BUSINESS

FUND NEEDED = [ X (Changes in sales) -

X (Changes in sales) ]

STEP 3: EXTERNAL/ADDITIONAL FUND NEEDED

EXTERNAL FUND NEEDED = FUND NEEDED

RETAINED EARNING


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EXAMPLE OPERATING AT FULL

CAPACITY (USING EQUATION)BALANCE SHEET OF TERAS COMPANY AS AT

31/12/94

ASSET RMCURRENT ASSETCash 10,000

Account Receivable 85,000Inventories 100,000

FIXED ASSETNet Fixed Asset 150,000

345,000

LIABILITY RMCURRENT LIABILITY

Account Payable 50,000Accrued Wages 25,000Notes Payable 30,000Mortgage Bonds 40,000

EQUITYCommon Stock 100,000Retained Earning 100,000

345,000


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QUESTION :

Companys sales are running at about RM

500,000 a year which is its maximumcapacity limit and the net profit marginafter tax is 4%. During 1994 the company

earned RM 20,000 after taxes and paidout RM 10,000 in dividend in the comingyears. How much additional financing

will be needed if sales expand to RM800,000 during 1995 ?


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SOLUTION

BALANCE SHEET OF TERAS COMPANY AS AT 31/12/94ASSETSCURRENT ASSETS

Cash x 100% 2%

Acc Receivable 17%Inventory 20%FIXED ASSET

Net fixed asset 30%

69%

LIABILITIESCURRENT LIABILITY

Account Payable 10%Accrued Wages 5%

15%


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STEP 1 : RETAINED EARNING

RETAINED EARNING = [0.04 x (1-0.5) x RM 800,000]

= RM 16,000

STEP 2: FUND NEEDED BY THE COMPANY IN ORDER

TO EXPAND THEIR BUSINESSFUND NEEDED = 69% x (RM 800,000 RM 500,000) 15%

x ( RM 800,000 RM 500,000)

= 54% (RM 300,000)

= RM 162,000 STEP 3: EXTERNAL FUND NEEDED

EXTERNAL FUND NEEDED = RM 162,000 RM 16,000

= RM 146,000


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OPERATING AT FULL CAPACITY

(USING PRO-FORMA BALANCE SHEET)

STEP 1: CALCULATE PERCENTAGE INCREASE IN SALESPERCENTAGE INCREASE IN SALES =

STEP 2: ITEM SUCH AS CURRENT ASSET AND FIXEDASSET AND CERTAIN LIABILITIES (FOR EXAMPLEACCOUNT PAYABLE AND ACCRUED EXPENSES) WILLBE INCREASE ACCORDING TO INCREASE IN SALES.THE OTHER ITEM FOR EXAMPLE CURRENT LIABILITY(NOTES PAYABLE) AND LONG TERM LIABILITY (BOND,MORTGAGE, DEBENTURE AND OTHERS) WILLREMAIN THE SAME.


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STEP 3: CALCULATE NEW RETAINED EARNING

NEW RETAINED EARNING = OLD RETAINED

EARNING + [NET PROFIT MARGIN x RETENTIONRATIO x FORECASTED SALES]

STEP 4: THE DIFFERENCE BETWEEN ASSET,

LIABILITIES AND EQUITIES WILL BE THEEXTERNAL/ADDITIONAL FUND NEEDED


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EXAMPLE OPERATING AT FULL

CAPACITY (USING PRO-FORMA)BALANCE SHEET OF TERAS COMPANY AS AT

31/12/94




345,000

LIABILITY RM

CURRENT LIABILITYAccount Payable 50,000Accrued Wages 25,000Notes Payable 30,000Mortgage Bonds 40,000


345,000


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QUESTION :


500,000 a year which is its maximumcapacity limit and the net profit marginafter tax is 4%. During 1994 the company

earned RM 20,000 after taxes and paidout RM 10,000 in dividend in the comingyears. How much additional financing

will be needed if sales expand to RM800,000 during 1995 ?


