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Financial planning formulates the ways by which financial goals are to be achieved.

Types of Financial Planning:

1. 2.

Short Term Financial Planning

( Planning for Current Year )

Long term Financial Planning

( Planning for Several Years )

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Sales Forecasting : Projection of achievable sales revenue, based on historical sales data, analysis of market surveys and trends, and salespersons' estimates. Also called sales budget, it forms the basis of a business plan because the level of sales revenue affects practically every aspect of a business.

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Pro forma Statement : It is a projected statement which shows the result of operations or financial position of an entity during the particular period of time. Pro forma statements are an integral part of business planning and control. Managers use them in the decision-making process when constructing an annual budget, developing long-range plans, and choosing among capital expenditures.
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Plug Variable: It is a designated source of External Financing Needed ( EFN ) deals with any shortfall or surplus in financing & thereby brings the balance sheet in the balance.

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Simple Financial Planning Approach: In Simple Financial Planning Approach percentage of Sales is applicable on every item of Income Statement & Balance Sheet.

Note : In ( SFPA ) Plug Variable would be Dividend.

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Percentage of Sales Approach : In Percentage of Sales Approach the Percentage of Sales is applicable on every item of Income Statement & the Resources portion of Balance Sheet.

Note: Plug Variable would be Debts.

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Q The following financial statement for John & son company. INCOME STATEMENT
Sales Less: cost Taxable income Less: Tax(35%) Net income 4000 (3500) 1500 ( 525) 975

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Assets

Equities

Current Assets
Fixed Assets

8000
5000

Current Debts
Long term Debts Equity

3000
4000 6000

Total Assets

13000

Total Equities

13000

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John & sons company predicted a sale increase by 16%. It has predict that every item of balance sheet will increase by 16% as will. Create pro forma balance sheet and reconcile them what is plug variable. Assets, cost and current liabilities are proportional to sale, long term debt and equity are not. John & sons maintain a constant 30% retention ratio. Next year sales projected to increase by exactly 16% what is external financing need. What is internal growth rate when dividend pay out ration is 40% What is sustainable growth rate when dividend pay out ration is 40%

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M/S John & sons

Pro forma Income Statement, 2011

% of Sales Sales 4640 4000x1.16

Less: Costs
EBT Less: Taxes (35%) Net Income

(2900)
1740 (609) 1131

2500x1.16

1740x35%

M/s john & sons company Pro forma balance sheet , 2011 ASSETS Current assets 8000x1.16 9280 Fixed assets 6000x1.16 5800 EQUITIES Current debts 3000x1.16 3480

Long term debts 4000x1.16 4640 Equity 6000x1.16 6960

Total Assets

15080

Total Equities

15080

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Plug Variable:
Net profit from pro forma income statement less Addition to retain earning Possible dividend paid 1131 (960) 171

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M/S John & sons

Pro forma Income Statement, 2011

% of Sales Sales 4640 4000x1.16

Less: Costs
EBT Less: Taxes (35%) Net Income

(2900)
1740 (609) 1131

2500x1.16

1740x35%

M/s john & sons company Pro forma balance sheet , 2011 ASSETS Current assets 8000x1.16 9280 fixed assets 6000x1.16 5800 EQUITIES Current debts Long term debts Equity 3000x1.16 3480 5261 6339

Total Assets

15080

Total Equities

15080

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Addition to R.E
Net profit form pro forma income statement 1131 1131*30% = 339 Addition to R.E

Long Term Debt

Total Assets less: current debts & equity 3480+6339 long term debts 15080 (9819) 5261

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Plug Variable
long term debt from pro forma balance sheet 5261 less: long term debts from actual balance sheet (4000) possible long term debts borrowing 1261

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The highest level of growth achievable for a business without obtaining outside financing.
Derived by taking a company's retained earnings and dividing by total assets.

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INTERNAL GROWTH RATE

Formula: ROA*b / 1-(ROA*b) X 100

Where, ROA is
ROA= NPAT / Total Assets = 975 / 13000 ROA= 0.075 b, Addition to R.E 1-0.4 = 0.6

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I.G.R= 0.075*.6 /1-(0.075*.6) X 100 = 4.71%

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The maximum growth rate that a firm can sustain without having to increase financial leverage. The sustainable growth rate is a measure of how much a firm can grow without borrowing more money. After the firm has passed this rate, it must borrow funds from another source to facilitate growth.

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SUBSTAIN GROWTH RATE Formula: ROE*b / 1-(ROE*b) X 100

Where, ROE is
ROE= NPAT / Total S.H.E = 975 / 6000 ROE= 0.1625 b, Addition to R.E 1-0.4 = 0.6

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S.G.R = 0.1625*.6 /1-(0.1625*.6) X 100 = 10.80%

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A financial plan is a statement of what needs to be done in the future to achieve company goals.
Long-term financial planning is required to implement decisions that have long lead times. For example, if a company wants to build a factory next year, contractors probably have to be lined up this year.

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Financial plans are meant to:

Make the link between different investment proposals and the financing choices available to the firm. Help the firm work through finding the best investment and/or financing option. Help the firm avoid surprises by identifying what may happen in the future if certain events take place.

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