1. Financial Planning and Control zFinancial Planning zSales forecasts  AFN formula method

2.  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. Financial plan

3. Financial Planning 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. Financial Planning and Control

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 nA method of forecasting financial requirements based on forecasted financial statements. nADF = additional funds needed to support the level of forecasted operations

7. 2011 Balance Sheet (in millions of $) Cash & sec. $ 20Accts. pay & $ 100 accruals Accounts rec. 240Notes payable 100 Inventories 240 Total CA $ 500 Total CL $ 200 L-T debt 100 Common stk 500 Net fixed Retained assets 500 earnings 200 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 700.00 EBIT $ 100.00 Interest 16.00 EBT$ 84.00 Taxes (30%) 25.20 Net income$ 58.80 Dividends (30%)$ 17.64 Add’n to RE$ 41.16

9. Key Ratios BEP10.00%20.00%Poor Profit Margin2.52%4.00%Poor ROE7.20%15.60%Poor DSO (days)43.232.0Poor Inv. turnover8.33x11.00xPoor FA turnover4.00x5.00xPoor TA turnover2.00x2.50xPoor D/A ratio30.00%36.00%Good TIE6.25x9.40xPoor Current ratio2.50x3.00xPoor Payout ratio30.00%30.00%OK NWC IndustryCondition

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. (%  S = 25%)

11. Assets Sales 0 1,000 2,000 A/S = 1,000/2,000 = 0.5 = 1,250/2,500. 1,250 2,500  Assets = (A/S)  Sales = 0.5(500) = 250. Assets = 0.5 sales

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

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

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

15. What is the AFN based on the AFN equation? AFN= (A*/S)  S - (L*/S)  S - M(S 1 )(1 - d) = ($1,000/$2,000)($500) - ($100/$2,000)($500) - 0.0252($2,500)(1 - 0.3) = $250 - $25 - $44.1 = $180.9 million.

16. Questions the Financial Planner Should Consider forecasting is very difficult, particularly if it concerns the future  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?