CHAPTER 14:

FINANCIAL
FORECASTING

GROUP 1
AGARAP, Elyza Nichole CIPRES, Lorenzo
BRIONES, John Roy SURBAN, Quendrick Keith
YAOTO, John
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TABLE OF CONTENTS
A. TERMS AND CONCEPTS ____________________________ 3
Financial Forecasting____________________________________________3
Importance of Financial Forecasting ________________________________3
Steps in Financial Forecasting_____________________________________3

B. PROBLEM 1: ETC Electronics Company _________________ 4

Requirements _________________________________________________4
Given Data and other information __________________________________4
Solutions and Computations ______________________________________5

C. PROBLEM 2: ODETTE ELECTRONICS__________________ 7

Requirement: __________________________________________________7
Given data and Information ____________________________________7
Solutions and Computation _______________________________________8

PROBLEM 3: TESS’ SHOP ______________________________ 9

Requirement __________________________________________________9
Given Data and Information _______________________________________9
Solutions and computations______________________________________10
Answer and Analysis for requirement (a) ____________________________10
Answer and Analysis for requirement (b) ____________________________11
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A. TERMS AND CONCEPTS

Financial Forecasting
“An estimated financial plan or a financial budget for a
given period of time”-enotes.com

Importance of Financial Forecasting

1. Allows the company to PLAN AHEAD.
2. Gives the company an IDEA OF WHAT THEY ARE GOING TO NEED.

Steps in Financial Forecasting

1. FORECAST THE STATEMENT OF COMPREHENSIVE INCOME
 Preparation of sales, costs and expense projections of the company- it may be
based on past operating trends or other internal company information.
2. FORECAST THE STATEMENT OF FINANCIAL POSITION
 Projecting the ASSETS, LIABILITIES and EQUITY that will be affected due to
forecasts in the Statement of Comprehensive Income; Additional Funds Needed
is determined.
3. RAISING THE ADDITIONAL FUNDS
 Consideration of different financial decisions based on the output of the
projections made.
4. CONSIDER FINANCING FEEDBACKS
 Evaluating and analyzing the methods used for obtaining additional funds.

WHAT DO YOU DETERMINE IN FINANCIAL FORECASTING?

1. Money that the firm will NEED

2. Money that the company will PRODUCE

3. Additional money that the firm will REQUIRE

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B. PROBLEM 1: ETC ELECTRONICS

COMPANY
Requirements
(A) Monthly Cash Receipts
(B) Monthly Cash Payments
(C) Complete Monthly Cash Budget

Given Data and other information

APRIL- SEPTEMBER (Actual/Forecasted) Sales and Purchases

Sales Purchases
April Actual ₱320,000 ₱130,000
May Actual 300,000 120,000
June Forecast 275,000 120,000
July Forecast 275,000 180,000
August Forecast 290,000 200,000
September Forecast 330,000 170,000

SALES: 10% Cash Sale, 90% Credit Sale OTHERS:

-Credit Sales: 20% collectible this month -20,000 cash balance on May
80% collectible next month -10,000 min. cash balance

PURCHASES: 40% payment for the next -50,000 max cash balances
*Excess Cash is used to buy Marketable
month
Securities
60% payment for the next 2 months
*Marketable Securities are sold before
EXPENSES:
borrowing funds in case of a cash
Labor Exp.: 10% of current sales
shortfall (Less than 10,000)
Overhead Exp.: 12,000 / month
Interest Payment: 30,000 (due on Jun. and Sept.)
Cash Dividend: 50,000 on Jun.
Tax Payment: 25,000 (due on Jun. and Sept.)
Capital Outlay: 300,000 on Sept.
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Solutions and Computations

(A) Monthly Cash Receipts (Table 1)
April May June July Aug. Sept.
Sales P320,000 P300,000 P275,000 P275,000 P290,000 P330,000
Add: Cash Sales (10%) 32,000 30,000 27,500 27,500 29,000 33,000

Credit Sales (90%) 288,000 270,000 247,500 247,500 261,000 297,000

Add:
Collections (month
after sale) 20% 57,600 54,000 49,500 49,500 52,200

Collections (second
Add:
month after sale) 80%
230,400 216,000 198,000 198,000

Total Cash
Receipts P311,900 P293,000 P276,500 P238,200

(B) Monthly Cash Payments (Table 2)

April May June July Aug. Sept.
Purchases P130,000 P120,000 P120,000 P180,000 P200,000 P170,000

Payments (month after

Add
purchase - 40%) 52,000 48,000 48,000 72,000 80,000

Payments (second
month after purchase -
60%) 78,000 72,000 72,000 108,000

Add
Labor Expense (10%
of sales) 27,500 27,500 29,000 33,000

Overhead 12,000 12,000 12,000 12,000

Interest Payments 30,000 30,000

Cash Dividend 50,000

Taxes 25,000 25,000

Capital Outlay 300,000

Total Cash
P270,500 P159,500 P185,000 P588,000
Payments
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(C) Monthly Cash Budget (Table 3)

June July August September
Cash Receipts (see table 1) P311,900 P293,000 P276,500 P283,200

Less: Cash Payments (see table 2) 270,500 159,500 185,000 588,000

Net Cash Flow 41,400 133,500 91,500 (304,800)

Add Beginning Cash Balance 20,000 50,000 50,000 50,000

Cumulative Cash Balance 61,400 183,500 141,500 (254,800)

