Date post: | 03-Apr-2018 |
Category: |
Documents |
Upload: | quenia-zahirah |
View: | 218 times |
Download: | 0 times |
of 30
7/28/2019 FINANCIAL FORECASTING AND PLANNING (chapter 4).pptx
1/30
7/28/2019 FINANCIAL FORECASTING AND PLANNING (chapter 4).pptx
2/30
FINANCIAL FORECASTING
Financial forecasting is a process whereby thefirm will estimates its total needs for future
operations. By doing so, funds can be obtained at the
lowest interest cost and on the best possibleterms because management has sufficient
time for effective negotiations. Forecasting is one of the most important
management activities, regardless of its size.
7/28/2019 FINANCIAL FORECASTING AND PLANNING (chapter 4).pptx
3/30
WHY DO WENEED TO DO
FORECASTING ?
7/28/2019 FINANCIAL FORECASTING AND PLANNING (chapter 4).pptx
4/30
BECAUSE WEWANT TO FIND
EXTERNAL/ADDITIONAL
FUNDNEEDED BY
THE COMPANYIN ORDER TO
EXPAND THEIRBUSINESS
7/28/2019 FINANCIAL FORECASTING AND PLANNING (chapter 4).pptx
5/30
METHODS OF FORECASTING
PERCENT OF SALES METHOD *
SCATTER DIAGRAM OR REGRESSION METHOD
7/28/2019 FINANCIAL FORECASTING AND PLANNING (chapter 4).pptx
6/30
PERCENT OFSALES
METHOD
Under this method external fund can bedetermined by using two ways:
a) Equation
b) Pro-Forma Balance sheet
Which ever
method is usedthe answershould be the
same
When the company want to expand their business (acquireadditional assets to support new sales or purchase additional
assets) definitely more money (fund) would be needed tosupport the expansion. Funds can be generated from internal
sources (retained earning) and external source
Two situation have to be lookedat before the amount of externalfund needed is determined, they
are:a) Firm is operating at full
capacity
b) Firm has not reached fullcapacity
7/28/2019 FINANCIAL FORECASTING AND PLANNING (chapter 4).pptx
7/30
By using EQUATION,STEP 1: CALCULATE RETAINED EARNING (INTERNAL SOURCES OF FUND)
RETAINED EARNING = [ Net profit margin xretention ratio x forecasted sales ]
OPERATING AT FULL CAPACITY
(EQUATION)Operating at full capacity means all assets available in the
company have been fully utilized. If the firm want to expandtheir business the only way is to increase all its assets (current
and fixed asset) and certain liabilities.
1 Dividend Payout Ratio
7/28/2019 FINANCIAL FORECASTING AND PLANNING (chapter 4).pptx
8/30
STEP 2: CALCULATE FUND NEEDED BY THECOMPANY IN ORDER TO EXPAND THEIR
BUSINESS
FUND NEEDED = [ X (Changes in sales) -
X (Changes in sales) ]
STEP 3: EXTERNAL/ADDITIONAL FUND NEEDED
EXTERNAL FUND NEEDED = FUND NEEDED
RETAINED EARNING
7/28/2019 FINANCIAL FORECASTING AND PLANNING (chapter 4).pptx
9/30
EXAMPLE OPERATING AT FULL
CAPACITY (USING EQUATION)BALANCE SHEET OF TERAS COMPANY AS AT
31/12/94
ASSET RMCURRENT ASSETCash 10,000
Account Receivable 85,000Inventories 100,000
FIXED ASSETNet Fixed Asset 150,000
345,000
LIABILITY RMCURRENT LIABILITY
Account Payable 50,000Accrued Wages 25,000Notes Payable 30,000Mortgage Bonds 40,000
EQUITYCommon Stock 100,000Retained Earning 100,000
345,000
7/28/2019 FINANCIAL FORECASTING AND PLANNING (chapter 4).pptx
10/30
QUESTION :
Companys sales are running at about RM
500,000 a year which is its maximumcapacity limit and the net profit marginafter tax is 4%. During 1994 the company
earned RM 20,000 after taxes and paidout RM 10,000 in dividend in the comingyears. How much additional financing
will be needed if sales expand to RM800,000 during 1995 ?
