Jeroen E. Ligterink jeroenl@fee.uva.nl www.fee.uva.nl/fm Financiering Jeroen E. Ligterink jeroenl@fee.uva.nl www.fee.uva.nl/fm Fin prop/Week 2

BMM 18: Financial Planning Topics Covered What is Financial Planning? Financial Planning Models Example: Executive Cheese Planners Beware External Financing and Growth Fin prop/Week 2 2

Financial Planning The Financial Planning Process Analyzing the investment and financing choices open to the firm. Projecting the future consequences of current decisions. Deciding which alternatives to undertake. Measuring subsequent performance against the goals set forth in the financial plan. Fin prop/Week 2 3

Financial Planning Models Inputs Planning Model Outputs Inputs - Current financial statements. Forecasts of key variables (such as sales or interest rates). Planning Model - Equations specifying key relationships. Outputs - Projected financial statements (pro forma). Financial ratios. Sources and uses of funds. Fin prop/Week 2 12

Financial Planning Models Pro Formas - Projected or forecasted financial statements. Percentage of Sales Model - Planning model in which sales forecasts are the driving variable and most other variables are proportional to sales. Balancing Item - Variable that adjusts to maintain the consistency of a financial plan. Also called plug. Fin prop/Week 2 13

Executive Cheese Current Income Statement and Balance Sheet Fin prop/Week 2 14

Executive Cheese Pro forma Income Statement and Balance Sheet Fin prop/Week 2 15

Executive Cheese Pro forma Balance Sheet with dividends fixed at $180 and debt used as the balance item. Fin prop/Week 2 16

Executive Fruit 1999 Financial Statements

Executive Fruit 2000 Pro Forma Statements

Planners Beware Percent of sales methods are not realistic because fixed costs exist. Most models generate accounting numbers not financial cash flows Adjustments must be made to consider these and other factors. Fin prop/Week 2 17

External Financing & Growth Fin prop/Week 2 20

BMM 19: Working capital management and short term planning Links Between Long-Term and Short-Term Financing Tracing Changes in Cash and Working Capital Cash Budgeting A Short-Term Financing Plan Sources of Short-Term Financing The Cost of Bank Loans Fin prop/Week 2 2

Cash Conversion Cycle Cash Raw materials Receivables inventory Period between firm’s payment for materials and collection on its sales. Cash Raw materials inventory Receivables Finished goods inventory Fin prop/Week 2 8

Cash conversion cycle Fin prop/Week 2 14

Example - Cash Conversion Cycle Given the aggregate balance sheet and income statement for US Manufacturing firms, calculate the cash conversion cycle. Fin prop/Week 2 15

Example - Cash Conversion Cycle Inventory period Fin prop/Week 2 17

Example - Cash Conversion Cycle Receivables period Fin prop/Week 2 18

Example - Cash Conversion Cycle: Payable period Fin prop/Week 2 19

Cash Budgeting Steps to preparing a cash budget Step 1 - Forecast the sources of cash. Step 2 - Forecast uses of cash. Step 3 - Calculate whether the firm is facing a cash shortage or surplus. Fin prop/Week 2 25

Sources of Short Term Financing Bank loans Commercial paper Secured loans Fin prop/Week 2 33

Cost of Bank Loans Simple Interest Effective annual rate Fin prop/Week 2 35

Cost of Bank Loans Discount Interest Fin prop/Week 2 36

Minicase chapter 19 Autodealer Capstan heeft in 2005 regeling uitgestelde betaling (koop nu betaal over een half jaar) ingevoerd. Het is nu einde eerste kwartaal 2006 Wat zijn de consequenties van de kortingsaktie? Investering in netto werkkapitaal Hoe is het gefinancierd? Bancaire financiering Bank wil niet verder financieren, is dit juist bezien vanuit haar perspectief?