1. Financial Statements Forecasting

2. 3 Primary Financial Statements
Income statement
Balance sheet
Consolidated statement of cash flows
Other decision-making measures:
Financial ratios
Common size statements
Free cash flow projections & valuation

3. Financial Analysis
Assess the strengths and weaknesses of the firm’s current condition
Ratio analysis
Break-even analysis
Operating and financial leverage analysis
Generate pro forma financial statements to identify strategies to improve the condition and assess future risks

4. Growth and the Need for Financing
Growth is frequently associated with cash
Faster growth  more profits  more cash
This is incorrect! Growth and profits do not always generate sufficient cash flow to cover the assets needed for growth!
Growth needs to be managed and planned
Firms often fail when the needs of expansion overwhelm the available resources for expansion

5. Flow of a Sales-Driven Model

6. Sustainable Growth in the Rapid Growth Phase
“It takes money to make money" phase
Increased sales require more assets of all types
Internal sources may not generate enough cash
Retained earnings
Increase in spontaneous liabilities
May need to raise capital externally
Debt
Equity

7. Calculating the Discretionary Financing Needed
Compile changes in assets
Left side of balance sheet
Cash
Current Assets
Inventories & Account Receivables
Long-term assets
Net Fixed Assets
Goodwill
Subtract forecasted Total Liabilities and Equity from Total Assets to determine Discretionary Funds Needed (DFN)

8. Achieving Equilibrium
When Discretionary Funds Needed is Positive
Raise external financing
Increase debt
Issue more stock
Reduce cash &/or marketable security stock balances
Decrease dividends

9. Achieving Equilibrium
When Discretionary Funds Needed is Negative
Decrease external capital:
Repurchase shares
Pay off debt
Hold excess cash &/or marketable security balances
Increase dividends

10. The “Plug”
The balance-sheet items which will “plug” or balance the balance sheet model so that Total Assets equals Total Liabilities & Equity
Models the assumption of how the firm finances itself:
Cash & marketable securities
Debt
Equity
Dividends

11. Testing the model for perverse effects
Questions:
When assumptions change what happens to the plug values?
Does it make sense?
Example: Problems associated with using dividends as a plug
May not have adequate cash balances to pay the dividends that are calculated
Negative dividends can be calculated when the firm experiences a loss
Dividends may not distribute excess cash that the firm wishes to reduce
Solution involves using =max(Calculated Dividend,0)
Here the 0 prevents negative dividends and the Calculated Dividend considers external financing needed to achieve company minimum dividend policy as well as any excess cash that is available for distribution

12. Equilibrium checks Balance Sheet Statement of Cash Flows
Discretionary Funds Needed must equal 0
Statement of Cash Flows
Net increase in cash from Consolidated Statement of Cash Flows
less changes in cash & marketable securities in Balance Sheet
>> must equal 0