7/28/2019 FINANCIAL FORECASTING AND PLANNING (chapter 4).pptx
11/30
SOLUTION
BALANCE SHEET OF TERAS COMPANY AS AT 31/12/94ASSETSCURRENT ASSETS
Cash x 100% 2%
Acc Receivable 17%Inventory 20%FIXED ASSET
Net fixed asset 30%
69%
LIABILITIESCURRENT LIABILITY
Account Payable 10%Accrued Wages 5%
15%
7/28/2019 FINANCIAL FORECASTING AND PLANNING (chapter 4).pptx
12/30
STEP 1 : RETAINED EARNING
RETAINED EARNING = [0.04 x (1-0.5) x RM 800,000]
= RM 16,000
STEP 2: FUND NEEDED BY THE COMPANY IN ORDER
TO EXPAND THEIR BUSINESSFUND NEEDED = 69% x (RM 800,000 RM 500,000) 15%
x ( RM 800,000 RM 500,000)
= 54% (RM 300,000)
= RM 162,000 STEP 3: EXTERNAL FUND NEEDED
EXTERNAL FUND NEEDED = RM 162,000 RM 16,000
= RM 146,000
7/28/2019 FINANCIAL FORECASTING AND PLANNING (chapter 4).pptx
13/30
OPERATING AT FULL CAPACITY
(USING PRO-FORMA BALANCE SHEET)
STEP 1: CALCULATE PERCENTAGE INCREASE IN SALESPERCENTAGE INCREASE IN SALES =
STEP 2: ITEM SUCH AS CURRENT ASSET AND FIXEDASSET AND CERTAIN LIABILITIES (FOR EXAMPLEACCOUNT PAYABLE AND ACCRUED EXPENSES) WILLBE INCREASE ACCORDING TO INCREASE IN SALES.THE OTHER ITEM FOR EXAMPLE CURRENT LIABILITY(NOTES PAYABLE) AND LONG TERM LIABILITY (BOND,MORTGAGE, DEBENTURE AND OTHERS) WILLREMAIN THE SAME.
7/28/2019 FINANCIAL FORECASTING AND PLANNING (chapter 4).pptx
14/30
STEP 3: CALCULATE NEW RETAINED EARNING
NEW RETAINED EARNING = OLD RETAINED
EARNING + [NET PROFIT MARGIN x RETENTIONRATIO x FORECASTED SALES]
STEP 4: THE DIFFERENCE BETWEEN ASSET,
LIABILITIES AND EQUITIES WILL BE THEEXTERNAL/ADDITIONAL FUND NEEDED
7/28/2019 FINANCIAL FORECASTING AND PLANNING (chapter 4).pptx
15/30
EXAMPLE OPERATING AT FULL
CAPACITY (USING PRO-FORMA)BALANCE SHEET OF TERAS COMPANY AS AT
31/12/94
ASSET RMCURRENT ASSETCash 10,000
Account Receivable 85,000Inventories 100,000
FIXED ASSETNet Fixed Asset 150,000
345,000
LIABILITY RM
CURRENT LIABILITYAccount Payable 50,000Accrued Wages 25,000Notes Payable 30,000Mortgage Bonds 40,000
EQUITYCommon Stock 100,000Retained Earning 100,000
345,000
7/28/2019 FINANCIAL FORECASTING AND PLANNING (chapter 4).pptx
16/30
QUESTION :
Companys sales are running at about RM
500,000 a year which is its maximumcapacity limit and the net profit marginafter tax is 4%. During 1994 the company
earned RM 20,000 after taxes and paidout RM 10,000 in dividend in the comingyears. How much additional financing
will be needed if sales expand to RM800,000 during 1995 ?
7/28/2019 FINANCIAL FORECASTING AND PLANNING (chapter 4).pptx
17/30
STEP 1 : PERCENTAGE INCREASE IN SALES
PERCENTAGE INCREASE IN SALES =
= 60%
SOLUTION
7/28/2019 FINANCIAL FORECASTING AND PLANNING (chapter 4).pptx
18/30
SOLUTION
BALANCE SHEET OF TERAS COMPANY AS AT 31/12/95ASSETS RMCURRENT ASSETS
Cash (RM 10,000 x 60%) + RM 10,000 16,000Acc Receivable(RM85,000 X 60%) + RM 85,000 136,000Inventory(RM100,00 x 60%) + RM100,000 160,000
FIXED ASSETNet fixed asset (RM150,000x60%) + RM150,000 240,000
552,000
LIABILITIES RMCURRENT LIABILITY
Account Payable (RM50,000x60%) + RM50,000 80,000Accrued Wages ( RM25,000x60%) + RM35,000 40,000Notes payable 30,000Mortgage bond 40,000Common Stock 100,000
Retained Earning 116,000
406,000EXTERNAL FUND NEEDED 146,000
552,000
7/28/2019 FINANCIAL FORECASTING AND PLANNING (chapter 4).pptx
19/30
STEP 3: NEW RETAINED EARNING
NEW RETAINED EARNING = RM100,000 +[4% x
( ) x RM 800,000]= RM 100,000 + RM16,000
= RM 116,000
7/28/2019 FINANCIAL FORECASTING AND PLANNING (chapter 4).pptx
20/30
NOT OPERATING AT FULL
CAPACITY (USING EQUATION)
Not operating at full capacity means the firm has
not reached its full (maximum) capacity limit andhence some of its assets that is fixed assets can
still be used to support the expansion. Thus, thefirm does not have to increase its fixed assets. The
increase will only be for current asset and certainliabilities (account payable and accruedexpenses).
