Financial Forecasting,Financial Forecasting,

Financial ForecastingFinancial Forecasting

1)1) Project sales revenues and Project sales revenues and expenses.expenses.

2)2) Estimate current assets and fixed Estimate current assets and fixed assets necessary to support projected assets necessary to support projected sales.sales.– Percent of sales forecastPercent of sales forecast

Percent of Sales MethodPercent of Sales Method

Suppose this years sales will total Suppose this years sales will total $32 million$32 million..

Next year, we forecast sales of Next year, we forecast sales of $40 million$40 million..

Net income should be Net income should be 5%5% of sales. of sales. Dividends should be Dividends should be 50%50% of of

earnings.earnings.

This yearThis year % of % of $32m$32m

AssetsAssetsCurrent AssetsCurrent Assets $8m$8m 25%25%Fixed AssetsFixed Assets $16m$16m 50%50% Total AssetsTotal Assets $24m$24mLiab. and EquityLiab. and EquityAccounts PayableAccounts Payable $4m$4m 12.5%12.5%Accrued ExpensesAccrued Expenses $4m$4m 12.5%12.5%Notes PayableNotes Payable $1m$1m n/an/aLong Term DebtLong Term Debt $6m$6m n/an/a Total LiabilitiesTotal Liabilities $15m$15mCommon StockCommon Stock $7m$7m n/an/aRetained EarningsRetained Earnings $2m$2m EquityEquity $9m$9m Total Liab & EquityTotal Liab & Equity $24m$24m

Next yearNext year % of % of $40m$40m

AssetsAssetsCurrent AssetsCurrent Assets $10m$10m 25%25%Fixed AssetsFixed Assets $20m$20m 50%50% Total AssetsTotal Assets $30m$30mLiab. and EquityLiab. and EquityAccounts PayableAccounts Payable $5m$5m 12.5%12.5%Accrued ExpensesAccrued Expenses $5m$5m 12.5%12.5%Notes PayableNotes Payable $1m$1m n/an/aLong Term DebtLong Term Debt $6m$6m n/an/a Total LiabilitiesTotal Liabilities $17m$17mCommon StockCommon Stock $7m$7m n/an/aRetained EarningsRetained Earnings EquityEquity Total Liab & EquityTotal Liab & Equity

Predicting Retained Earnings:Predicting Retained Earnings:

Next year’s projected retained earnings = last Next year’s projected retained earnings = last years years $2 million$2 million, plus:, plus:

projected net incomeprojected net income cash cash dividendsdividends

salessales sales sales net income net income

$40 million x .05 $40 million x .05 xx (1 - .50)(1 - .50)

= $2 million + $1 million = = $2 million + $1 million = $3million$3million

xx xx ( 1 - ) ( 1 - )

Next yearNext year % of % of $40m$40m

AssetsAssetsCurrent AssetsCurrent Assets $10m$10m 25%25%Fixed AssetsFixed Assets $20m$20m 50%50% Total AssetsTotal Assets $30m$30mLiab. and EquityLiab. and EquityAccounts PayableAccounts Payable $5m$5m 12.5%12.5%Accrued ExpensesAccrued Expenses $5m$5m 12.5%12.5%Notes PayableNotes Payable $1m$1m n/an/aLong Term DebtLong Term Debt $6m$6m n/an/a Total LiabilitiesTotal Liabilities $17m$17mCommon StockCommon Stock $7m$7m n/an/aRetained EarningsRetained Earnings $3m$3m EquityEquity Total Liab & EquityTotal Liab & Equity

Next yearNext year % of % of $40m$40m

AssetsAssetsCurrent AssetsCurrent Assets $10m$10m 25%25%Fixed AssetsFixed Assets $20m$20m 50%50% Total AssetsTotal Assets $30m$30mLiab. and EquityLiab. and EquityAccounts PayableAccounts Payable $5m$5m 12.5%12.5%Accrued ExpensesAccrued Expenses $5m$5m 12.5%12.5%Notes PayableNotes Payable $1m$1m n/an/aLong Term DebtLong Term Debt $6m$6m n/an/a Total LiabilitiesTotal Liabilities $17m$17mCommon StockCommon Stock $7m$7m n/an/aRetained EarningsRetained Earnings $3m$3m EquityEquity $10m$10m Total Liab & EquityTotal Liab & Equity $27m$27m

Next yearNext year % of % of $40m$40m

AssetsAssetsCurrent AssetsCurrent Assets $10m$10m 25%25%Fixed AssetsFixed Assets $20m$20m 50%50% Total AssetsTotal Assets $30m$30mLiab. and EquityLiab. and EquityAccounts PayableAccounts Payable $5m$5m 12.5%12.5%Accrued ExpensesAccrued Expenses $5m$5m 12.5%12.5%Notes PayableNotes Payable $1m$1m n/an/aLong Term DebtLong Term Debt $6m$6m n/an/a Total LiabilitiesTotal Liabilities $17m$17mCommon StockCommon Stock $7m$7m n/an/aRetained EarningsRetained Earnings $3m$3m EquityEquity $10m$10m Total Liab & EquityTotal Liab & Equity $27m$27m

How muchDiscretionary

Financing will weNeed?

Predicting Discretionary Financing Predicting Discretionary Financing NeedsNeeds

Predicting Discretionary Financing Predicting Discretionary Financing NeedsNeeds

Discretionary Financing Needed =Discretionary Financing Needed =

projectedprojected projectedprojected projectedprojected totaltotal -- total total -- owners’ owners’ assetsassets liabilitiesliabilities equity equity

$30 million - $17 million - $10 million$30 million - $17 million - $10 million

= = $3 million$3 million in discretionary financing in discretionary financing

Sustainable Rate of GrowthSustainable Rate of Growth

g* = ROE (1 - b) g* = ROE (1 - b) wherewhere

b = dividend payout ratiob = dividend payout ratio

(dividends / net income)(dividends / net income)

ROE = return on equity ROE = return on equity

(net income / common equity) or(net income / common equity) or

net income sales common equitynet income sales common equity

sales assets assetssales assets assetsROE = x xROE = x x