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4. Strategic Planning Additional Funds Needed (AFN) Adjusting Capacity The Role of Financial Forecasting in Planning Forecasting Financial Statements > The Role of Financial Forecasting in Planning Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance?campaign_content=book_192_section_48&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=dir ect&utm_source=boundless

5. Using historical internal accounting and sales data, in addition to external market and economic indicators, a financial forecast is an economist's best guess of what will happen to a company in financial terms over a given time period, which is usually one year. Financial forecasting is often helped by financial modeling processes. Financial modeling is the task of building an abstract representation (a model) of a financial decision-making situation. Assumptions play a key role in financial forecasts and can affect the way the forecasts predict the outcomes of decisions made on the corporate level. Strategic Planning Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/forecasting-financial-statements-4/the-role-of-financial-forecasting-in-planning- 48/strategic-planning-235- 7547?campaign_content=book_192_section_48&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=boundl ess Strategic Planning View on Boundless.com Forecasting Financial Statements > The Role of Financial Forecasting in Planning

6. AFN is a way of calculating how much new funding will be required, so that the firm can realistically look at whether or not they will be able to generate the additional funding and therefore be able to achieve the higher sales level. The simplified formula is: AFN = Projected increase in assets – spontaneous increase in liabilities – any increase in retained earnings. If this value is negative, this means the action or project which is being undertaken will generate extra income for the company, which can be invested elsewhere. The mathematical formulas used to determine AFN are based on showing how liabilities will grow relative to new assets and sales when a project is undertaken and can be used as tools to determine whether a project or operational expansion is worthwhile. Additional Funds Needed (AFN) Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/forecasting-financial-statements-4/the-role-of-financial-forecasting-in-planning- 48/additional-funds-needed-afn-236- 597?campaign_content=book_192_section_48&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=boundle ss Assets - Economic Resources View on Boundless.com Forecasting Financial Statements > The Role of Financial Forecasting in Planning

7. Capacity planning is the process of determining the production capacity needed by an organization to meet changing demands for its products. Capacity utilization is a concept in economics and managerial accounting which refers to the extent to which an enterprise or a nation actually uses its installed productive capacity. When planning out how to manage capacity at the optimal level to attain the long term goals of the firm, capacity planning and utilization and other processes should be analyzed. Adjusting Capacity Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/forecasting-financial-statements-4/the-role-of-financial-forecasting-in-planning- 48/adjusting-capacity-237- 7959?campaign_content=book_192_section_48&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=boundl ess Thunderbird Assembly Line View on Boundless.com Forecasting Financial Statements > The Role of Financial Forecasting in Planning

8. Free to share, print, make copies and changes. Get yours at www.boundless.com Appendix

9. Key terms asset Something or someone of any value; any portion of one's property or effects so considered. capacity The maximum that can be produced on a machine or in a facility or group. capitalism A socio-economic system based on private property rights, including the private ownership of resources or capital, with economic decisions made largely through the operation of a market unregulated by the state. financial forecast estimate of future financial outcomes for a company or country financial modeling the task of building an abstract representation (a model) of a financial decision making situation. forecast An estimation of a future condition. liabilities An amount of money in a company that is owed to someone and has to be paid in the future, such as tax, debt, interest, and mortgage payments. sales Revenues strategy A plan of action intended to accomplish a specific goal Free to share, print, make copies and changes. Get yours at www.boundless.com Forecasting Financial Statements

10. Assets - Economic Resources AFN determines the extra assets and financing that will be needed for a firm to undertake a new project or expand its operations and sales. Free to share, print, make copies and changes. Get yours at www.boundless.com Stock.KCHNG. License: Other http://www.sxc.hu/pic/s/f/fo/forwardcom/911375_paper_work.jpg View on Boundless.comLicense: Otherhttp://www.sxc.hu/pic/s/f/fo/forwardcom/911375_paper_work.jpgView on Boundless.com Forecasting Financial Statements

11. Strategic Planning Financial forecasting is essential for a company's strategic planning, management, and organization. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikimedia. "Wikimedia Strategic planning 10." CC BY-SA http://commons.wikimedia.org/wiki/File%253AWikimedia_Strategic_planning_10.svg View on Boundless.comCC BY-SAhttp://commons.wikimedia.org/wiki/File%253AWikimedia_Strategic_planning_10.svgView on Boundless.com Forecasting Financial Statements

12. Thunderbird Assembly Line Adjusting capacity will affect the amount of items produced on the assembly line. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikimedia. "Thunderbird assembly line." Public domain http://commons.wikimedia.org/wiki/File:Thunderbird_assembly_line.jpg View on Boundless.comPublic domainhttp://commons.wikimedia.org/wiki/File:Thunderbird_assembly_line.jpgView on Boundless.com Forecasting Financial Statements

13. Free to share, print, make copies and changes. Get yours at www.boundless.com Forecasting Financial Statements Which of the following statements regarding strategic planning and financial forecasting is correct? A) The most difficult aspect of preparing a financial forecast is predicting revenue. B) Forecasting is straightforward and does not require making many assumptions. C) Financial forecasts help strategic planners understand the possibilities of different investments. D) All of these answers.

14. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Forecasting Financial Statements Which of the following statements regarding strategic planning and financial forecasting is correct? A) The most difficult aspect of preparing a financial forecast is predicting revenue. B) Forecasting is straightforward and does not require making many assumptions. C) Financial forecasts help strategic planners understand the possibilities of different investments. D) All of these answers.

15. Free to share, print, make copies and changes. Get yours at www.boundless.com Forecasting Financial Statements A company has $1 million in sales last year, $1.5 million in sales this year, and projected net income of $250,000. It has $5 million of its assets tied to sales, $3 million in sale affected liabilities, and a retention ratio of 0.3. What is its AFN? A) $9,925,000 B) $925,000 C) $23,425,000 D) $9,992,500

16. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Forecasting Financial Statements A company has $1 million in sales last year, $1.5 million in sales this year, and projected net income of $250,000. It has $5 million of its assets tied to sales, $3 million in sale affected liabilities, and a retention ratio of 0.3. What is its AFN? A) $9,925,000 B) $925,000 C) $23,425,000 D) $9,992,500

17. Free to share, print, make copies and changes. Get yours at www.boundless.com Forecasting Financial Statements Which of the following represents a company in a developed economy operating at peak effective capacity? A) 100% design capacity. B) 80% design capacity. C) 50% design capacity. D) 20% design capacity.

18. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Forecasting Financial Statements Which of the following represents a company in a developed economy operating at peak effective capacity? A) 100% design capacity. B) 80% design capacity. C) 50% design capacity. D) 20% design capacity.

19. Attribution Wikipedia. "Additional Funds Needed." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Additional_Funds_NeededCC BY-SA 3.0http://en.wikipedia.org/wiki/Additional_Funds_Needed Wiktionary. "sales." CC BY-SA 3.0 http://en.wiktionary.org/wiki/salesCC BY-SA 3.0http://en.wiktionary.org/wiki/sales Wiktionary. "liabilities." CC BY-SA 3.0 http://en.wiktionary.org/wiki/liabilitiesCC BY-SA 3.0http://en.wiktionary.org/wiki/liabilities Wiktionary. "asset." CC BY-SA 3.0 http://en.wiktionary.org/wiki/assetCC BY-SA 3.0http://en.wiktionary.org/wiki/asset Wikipedia. "Financial forecast." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Financial_forecastCC BY-SA 3.0http://en.wikipedia.org/wiki/Financial_forecast Wikipedia. "Financial modeling." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Financial_modelingCC BY-SA 3.0http://en.wikipedia.org/wiki/Financial_modeling Wikipedia. "Strategic planning." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Strategic_planningCC BY-SA 3.0http://en.wikipedia.org/wiki/Strategic_planning Wiktionary. "strategy." CC BY-SA 3.0 http://en.wiktionary.org/wiki/strategyCC BY-SA 3.0http://en.wiktionary.org/wiki/strategy Wikipedia. "financial modeling." CC BY-SA 3.0 http://en.wikipedia.org/wiki/financial%20modelingCC BY-SA 3.0http://en.wikipedia.org/wiki/financial%20modeling Wikipedia. "financial forecast." CC BY-SA 3.0 http://en.wikipedia.org/wiki/financial%20forecastCC BY-SA 3.0http://en.wikipedia.org/wiki/financial%20forecast Wikipedia. "Capacity planning." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Capacity_planningCC BY-SA 3.0http://en.wikipedia.org/wiki/Capacity_planning Wikipedia. "Capacity utilization." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Capacity_utilizationCC BY-SA 3.0http://en.wikipedia.org/wiki/Capacity_utilization Wiktionary. "capacity." CC BY-SA 3.0 http://en.wiktionary.org/wiki/capacityCC BY-SA 3.0http://en.wiktionary.org/wiki/capacity Wiktionary. "capitalism." CC BY-SA 3.0 http://en.wiktionary.org/wiki/capitalismCC BY-SA 3.0http://en.wiktionary.org/wiki/capitalism Wiktionary. "forecast." CC BY-SA 3.0 http://en.wiktionary.org/wiki/forecastCC BY-SA 3.0http://en.wiktionary.org/wiki/forecast Free to share, print, make copies and changes. Get yours at www.boundless.com Forecasting Financial Statements