1. Financial Planning and Control
Sales forecasts
AFN formula method

2. Financial plan Set up a system of projected financial statements.
Determine the funds needed.
Forecast funds available.
Establish and maintain the system of controls.
Develop procedures for adjusting the basic plan.
Establish the performance-based management.

3. Financial Planning and Control
The projection of sales, income, and assets based on alternative production and marketing strategies, as well as the determination of the resources needed to achieve these projections.
Financial Control
The phase in which financial plans are implemented; control deals with the feedback and adjustment process required to ensure adherence to plans and modification of plans because of unforeseen changes.

4. Financial Planning: The Sales Forecast
A forecast of a firm’s unit and dollar sales for some future period; generally based on recent sales trends plus forecasts of the economic prospects for the nation, region, industry, etc.

5. Sales Projection (millions of dollars)

6. Projected (Pro Forma) Financial Statements
A method of forecasting financial requirements based on forecasted financial statements.
ADF = additional funds needed to support the level of forecasted operations

7. 2011 Balance Sheet (in millions of $)
Cash & sec. $ Accts. pay & $ 100
accruals
Accounts rec Notes payable
Inventories
Total CA $ Total CL $ 200
L-T debt 100
Common stk 500
Net fixed Retained
assets earnings
Total assets $1,000 Total claims $1,000

8. 2011 Income Statement (in millions of $)
Sales $2,000.00
Less: Var. costs (60%) 1,200.00
Fixed costs
EBIT $
Interest
EBT $
Taxes (30%)
Net income $
Dividends (30%) $
Add’n to RE $

9. Key Ratios NWC Industry Condition BEP 10.00% 20.00% Poor
Profit Margin 2.52% 4.00% Poor
ROE 7.20% 15.60% Poor
DSO (days) Poor
Inv. turnover 8.33x 11.00x Poor
FA turnover 4.00x 5.00x Poor
TA turnover 2.00x 2.50x Poor
D/A ratio 30.00% 36.00% Good
TIE 6.25x 9.40x Poor
Current ratio 2.50x 3.00x Poor
Payout ratio 30.00% 30.00% OK

10. Key Assumptions
Interest rate = 8% for any debt.
Operating at full capacity in 2011.
Each type of asset grows proportionally with sales.
Payables and accruals grow proportionally with sales.
2011 profit margin (2.52%) and payout (30%) will be maintained.
Sales are expected to increase by $500 million. (%DS = 25%)

11. Assets Assets = 0.5 sales Sales A/S = 1,000/2,000 = 0.5 = 1,250/2,500.
D Assets =
(A/S) D Sales
= 0.5(500)
= 250.
1,000
Sales
2,000
2,500
A/S = 1,000/2,000 = 0.5 = 1,250/2,500.

12. AFN formula AFN= (A*/S)DS - (L*/S)DS - M(S1)(1 - d)
Spontaneous increase in liabilities
Increase in retained earnings
Additional funds needed
Required increase in assets

13. AFN formula AFN= Additional funds needed
A*= assets that tied directly to sales, so must increase if sales are to increase
S = sales during the last year
DS = change in sales =S1 - S
L*= liabilities that increase spontaneously, normally include account payables and accruals, but not bank loans and bonds
M = profit margin = profit per $1 of sales

14. AFN formula S1= total sales projected for next year
(1 - d)= Retention ratio = the percentage of net income that retained
(A*/S) = percentage of required assets to sales, showing the required dollar increase in asset per $1 increase in sales
(L*/S) = liabilities that increase spontaneously as a percentage of sales, or spontaneously generated financing per $1 increase in sales

15. What is the AFN based on the AFN equation?
AFN = (A*/S)DS - (L*/S)DS - M(S1)(1 - d)
= ($1,000/$2,000)($500)
- ($100/$2,000)($500)
($2,500)( )
= $250 - $25 - $44.1
= $180.9 million.

16. Questions the Financial Planner Should Consider
Mark Twain once said “forecasting is very difficult, particularly if it concerns the future”. The process of financial planning involves the use of mathematical models which provide the illusion of great accuracy.

17. Questions the Financial Planner Should Consider
In assessing a financial forecast, the planner should ask the following questions:
Are the results generated by the model reasonable?
Have I considered all possible outcomes?
How reasonable were the economic assumptions which were used to generate the forecast?
Which assumptions have the greatest impact on the outcome?
Which variables are of the greatest importance in determining the outcome?
Have I forgotten anything important?