1. Financial Forecasting, Planning, and Budgeting , Prentice Hall, Inc.

2. Financial Forecasting 1) Project sales revenues and expenses.

3. Financial Forecasting 1) Project sales revenues and expenses. 2) Estimate current assets and fixed assets necessary to support projected sales.

4. Financial Forecasting 1) Project sales revenues and expenses. 2) Estimate current assets and fixed assets necessary to support projected sales. –Percent of sales forecast

5. Percent of Sales Method Suppose this year’s sales will total $32 million. Next year, we forecast sales of $40 million. Net income should be 5% of sales. Dividends should be 50% of earnings.

6. This year % of $32m Assets Current Assets$8m25% Fixed Assets$16m50% Total Assets$24m Liab. and Equity Accounts Payable$4m12.5% Accrued Expenses$4m12.5% Notes Payable$1mn/a Long Term Debt$6mn/a Total Liabilities$15m Common Stock$7mn/a Retained Earnings$2m Equity$9m Total Liab. & Equity$24m

7. Next year % of $40m Assets Current Assets25% Fixed Assets50% Total Assets Liab. and Equity Accounts Payable12.5% Accrued Expenses12.5% Notes Payablen/a Long Term Debtn/a Total Liabilities Common Stockn/a Retained Earnings Equity Total Liab. & Equity

8. Next year % of $40m Assets Current Assets$10m25% Fixed Assets50% Total Assets Liab. and Equity Accounts Payable12.5% Accrued Expenses12.5% Notes Payablen/a Long Term Debtn/a Total Liabilities Common Stockn/a Retained Earnings Equity Total Liab. & Equity

9. Next year % of $40m Assets Current Assets$10m25% Fixed Assets$20m50% Total Assets Liab. and Equity Accounts Payable12.5% Accrued Expenses12.5% Notes Payablen/a Long Term Debtn/a Total Liabilities Common Stockn/a Retained Earnings Equity Total Liab. & Equity

10. Next year % of $40m Assets Current Assets$10m25% Fixed Assets$20m50% Total Assets$30m Liab. and Equity Accounts Payable12.5% Accrued Expenses12.5% Notes Payablen/a Long Term Debtn/a Total Liabilities Common Stockn/a Retained Earnings Equity Total Liab. & Equity

11. Next year % of $40m Assets Current Assets$10m25% Fixed Assets$20m50% Total Assets$30m Liab. and Equity Accounts Payable$5m12.5% Accrued Expenses12.5% Notes Payablen/a Long Term Debtn/a Total Liabilities Common Stockn/a Retained Earnings Equity Total Liab. & Equity

12. Next year % of $40m Assets Current Assets$10m25% Fixed Assets$20m50% Total Assets$30m Liab. and Equity Accounts Payable$5m12.5% Accrued Expenses$5m12.5% Notes Payablen/a Long Term Debtn/a Total Liabilities Common Stockn/a Retained Earnings Equity Total Liab. & Equity

13. Next year % of $40m Assets Current Assets$10m25% Fixed Assets$20m50% Total Assets$30m Liab. and Equity Accounts Payable$5m12.5% Accrued Expenses$5m12.5% Notes Payable$1mn/a Long Term Debtn/a Total Liabilities Common Stockn/a Retained Earnings Equity Total Liab. & Equity

14. Next year % of $40m Assets Current Assets$10m25% Fixed Assets$20m50% Total Assets$30m Liab. and Equity Accounts Payable$5m12.5% Accrued Expenses$5m12.5% Notes Payable$1mn/a Long Term Debt$6mn/a Total Liabilities Common Stockn/a Retained Earnings Equity Total Liab. & Equity

15. Next year % of $40m Assets Current Assets$10m25% Fixed Assets$20m50% Total Assets$30m Liab. and Equity Accounts Payable$5m12.5% Accrued Expenses$5m12.5% Notes Payable$1mn/a Long Term Debt$6mn/a Total Liabilities$17m Common Stockn/a Retained Earnings Equity Total Liab. & Equity

16. Next year % of $40m Assets Current Assets$10m25% Fixed Assets$20m50% Total Assets$30m Liab. and Equity Accounts Payable$5m12.5% Accrued Expenses$5m12.5% Notes Payable$1mn/a Long Term Debt$6mn/a Total Liabilities$17m Common Stock$7mn/a Retained Earnings Equity Total Liab. & Equity