For Monthly Borrowing or
Sept. -- -- -- *28,400
(Repayment)
Add Cumulative Loan Balance -- -- -- 28,400
Marketable Securities
Less 11,400 133,500 91,500
Purchased
Less Marketable Securities (Sold) -- -- (236,400)
Cumulative Marketable
11,400 144,900 236,400
Securities
Ending Cash Balance 50,000 50,000 50,000 10,000

*COMPUTATION FOR
MONTHLY BORROWING/
REPAYMENT
Cumulative Marketable Sec. P236,400
(Aug.)
Cumulative Cash Balance - 254,800
(Sept.)
Required (ending) Cash - 10,000
Balance
Monthly Borrowing - P28,400
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C. PROBLEM 2: ODETTE ELECTRONICS

Requirement:
Determine how much new funds are needed to finance the growth in sales.

Given data and Information

Odette Electronics
Statement of Financial Position
As of year-end XXXX
(In P Millions)
Assets Liabilities and Equity
Cash P2 Accounts payable P15
Accounts Receivable 20 Accrued Wages 2
Inventory 23 Accrued Taxes 8
Current Assets 45 Current Liabilities 25
Fixed Assets 40 Notes payable 10
Ordinary Shares 15
Retained Earnings 35

Total Assets 85 Total Liabilities and Equity 85

100 Million last year’s sales

7% After-tax profit Margin
40% Dividend payout ratio
10% sales growth next year

NOTE:
1. The Statement of financial position at year-end is similar in percentage
of sales to that of previous years
2. All Assets (including fixed assets) and current liabilities will vary directly
with sales
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Solutions and Computation

STEP 1: Identifying the formula

ADDITIONAL Required Spontaneous Increase in

FUNDS Increase in increase in retained

NEEDED assets liabilities earnings

Changes in Changes in
Sales Sales Earnings after
X X taxes less
(Current (Current Dividend
Assets-present/ Liabilities- Payment
Sales-present) present/ Sales-
present)

STEP 2: Compute for the change in Sales

Change in Sales = 100,000,000 X 10% sales growth

=P 10,000,000

STEP 3: Substitute all necessary information to get the answer

ADDITIONAL 85 Mil. 25 Mil. 110,000,000 X

X 10 Mil X 10 Mil
FUNDS 100 Mil. 7% X (1-.40)
100 Mil.
NEEDED

.85(P10,000,000) .25(P10,000,000) .07(P110,000,000) X

(.60)

P1,380,000
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PROBLEM 3: TESS’ SHOP

Requirement
(A) Will external financing be required for the company during the year
(B) What would be the need for external financing if the net profit margin went up to 9.5
percent and the dividend payout ratio was increased to 50%

Given Data and Information

Tess’ Shop Inc.
Statement of Financial Position
As of year-end XXXX
(In P Millions)
Assets Liabilities and Equity
Cash P20 Accounts payable P70
Accounts Receivable 25 Accrued expenses 20
Inventory 75 Other Payables 30
Current Assets 120 Current Liabilities 120
Fixed Assets 120
Ordinary Shares 40
Retained Earnings 80

Total Assets P240 Total Liabilities and Equity P240

300 Million last year’s sales

8% Net profit Margin

25% Dividend payout ratio

15% sales growth next year
NOTE:
1. The Statement of financial position are expected to maintain the same percent-
of-sales as last year, EXCEPT for ordinary shares and retained earnings
2. No change is scheduled in the number of ordinary shares outstanding and
retained earnings will change as dictated by the profits and dividend policy of the
firm
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Solutions and computations

Requirement (A)

STEP 1: Identifying the formula (See formula from previous problem)

STEP 2: Compute for the change in Sales

Change in Sales = 300,000,000 X 15% sales growth

=P 45,000,000

STEP 3: Substitute all necessary information to get the answer

ADDITIONAL 240 Mil. 120 Mil. 345,000,000 X

X 45 Mil X 45 Mil
FUNDS 300 Mil. 8% X (1-.25)
300 Mil.
NEEDED

.80(P45,000,000) .40(P45,000,000) .07(P345,000,000) X

(.75)

(P2,700,000)

Answer and Analysis for requirement (a)

Since the Additional funds needed showed a negative outcome, such output indicates that there
are excess funds amounting to P2,700,000 which can be used as funds for new investments.
Thus, it can be concluded that since the company has enough funds, the company would no
longer need any external funding.
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Requirement (B)

STEP 1: Identifying the formula (See formula from previous problem)

STEP 2: Compute for the change in Sales

Change in Sales = 300,000,000 X 15% sales growth

=P 45,000,000

STEP 3: Substitute all necessary information to get the answer

ADDITIONAL 240 Mil. 120 Mil. 345,000,000 X

X 45 Mil X 45 Mil
FUNDS 300 Mil. 9.5% X (1-0.50)
300 Mil.
NEEDED

.80(P45,000,000) .40(P45,000,000) .095(P345,000,000)

X (0.50)

P1,612,500

Answer and Analysis for requirement (b)

Since this scenario resulted into a positive outcome, this would indicate that the company
would need external funding in order to finance the said projected assumptions. This sudden
increase may be due to the 25% increase in dividend pay-out ratio which is greater than the
increase in net profit margin of only 1.5%. Thus, though net profit margin increased, the
drastic increase in dividend pay-out overwhelmed the beneficial inflows from change in net
profit margin.