Forecasting Financial Needs-13!2!2009

FORECASTING FINANCIAL NEEDS
William M. Kinai
1.1 Introduction
A financial plan is blueprint in which management analyzes a firm’s financial needs over
a duration of time and includes suggestions on how funds may be raised where necessary.
Financial plans relate to a specified time period. A financial plan could be either a short-
term or long-term plan. A short-term financial plan relates to the next 12 months. A
cash budget is an example of a short-term financial plan. A long-term plan relates to
periods longer than 12 months. This session focuses on the formulation of a long-term
plan.
1.2 Financial Planning Models

On average a financial planning model requires the following elements.
a. Sales forecast: This is a forecast of sale to be made over a duration of time in
future. This duration of time is also referred to as the planning horizon. The sales
forecast takes into consideration expected increase in the production levels over the
planning horizon.
b. Budgeted financial statements: These are financial statement (profit and loss
account and balance sheet) at the end of the planning horizon.
c. Asset requirements: This is a forecast of the investments required in capital and
working capital over the planning horizon.
d. Financial requirements: This is a proposal of how debt and equity funds will be
raised to finance investments in capital and working capital over the planning
horizon. It takes into consideration the firm’s dividend policy.
e. External funds requirement: This is an estimate of the amount of fund that is to
be raised from outside source to support the expected increases in capital and
working capital over the planning horizon.
1.3 Percentage of Sales Financial Planning Model

The percentage of sales financial planning model is a tool of long-term financial
management. This method takes into consideration the relationship between sales,
expenses, assets and liabilities.
William M. Kinai (williamkinai@yahoo.com; +254 020 2323 858) is the founder and principal of Concert Management
Consulting, a firm that provides business assessment, business planning, interim management, and executive training
services to growing businesses and nonprofit organizations in the East African region including Kenya, Uganda, Tanzania,
Rwanda, Burundi, Ethiopia, and South Sudan.
Copyright © 2009 William M. Kinai. This article may be reprinted free of charge in any publication or website provided that
the article is unedited, and that the copyright, author's bio, and contact information appears with each reproduction and/or
posting.
FORECASTING FINANCIAL NEEDS 2
1.3.1 Items That Move Proportionately to Sales

Some items move in direct proportion to sales, while others are dependent on company
policies. Company policies are strongly influence by the company’s shareholders. For
example, the cost of goods sold move in proportion to the level of sales. There is often a
direct relationship between the level of sales and additional investments in assets. A
business will need to increase investment in assets to achieve an increase in sales. Some
liability items such as trade creditors (suppliers who accept to sale to the business under
credit terms) the financing availed will be proportional to the level of sale. The higher the
sales the more the purchases and the greater will be the purchases made on credit.
1.3.2 Items Influenced by Company Policy

The company’s debt policy will influence the extent to which long term liabilities such as
leases and new bond issues will be utilized as a source of additional financing. The
company’s dividend policy will provide a guide as to the extent to which retained
earnings will be used as a source of long term financing. Further, the raising of equity
capital is at the discretion of shareholders on recommendation of management. Generally,
financing decisions are not directly related to sale but on other factors such as the
availability of found in the capital markets and the company’s polices which reflect the
preferences of shareholders.
The percentage of sales financial planning model takes into consideration the relationship
between sales and individual cost, assets and liabilities. The following is an illustration
for how the percentage of sales financial planning model can be applied in forecasting
financial needs in the context of growing businesses.
1.3.3 Percentage of Sales Financial Planning Model: Illustrated

Mwangaza Times Ltd publishes a weekly newspaper under the brand Mwangaza Times.
Mwangaza Times current circulation is 120,000 copies annually. The management of
Mwangaza Times plans to double circulation to 240,000 copies annually in next 2 years.
Mwangaza Times Ltd will purchase a new printing press from International Printing
Machines Ltd. The suppliers of the new industrial printing press will take one year to
manufacture and install the new plant. This new machine will be ready for operation on
an industrial scale on 1 January 2010. In the financial year 2010, sales are expected to
double at 240,000 copies annually. Profit and loss account for the financial year ended 31
December 2007 and balance sheet as at 31 December 2007 is presented in Exhibit 2.1a
and 2.1b.
William M. Kinai (williamkinai@yahoo.com; +254 020 2323 858) is the founder and principal of Concert Management Consulting, a
firm that provides business assessment, business planning, interim management, and executive training services to growing
businesses and nonprofit organizations in the East African region including Kenya, Uganda, Tanzania, Rwanda, Burundi, Ethiopia,
and South Sudan.
Exhibit 2.1a
Mwangaza Times Ltd.