7/28/2019 FINANCIAL FORECASTING AND PLANNING (chapter 4).pptx
21/30
EXAMPLE NOT OPERATING AT
FULL CAPACITY (USING EQUATION)BALANCE SHEET OF TERAS COMPANY AS AT
31/12/94
ASSET RMCURRENT ASSETCash 10,000
Account Receivable 85,000Inventories 100,000
FIXED ASSETNet Fixed Asset 150,000
345,000
LIABILITY RM
CURRENT LIABILITYAccount Payable 50,000Accrued Wages 25,000Notes Payable 30,000Mortgage Bonds 40,000
EQUITYCommon Stock 100,000Retained Earning 100,000
345,000
7/28/2019 FINANCIAL FORECASTING AND PLANNING (chapter 4).pptx
22/30
QUESTION :
Companys sales are running at about RM
500,000 a year which has not reached itsmaximum capacity limit and the netprofit margin after tax is 4%. During
1994 the company earned RM 20,000after taxes and paid out RM 10,000 individend in the coming years. How
much additional financing will beneeded if sales expand to RM 800,000during 1995 ?
7/28/2019 FINANCIAL FORECASTING AND PLANNING (chapter 4).pptx
23/30
SOLUTION
BALANCE SHEET OF TERAS COMPANY AS AT 31/12/94ASSETSCURRENT ASSETS
Cash x 100% 2%
Acc Receivable 17%Inventory 20%
39%
LIABILITIESCURRENT LIABILITY
Account Payable 10%Accrued Wages 5%
15%
Note: Since FIXED ASSET will not increase thus we do not calculatepercentage in FIXED ASSET
7/28/2019 FINANCIAL FORECASTING AND PLANNING (chapter 4).pptx
24/30
STEP 1 : RETAINED EARNING
RETAINED EARNING = [0.04 x (1-0.5) x RM 800,000]
= RM 16,000
STEP 2: FUND NEEDED BY THE COMPANY IN ORDER
TO EXPAND THEIR BUSINESSFUND NEEDED = 39% x (RM 800,000 RM 500,000) 15% x
( RM 800,000 RM 500,000)
= 24% (RM 300,000)
= RM 72,000 STEP 3: EXTERNAL FUND NEEDED
EXTERNAL FUND NEEDED = RM 72,000 RM 16,000
= RM 56,000
7/28/2019 FINANCIAL FORECASTING AND PLANNING (chapter 4).pptx
25/30
EXAMPLE NOT OPERATING AT FULL
CAPACITY (USING PRO-FORMA)BALANCE SHEET OF TERAS COMPANY AS AT
31/12/94
ASSET RMCURRENT ASSETCash 10,000
Account Receivable 85,000Inventories 100,000
FIXED ASSETNet Fixed Asset 150,000
345,000
LIABILITY RM
CURRENT LIABILITYAccount Payable 50,000Accrued Wages 25,000Notes Payable 30,000Mortgage Bonds 40,000
EQUITYCommon Stock 100,000Retained Earning 100,000
345,000
7/28/2019 FINANCIAL FORECASTING AND PLANNING (chapter 4).pptx
26/30
QUESTION :
Companys sales are running at about RM
500,000 a year which has not reached itsmaximum capacity limit and the netprofit margin after tax is 4%. During
1994 the company earned RM 20,000after taxes and paid out RM 10,000 individend in the coming years. How
much additional financing will beneeded if sales expand to RM 800,000during 1995 ?
7/28/2019 FINANCIAL FORECASTING AND PLANNING (chapter 4).pptx
27/30
STEP 1 : PERCENTAGE INCREASE IN SALES
PERCENTAGE INCREASE IN SALES =
= 60%
SOLUTION
7/28/2019 FINANCIAL FORECASTING AND PLANNING (chapter 4).pptx
28/30
SOLUTION
BALANCE SHEET OF TERAS COMPANY AS AT 31/12/94ASSETS RMCURRENT ASSETS
Cash (RM 10,000 x 60%) + RM 10,000 16,000Acc Receivable(RM85,000 X 60%) + RM 85,000 136,000Inventory(RM100,00 x 60%) + RM100,000 160,000
FIXED ASSETNet fixed asset 150,000
462,000
LIABILITIES RMCURRENT LIABILITY
Account Payable (RM50,000x60%) + RM50,000 80,000Accrued Wages ( RM25,000x60%) + RM35,000 40,000Notes payable 30,000Mortgage bond 40,000Common Stock 100,000
Retained Earning 116,000
406,000EXTERNAL FUND NEEDED 56,000
462,000
7/28/2019 FINANCIAL FORECASTING AND PLANNING (chapter 4).pptx
29/30
STEP 3: NEW RETAINED EARNING
NEW RETAINED EARNING = RM100,000 +[4% x
( ) x RM 800,000]= RM 100,000 + RM16,000
= RM 116,000
7/28/2019 FINANCIAL FORECASTING AND PLANNING (chapter 4).pptx
30/30
EASYRIGHT
?