17. Predicting Retained Earnings Next year’s projected retained earnings = last year’s $2 million, plus:

18. Predicting Retained Earnings Next year’s projected retained earnings = last year’s $2 million, plus: projected net income cash dividends sales sales net income x x ( 1 - ) x x ( 1 - )

19. Predicting Retained Earnings Next year’s projected retained earnings = last year’s $2 million, plus: projected net income cash dividends sales sales net income $40 million x.05 x(1 -.50) x x ( 1 - ) x x ( 1 - )

20. Predicting Retained Earnings Next year’s projected retained earnings = last year’s $2 million, plus: projected net income cash dividends sales sales net income $40 million x.05 x(1 -.50) = $2 million + $1 million = $3million x x ( 1 - ) x x ( 1 - )

21. Next year % of $40m Assets Current Assets$10m25% Fixed Assets$20m50% Total Assets$30m Liab. and Equity Accounts Payable$5m12.5% Accrued Expenses$5m12.5% Notes Payable$1mn/a Long Term Debt$6mn/a Total Liabilities$17m Common Stock$7mn/a Retained Earnings$3m Equity Total Liab. & Equity

22. Next year % of $40m Assets Current Assets$10m25% Fixed Assets$20m50% Total Assets$30m Liab. and Equity Accounts Payable$5m12.5% Accrued Expenses$5m12.5% Notes Payable$1mn/a Long Term Debt$6mn/a Total Liabilities$17m Common Stock$7mn/a Retained Earnings$3m Equity$10m Total Liab. & Equity

23. Next year % of $40m Assets Current Assets$10m25% Fixed Assets$20m50% Total Assets$30m Liab. and Equity Accounts Payable$5m12.5% Accrued Expenses$5m12.5% Notes Payable$1mn/a Long Term Debt$6mn/a Total Liabilities$17m Common Stock$7mn/a Retained Earnings$3m Equity$10m Total Liab. & Equity$27m

24. Next year % of $40m Assets Current Assets$10m25% Fixed Assets$20m50% Total Assets$30m Liab. and Equity Accounts Payable$5m12.5% Accrued Expenses$5m12.5% Notes Payable$1mn/a Long Term Debt$6mn/a Total Liabilities$17m Common Stock$7mn/a Retained Earnings$3m Equity$10m Total Liab. & Equity$27m How much Discretionary Financing will we Need?

25. Next year % of $40m Assets Current Assets$10m25% Fixed Assets$20m50% Total Assets$30m Liab. and Equity Accounts Payable$5m12.5% Accrued Expenses$5m12.5% Notes Payable$1mn/a Long Term Debt$6mn/a Total Liabilities$17m Common Stock$7mn/a Retained Earnings$3m Equity$10m Total Liab. & Equity$27m How much Discretionary Financing will we Need?

26. Next year % of $40m Assets Current Assets$10m25% Fixed Assets$20m50% Total Assets$30m Liab. and Equity Accounts Payable$5m12.5% Accrued Expenses$5m12.5% Notes Payable$1mn/a Long Term Debt$6mn/a Total Liabilities$17m Common Stock$7mn/a Retained Earnings$3m Equity$10m Total Liab. & Equity$27m How much Discretionary Financing will we Need?

27. Predicting Discretionary Financing Needs

28. Discretionary Financing Needed =

29. Predicting Discretionary Financing Needs Discretionary Financing Needed = projectedprojectedprojected total- total- owners’ assetsliabilities equity

30. Predicting Discretionary Financing Needs Discretionary Financing Needed = projectedprojectedprojected total- total- owners’ assetsliabilities equity $30 million - $17 million - $10 million

31. Predicting Discretionary Financing Needs Discretionary Financing Needed = projectedprojectedprojected total- total- owners’ assetsliabilities equity $30 million - $17 million - $10 million = $3 million in discretionary financing

32. Sustainable Rate of Growth

33. g* = ROE (1 - b) where

34. Sustainable Rate of Growth g* = ROE (1 - b) where b = dividend payout ratio (dividends / net income)

35. Sustainable Rate of Growth g* = ROE (1 - b) where b = dividend payout ratio (dividends / net income) ROE = return on equity (net income / common equity) or

36. Sustainable Rate of Growth g* = ROE (1 - b) where b = dividend payout ratio (dividends / net income) ROE = return on equity (net income / common equity) or net income sales assets sales assets common equity ROE = x x

37. Budgets Budget: a forecast of future events.

38. Budgets Budgets indicate the amount and timing of future financing needs. Budgets provide a basis for taking corrective action if budgeted and actual figures do not match. Budgets provide the basis for performance evaluation.