Profit and Loss Account
for the financial year end 31 December 2008
Sh.000 Sh.000
Sales 20,000
Cost of sales and expenses -16,000
Net profits before tax 4,000
Taxes (30%) -1200
Net profits after tax 2,800
Dividend 1,400
Transferred to retained earnings 1,400
The following information is available:

a. Mwangaza Times’ cost of sales and operating expenses amount to 80 percent of
sales revenues.
b. The company faces a 30 percent tax rate.
c. The company retains half of its profits after taxes.
d. The company has issued 2,300,000 shares of Sh.10 each.
e. Noncurrent liabilities consist of amounts owing to the holders of a 12 percent
interest bond with a floating charge on the assets of the company. The bonds are
redeemable on the 31 December 2015.
f. The following items are directly proportional to the level of sale:
i. Property, plant and equipment
ii. Inventories
iii. Trade debtors
iv. Cash
v. Trade creditors
g. Directors, subject to the approval of shareholders, decide on when to raise
additional short term debt, long term debt and equity. The directors approve certain
types of current liabilities such as bank overdrafts. Thus, share capital, noncurrent
liabilities and certain types of current liabilities such as bank loans are at the
discretion of directors and shareholders. As a consequence these items will bear no
relationship with the level of sales.
h. The dividend payout and retention rate are at the discretion of the directors subject
to the approval of shareholders. Over the planning horizon both the dividend payout
and South Sudan.
Exhibit 2.1b
Mwangaza Times Ltd.

Balance Sheet
as at 31 December 2008
Sh.000
Noncurrent assets:
Property, plant and equipment 16,000
Current assets:
Inventories 10,000
Trade debtors 6,000
Cash 4,000
Total current assets 20,000
Total assets 36,000
Sh.000
Share capital 23,000
Retained earnings 1,400
Shareholders funds 24,400
Noncurrent liabilities 1,600
Current liabilities:
Trade creditors 10,000
Total equity and liabilities 36,000
and retention rates will remain at the current levels. The dividend payout and
retention rate will bear no relationship with the level of sales.
i. From the 2009 financial year all retained earnings will be invested in short-term
investments in Treasury bills. These investments will be sold to raise cash if the
company faces contingencies that were not planned for.
j. Management has proposed that 70 percent of the financing gap will be finance by
issuing new ordinary share capital. Each newly issued share will be priced at a
premium of Sh.8.20. The remaining 30 percent of the financing gap will be finance
by the issue of 13.5 percent, 10 year bonds.
and South Sudan.
Suppose that Mwangaza Times double circulation to 240,000 copies annually in 2 years
as planned, how would the company’s profit and loss account for the financial year ended
31 December 2009 look? How would the company’s balance sheet at the end of 31
December 2009 look? How would the company’s profit and loss account for the financial
year ended 31 December 2010 look? How would the company’s balance sheet at the end
of 31 December 2010 look before the financing gap is filed? What is the financing gap?
How much debt and equity should be raised? How would the company’s balance sheet at
the end of 31 December 2010 look after the financing gap is filed?
Exhibit 2.2 presents the profit and loss account of Mwangaza Times Ltd. for the financial
year ended 31 December 2009. Note that the profit and loss account for the financial year
ended 31 December 2009 in identical to that for financial year ended 31 December 2008.
The reason for this is that the production level for the financial year ended 2009 is based
on a production estimate120,000 copies , a production level that is identical to that of the
financial year ended 31 December 2008.
Exhibit 2.2
Mwangaza Times Ltd.