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STEP 1 : PERCENTAGE INCREASE IN SALES

PERCENTAGE INCREASE IN SALES =

= 60%

SOLUTION


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SOLUTION

BALANCE SHEET OF TERAS COMPANY AS AT 31/12/95ASSETS RMCURRENT ASSETS

Cash (RM 10,000 x 60%) + RM 10,000 16,000Acc Receivable(RM85,000 X 60%) + RM 85,000 136,000Inventory(RM100,00 x 60%) + RM100,000 160,000

FIXED ASSETNet fixed asset (RM150,000x60%) + RM150,000 240,000

552,000

LIABILITIES RMCURRENT LIABILITY

Account Payable (RM50,000x60%) + RM50,000 80,000Accrued Wages ( RM25,000x60%) + RM35,000 40,000Notes payable 30,000Mortgage bond 40,000Common Stock 100,000

Retained Earning 116,000

406,000EXTERNAL FUND NEEDED 146,000

552,000


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STEP 3: NEW RETAINED EARNING

NEW RETAINED EARNING = RM100,000 +[4% x

( ) x RM 800,000]= RM 100,000 + RM16,000

= RM 116,000


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NOT OPERATING AT FULL

CAPACITY (USING EQUATION)

Not operating at full capacity means the firm has

not reached its full (maximum) capacity limit andhence some of its assets that is fixed assets can

still be used to support the expansion. Thus, thefirm does not have to increase its fixed assets. The

increase will only be for current asset and certainliabilities (account payable and accruedexpenses).


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EXAMPLE NOT OPERATING AT

FULL CAPACITY (USING EQUATION)BALANCE SHEET OF TERAS COMPANY AS AT

31/12/94




345,000

LIABILITY RM



345,000


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QUESTION :


500,000 a year which has not reached itsmaximum capacity limit and the netprofit margin after tax is 4%. During

1994 the company earned RM 20,000after taxes and paid out RM 10,000 individend in the coming years. How

much additional financing will beneeded if sales expand to RM 800,000during 1995 ?


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SOLUTION

BALANCE SHEET OF TERAS COMPANY AS AT 31/12/94ASSETSCURRENT ASSETS

Cash x 100% 2%

Acc Receivable 17%Inventory 20%

39%

LIABILITIESCURRENT LIABILITY

Account Payable 10%Accrued Wages 5%

15%

Note: Since FIXED ASSET will not increase thus we do not calculatepercentage in FIXED ASSET


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STEP 1 : RETAINED EARNING

RETAINED EARNING = [0.04 x (1-0.5) x RM 800,000]

= RM 16,000

STEP 2: FUND NEEDED BY THE COMPANY IN ORDER

TO EXPAND THEIR BUSINESSFUND NEEDED = 39% x (RM 800,000 RM 500,000) 15% x

( RM 800,000 RM 500,000)

= 24% (RM 300,000)

= RM 72,000 STEP 3: EXTERNAL FUND NEEDED

EXTERNAL FUND NEEDED = RM 72,000 RM 16,000

= RM 56,000


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EXAMPLE NOT OPERATING AT FULL

CAPACITY (USING PRO-FORMA)BALANCE SHEET OF TERAS COMPANY AS AT

31/12/94




345,000

LIABILITY RM



345,000


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QUESTION :


500,000 a year which has not reached itsmaximum capacity limit and the netprofit margin after tax is 4%. During

1994 the company earned RM 20,000after taxes and paid out RM 10,000 individend in the coming years. How

much additional financing will beneeded if sales expand to RM 800,000during 1995 ?


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STEP 1 : PERCENTAGE INCREASE IN SALES

PERCENTAGE INCREASE IN SALES =

= 60%

SOLUTION


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SOLUTION

BALANCE SHEET OF TERAS COMPANY AS AT 31/12/94ASSETS RMCURRENT ASSETS

Cash (RM 10,000 x 60%) + RM 10,000 16,000Acc Receivable(RM85,000 X 60%) + RM 85,000 136,000Inventory(RM100,00 x 60%) + RM100,000 160,000

FIXED ASSETNet fixed asset 150,000

462,000

LIABILITIES RMCURRENT LIABILITY

Account Payable (RM50,000x60%) + RM50,000 80,000Accrued Wages ( RM25,000x60%) + RM35,000 40,000Notes payable 30,000Mortgage bond 40,000Common Stock 100,000

Retained Earning 116,000

406,000EXTERNAL FUND NEEDED 56,000

462,000


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STEP 3: NEW RETAINED EARNING

NEW RETAINED EARNING = RM100,000 +[4% x

( ) x RM 800,000]= RM 100,000 + RM16,000

= RM 116,000


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FINANCIAL FORECASTING AND PLANNING (chapter 4).pptx