Financial Planning

and forecasting

KiranThapa

Financial Planning
Theprojectionofsales,income,and
assetsbasedonalternativeproduction
andmarketingstrategies,aswellasthe
determinationoftheresourcesneededto
achievetheseprojections

Financial Control
Thephaseinwhichfinancialplansare
implemented
Controldealswiththefeedback
andadjustmentprocess
requiredtoensure
adherencetoplansand
modificationofplans
becauseofunforeseenchanges

Sales Forecasts
Aforecastofafirmsunitanddollar
salesforsomefutureperiod

Sales Forecasts
Aforecastofafirmsunitandrupee
salesforsomefutureperiod
Generallybasedonrecentsalestrends
plusforecastsoftheeconomicprospects
forthenation,region,industry,andso
forth

Financial Statements
Forecasting
Oncesaleshavebeenforecasted,future
balancesheetsandincomestatementsmustbe
forecast.
Themostcommonlyusedtechniqueisthe
percentofsalesmethod.
Thismethodisalsoknownasconstantratio
method.
Stepsofforecasting

Financial Statement
forecasting contd.
Amethodofforecastingfinancial
requirementsbasedonforecasted
financialstatements

1.ForecasttheIncomeStatement
2.ForecasttheBalanceSheet
Adjustforspontaneouslygeneratedfunds

obtainedfromroutinebusinesstransactions

Forecasting Contd.
Step1:Forecastincomestatement
Step2:Forecastthebalancesheet
Step3:RaisingtheAdditionalfund
needed(AFN)
AFN=ProjectedTotalassetsProjected
liabilitiesandcapital

AFN Formula
Fundsthatafirmmustraiseexternally
throughborrowingorbysellingnew
commonorpreferredstock
Assumptions:
1.Presentassetslevelsareoptimalwith
respecttopresentsales

AFN contd.
2.Mostitemsonthebalancesheetincrease
inproportiontosalesincreases,and
3. Thefirmsprofitmarginonsales
remainsconstant.
AFN=(A*/S0)S(L*/S0)S-MS1RR

AFN contd.
Where,
A*=Assetsthataretieddirectlytosales
A*/S0=Assetsthatmustincreaseifsales
aretoincrease
L*=Liabilitiesthatincreasespontaneously

AFN contd.
L*/S0=Liabilitiesthatincreasespontaneouslyas
apercentageofsales.
S1=Totalexpectedsalesfortheyear
S0=Lastyearssales
S = Change in sales = S1 S0
M = Profit margin
RR = Retention ratio or 1 DPR

Example:
TradingCorporationssalesareexpectedtoincreasefromRs.5millionin2004toRs.6
millionin2005,orby20percent.ItsassetstotaledRs.3millionattheendof2004.
Corporationisatfullcapacity,anditsassetsmustgrowinproportiontoprojected
sales.Attheendof2004,currentliabilitiesareRs.1.5million,consistingofRs.
300,000ofaccountspayable,Rs.650,000ofnotespayable,andRs.550,000of
accruedliabilities.Theaftertaxprofitmarginisforecastedtobe5percent,andthe
forecastedretentionratiois30percent.
Required:
a. Forecastthecorporationsadditionalfundsneededforthecomingyear.
b. Whatwouldtheadditionalfundsneededbeifthecorporationsyearend2004
assetshadbeenRs.4million?Assumethatallothernumbersarethesame.Isthe
capitalintensitythesameordifferentwiththatcalculatedin(a)above?
c. Assumethatthecorporationpaysnodividends.Underthisassumptionwhatwould
betheadditionalfundsneededforthecomingyear,assumingallothernumbers
arethesame?Whytheforecastedadditionalfundisdifferentfromtheoneyou
foundin(a)above?

Example contd.
Ans:
a.340,000
b.540,000
c.130,000

Simple Linear Regression

Anestimatedregressionequationis
determinedthatprovidesanestimated
relationshipbetweenagivenassetand
sales.
Thismethodisalsousedtodescribethe
relationshipbetweendifferentestimates
ofassetsandliabilitiesandsales.

Regression contd.
Regressionequation
Y =a+bX;Where
Y =Levelofgivenassetorliabilitieswithsales
(dependentvariable)
X =Levelofsales(Independentvariable)
a =Slopeofthelinerepresentingtherelationship
betweenXandYorinterceptofregressionline.
b =Coefficientofsalesorslopeofregressionline

Regression contd.
Valueofb
b=[NXYXY]/[NX2(X)2]
Valueofa
a=Y/NbX/N