Profit and Loss Account
Sh.000 Sh.000
Sales 20,000
Taxes (30%) -1200
Dividend 1,400
Exhibit 2.3 presents the balance sheet of Mwangaza Times Ltd. as at 31 December 2009.
Note that the balance sheet as at 31 December 2009 includes a new asset category
“Investments” which represents retained earnings invested in short-term investments in
Treasury bills. The balance in the retained earnings account grows by the amount of
retained earnings to Sh.2,800,000.
Exhibit 2.4 presents the profit and loss account of Mwangaza Times Ltd. for the financial
year ended 31 December 2010. Note that all items in this profit and loss account are
double the figures in the profit and loss account for the financial year ended 31 December
2008. The reason for this is that the production level for the financial year ended 2010 is
and South Sudan.
Exhibit 2.3
Mwangaza Times Ltd.

Balance Sheet
Sh.000
Noncurrent assets:
Investments 1,400
Current assets:
Inventories 10,000
Trade debtors 6,000
Cash 4,000
Total assets 37,400
Sh.000
based on a production estimate 240,000 copies. Recall that in the on 1 January 2010 the
new machine will be ready for operation on an industrial scale, allowing Mwangaza
Times Ltd. to increase capacity to 240,000 copies.
As the company plans to double its sales over the next 2 years, all profit and loss items
double. This is not necessarily the case with the balance sheet items. Recall the certain
balance sheet items, namely, share capital, noncurrent liabilities and some types of
and South Sudan.
Exhibit 2.4
Mwangaza Times Ltd

Pro forma Profit and Loss Account
Sh.000 Sh.000
Sales 40,000
Taxes (30%) -2400
Dividend 2,800
current liabilities such as bank overdrafts, the dividend payout and the retention rate, are
at the discretion of directors and shareholders. These items will not bear no relationship
with the level of sales.
To prepare the balance sheet of Mwangaza Times Ltd. for the financial year ended 31
December 2010, we need to first determine the relationships between balance sheet items
and the level of sales. This information is derived from the balance sheet as at 31
December 2008. Exhibit 2.5 presents the balance sheet of Mwangaza Times Ltd. as at 31
December 2008 with the various balance sheet items being expressed as a percentage of
sales, as well as instances where a percentage of sales expression is not applicable. Where
an item bears no direct relationship with the level of sales indicate “N/A” meaning “not
applicable.” Recall that sales made in the financial year ended 31 December 2008
amounted to Sh.20,000,000.
It is expected that as the sales of Mwangaza Times increase or alternatively decrease,

property, plant and equipment, inventories, trade debtors, cash and trade creditors will
adjust to retain a percentage of sales level as presented in Figure 2.5.
Note that the total assets as a percentage of sales are 180%. This means that it is expected
the total assets employed by the company will be 180% of sales, other factors such as
level of operational efficency and technology remaining constant. Thus, if the company
wishes to increase sales, it will have to increase the investments in total assets to maintain
the total assets as a percentage of sales at a 180% level. The ratio of total assets to sales is
called the capital intensity ratio. The capital intensity ratio is higher for businesses
whose nature of production requires a relatively high investment in assets.
and South Sudan.
Exhibit 2.5
Mwangaza Times Ltd.

Balance Sheet
Percentage
Sh.000
of sales
Noncurrent assets:
Property, plant and equipment 16,000 80%
Current assets:
Inventories 10,000 50%
Trade debtors 6,000 30%
Cash 4,000 20%
Total current assets 20,000 100%
Total assets 36,000 180%
Sh.000
Share capital 23,000 N/A
Retained earnings 1,400 N/A
Shareholders funds 24,400 N/A
Noncurrent liabilities 1,600 N/A
Trade creditors 10,000 50%
Total equity and liabilities 36,000 N/A
Also note that on the equity and liabilities side of the balance sheet, the only item that has
a direct relationship with sales are the trade creditors. This is because as more credit
facilities will be “spontaneously” availed to the company as it increases its purchases of
materials. All other items on the equity and liabilities side of the balance sheet are marked
“N/A” (not applicable) because the decision to raise or retire these sources of funds is at
the discretion of directors or shareholders of the company. Therefore they do not vary
directly with sales. The investments and retained earnings have no relationship with sales.
If Mwangaza Times Ltd double its sales in 2 years to 240,000 copies annually, property,
plant and equipment, inventories, trade debtors, cash, and trade creditors are adjusted to
and South Sudan.
Exhibit 2.6
Mwangaza Times Ltd.

Pro forma Balance Sheet extract
Sh.000
Noncurrent assets:
Investments 2,800
Current assets:
Inventories 20,000
Trade debtors 12,000
Cash 8,000
Total assets 74,800
Sh.000
there new levels bearing in mind that the adjustment will be directly proportional to the
percentage of sales at 31 December 2007. Initially, no adjustments are made to share
capital, noncurrent liabilities and current liabilities such as bank overdraft. The dividend
payout and the retention rate remain unchanged.
Exhibit 2.6 show the balance sheet extract of Mwangaza Times Ltd as at 31 December
2010 before any adjustments for share capital, noncurrent liabilities and current liabilities
such as bank overdraft, which are at the discretion of management are made. Note that the
total assets and total equity and liabilities do not balance.
and South Sudan.
Exhibit 2.7
Mwangaza Times Ltd.

Sh.000
Noncurrent assets:
Investments 2,800
Current assets:
Inventories 20,000
Cash 8,000
Total assets 74,800
Sh.000
Shareholders funds 27200
External financing required 26,000
Having adjusted the items that vary with sales, and with capital, noncurrent liabilities and
current liabilities such as bank overdraft remaining unchanged, it is observed that the total
equity and liabilities amount to Sh.48,800,000. The total assets amount to Sh.74,800,000.
The difference between the total assets and the total equity and liabilities is a financing
gap that will be filled by raising external financing. The amount of external financing
required will be calculated as follows:
and South Sudan.
External financing required = Total assets - Total equity and liabilities

External financing required = Sh.74,800,000 - Sh.48,800,000
External financing required = Sh.26,000,000
Exhibit 2.7 shows the balance sheet extract of Mwangaza Times Ltd as at 31 December
2010, after indicating the amount of external financing required. On this balance sheet the
total assets and the total equity and liabilities balance.
The implication here is that if Mwangaza Times Ltd intends to double sales form Sh.20
million to Sh.40 million in three years the company will have to raise Sh.26,000,000
additional financing from external sources.
Assume that the shareholders of the company accept the proposal to bridge 70 percent of
the financing gap by issuing new ordinary share capital. Each newly issued share being
priced at a premium of Sh.8.20. The remaining 30 percent of the financing gap being
finance by the issue of 13.5 percent, 10 year bonds. The amount to be raised from the
issue of new equity and debt are as follows.
Sh.
Financing gap to be filled 26,000,000
Amount to be raise by issuing new equity 18,200,000

Amount to be raise by issuing new bonds 7,800,000
Total amount of equity and debt to be raised 26,000,000
Exhibit 2.8 presents the balance sheet of Mwangaza Times Ltd. as at 31 December 2010
assuming the external financing required is raised as approved by the shareholders.
Total amount for each new ordinary share issued:
Sh.
Par value 10.00
Share premium 8.20
Total amount for each new ordinary share issued 18.20
and South Sudan.
Exhibit 2.8
Mwangaza Times Ltd.

Sh.000
Noncurrent assets:
Investments 2,800
Current assets:
Inventories 20,000
Cash 8,000
Total assets 74,800
Sh.000
Share premium 8,200
Number of new shares issued will be calculated as follows:
= Amount to be raise by issuing new equity

Total amount for each new ordinary share issued
= Sh.18,200,000
Sh.18.20
and South Sudan.
= 1,000,000 shares
Share capital issued by 31 December 2010 is calculated as follows:
Sh.000
Share capital issued by 31 December 2008 23,000
Nominal value of 1,000,000 ordinary shares

10,000
(1,000,000 shares × Sh.10 par)
Share capital issued by 31 December 2010 33,000
Share premium is calculated as follows:
Sh.000
Sh.8.20 share premium per share on 1,000,000 ordinary

8,200
shares (1,000,000 shares × Sh.10 )
Share premium by 31 December 2010 8,200
Noncurrent liabilities are calculated as follows:
Sh.000
Bonds—12 percent, redeemable 31 December 2015 1,600
Bonds—13.5 percent, redeemable 31 December 2019 7,800
Noncurrent liabilities owing by 31 December 2010 9,400
The balance sheet presented in figure 2.6 above concludes the financial plan of the
Mwangaza Times Ltd. The following is an abbreviated financial plan of Mwangaza
Times Ltd.
and South Sudan.
Exhibit 2.9: An abbreviated financial plan of Mwangaza Times Ltd.
Mwangaza Times Ltd.

Financial Plan
2009-2010
Sales forecasts: Sh.40 million by end of 2010
Budgeted financial statements: See Exhibits 2.4 and 2.8
Asset requirements: an investment of Sh.38,800,000 in assets is

required including Sh.2,800,000 held in invests for
unplanned contingencies
Financial requirements: Management has proposed that 70 percent of the

financing gap will be finance by issuing new
ordinary share capital. Each newly issued share will
be priced at a premium of Sh.8.20. The remaining
30 percent of the financing gap will be finance by
the issue of 13.5 percent, 10 year bonds.
External funds requirement: Sh.26,000,000 to be raised by issuing 1,000,000

ordinary shares of Sh.10 par at a premiums of
Sh.8.20 per share raising Sh.18,200,000; and by
issuing 13.5 percent, 10 year bonds with a nominal
value of Sh.7,800,000.
1.4 Need for Financial Planning

It is imperative for any business embarking on an expansion initiative to carefully plan
for their financial requirements before they implement the expansion plans. Financial
planning provides perspective of the quantity of fund that will be required to achieve
strategic goals. With this quantification of financial need, concrete arrangement for
raising these funds can be made.
and South Sudan.

Forecasting Financial Needs-13!2!2009

Transféré par

Informations du document

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

Forecasting Financial Needs-13!2!2009

Transféré par

Droits d'auteur :

Formats disponibles

FORECASTING FINANCIAL NEEDS

1.2 Financial Planning Models

1.3 Percentage of Sales Financial Planning Model

1.3.1 Items That Move Proportionately to Sales

1.3.2 Items Influenced by Company Policy

1.3.3 Percentage of Sales Financial Planning Model: Illustrated

Mwangaza Times Ltd.

The following information is available:

Mwangaza Times Ltd.

Total assets 36,000

Noncurrent liabilities 1,600

Total equity and liabilities 36,000

Mwangaza Times Ltd.

Mwangaza Times Ltd.

Total assets 37,400

Noncurrent liabilities 1,600

Total equity and liabilities 37,400

Mwangaza Times Ltd

It is expected that as the sales of Mwangaza Times increase or alternatively decrease,

Mwangaza Times Ltd.

Total assets 36,000 180%

Noncurrent liabilities 1,600 N/A

Total equity and liabilities 36,000 N/A

Mwangaza Times Ltd.

Total assets 74,800

Noncurrent liabilities 1,600

Total equity and liabilities 48,800

Mwangaza Times Ltd.

Total assets 74,800

Noncurrent liabilities 1,600

External financing required 26,000

Total equity and liabilities 74,800

External financing required = Total assets - Total equity and liabilities

Amount to be raise by issuing new equity 18,200,000

Total amount for each new ordinary share issued:

Par value 10.00

Share premium 8.20

Total amount for each new ordinary share issued 18.20

Mwangaza Times Ltd.

Total assets 74,800

Noncurrent liabilities 9,400

Total equity and liabilities 74,800

Number of new shares issued will be calculated as follows:

= Amount to be raise by issuing new equity

Share capital issued by 31 December 2010 is calculated as follows:

Share capital issued by 31 December 2008 23,000

Nominal value of 1,000,000 ordinary shares

Share capital issued by 31 December 2010 33,000

Share premium is calculated as follows:

Sh.8.20 share premium per share on 1,000,000 ordinary

Share premium by 31 December 2010 8,200

Noncurrent liabilities are calculated as follows:

Bonds—12 percent, redeemable 31 December 2015 1,600

Bonds—13.5 percent, redeemable 31 December 2019 7,800

Noncurrent liabilities owing by 31 December 2010 9,400

Exhibit 2.9: An abbreviated financial plan of Mwangaza Times Ltd.

Mwangaza Times Ltd.

Sales forecasts: Sh.40 million by end of 2010

Budgeted financial statements: See Exhibits 2.4 and 2.8

Asset requirements: an investment of Sh.38,800,000 in assets is

Financial requirements: Management has proposed that 70 percent of the

External funds requirement: Sh.26,000,000 to be raised by issuing 1,000,000

1.4 Need for Financial Planning

Vous aimerez peut-être aussi