Ch.

4: Financial Forecasting,
Planning, and Budgeting

, Prentice Hall, Inc.

Financial Forecasting
1) Project sales revenues and
expenses.

Financial Forecasting
1) Project sales revenues and
expenses.
2) Estimate current assets and fixed
assets necessary to support projected
sales.

Financial Forecasting
1) Project sales revenues and
expenses.
2) Estimate current assets and fixed
assets necessary to support projected
sales.
Percent of sales forecast

Percent of Sales Method

Suppose this years sales will total
$32 million.
Next year, we forecast sales of
$40 million.
Net income should be 5% of sales.
Dividends should be 50% of
earnings.

This year
Assets
Current Assets
Fixed Assets
Total Assets
Liab. and Equity
Accounts Payable
Accrued Expenses
Notes Payable
Long Term Debt
Total Liabilities
Common Stock
Retained Earnings
Equity
Total Liab. & Equity

$8m
$16m
$24m
$4m
$4m
$1m
$6m

% of $32m
25%
50%

12.5%
12.5%
n/a
n/a
$15m

$7m
$2m

n/a
$9m
$24m

Next year
Assets
Current Assets
Fixed Assets
Total Assets
Liab. and Equity
Accounts Payable
Accrued Expenses
Notes Payable
Long Term Debt
Total Liabilities
Common Stock
Retained Earnings
Equity
Total Liab. & Equity

% of $40m
25%
50%

12.5%
12.5%
n/a
n/a
n/a

Next year
Assets
Current Assets
Fixed Assets
Total Assets
Liab. and Equity
Accounts Payable
Accrued Expenses
Notes Payable
Long Term Debt
Total Liabilities
Common Stock
Retained Earnings
Equity
Total Liab. & Equity

$10m

% of $40m
25%
50%

12.5%
12.5%
n/a
n/a
n/a

Next year
Assets
Current Assets
Fixed Assets
Total Assets
Liab. and Equity
Accounts Payable
Accrued Expenses
Notes Payable
Long Term Debt
Total Liabilities
Common Stock
Retained Earnings
Equity
Total Liab. & Equity

$10m
$20m

% of $40m
25%
50%

12.5%
12.5%
n/a
n/a
n/a

Next year
Assets
Current Assets
Fixed Assets
Total Assets
Liab. and Equity
Accounts Payable
Accrued Expenses
Notes Payable
Long Term Debt
Total Liabilities
Common Stock
Retained Earnings
Equity
Total Liab. & Equity

$10m
$20m
$30m

% of $40m
25%
50%

12.5%
12.5%
n/a
n/a
n/a

Next year
Assets
Current Assets
Fixed Assets
Total Assets
Liab. and Equity
Accounts Payable
Accrued Expenses
Notes Payable
Long Term Debt
Total Liabilities
Common Stock
Retained Earnings
Equity
Total Liab. & Equity

$10m
$20m
$30m
$5m

% of $40m
25%
50%

12.5%
12.5%
n/a
n/a
n/a

Next year
Assets
Current Assets
Fixed Assets
Total Assets
Liab. and Equity
Accounts Payable
Accrued Expenses
Notes Payable
Long Term Debt
Total Liabilities
Common Stock
Retained Earnings
Equity
Total Liab. & Equity

$10m
$20m
$30m
$5m
$5m

% of $40m
25%
50%

12.5%
12.5%
n/a
n/a
n/a

Next year
Assets
Current Assets
Fixed Assets
Total Assets
Liab. and Equity
Accounts Payable
Accrued Expenses
Notes Payable
Long Term Debt
Total Liabilities
Common Stock
Retained Earnings
Equity
Total Liab. & Equity

$10m
$20m
$30m
$5m
$5m
$1m

% of $40m
25%
50%

12.5%
12.5%
n/a
n/a
n/a

Next year
Assets
Current Assets
Fixed Assets
Total Assets
Liab. and Equity
Accounts Payable
Accrued Expenses
Notes Payable
Long Term Debt
Total Liabilities
Common Stock
Retained Earnings
Equity
Total Liab. & Equity

$10m
$20m
$30m
$5m
$5m
$1m
$6m

% of $40m
25%
50%

12.5%
12.5%
n/a
n/a
n/a

Next year
Assets
Current Assets
Fixed Assets
Total Assets
Liab. and Equity
Accounts Payable
Accrued Expenses
Notes Payable
Long Term Debt
Total Liabilities
Common Stock
Retained Earnings
Equity
Total Liab. & Equity

$10m
$20m
$30m
$5m
$5m
$1m
$6m

% of $40m
25%
50%

12.5%
12.5%
n/a
n/a
$17m
n/a

Next year
Assets
Current Assets
Fixed Assets
Total Assets
Liab. and Equity
Accounts Payable
Accrued Expenses
Notes Payable
Long Term Debt
Total Liabilities
Common Stock
Retained Earnings
Equity
Total Liab. & Equity

$10m
$20m
$30m
$5m
$5m
$1m
$6m

% of $40m
25%
50%

12.5%
12.5%
n/a
n/a
$17m

$7m

n/a

Predicting Retained Earnings

Next years projected retained earnings = last
years $2 million, plus:

Predicting Retained Earnings

Next years projected retained earnings = last
years $2 million, plus:
projected
sales

net income
x
sales

(1

cash dividends
- net income )

Predicting Retained Earnings

Next years projected retained earnings = last
years $2 million, plus:
projected
sales

net income
x
sales

$40 million x

.05

(1
x

cash dividends
- net income )

(1 - .50)

Predicting Retained Earnings

Next years projected retained earnings = last
years $2 million, plus:
projected
sales

net income
x
sales

$40 million x

.05

(1
x

cash dividends
- net income )

(1 - .50)

= $2 million + $1 million = $3million

Next year
Assets
Current Assets
Fixed Assets
Total Assets
Liab. and Equity
Accounts Payable
Accrued Expenses
Notes Payable
Long Term Debt
Total Liabilities
Common Stock
Retained Earnings
Equity
Total Liab. & Equity

$10m
$20m
$30m
$5m
$5m
$1m
$6m

% of $40m
25%
50%

12.5%
12.5%
n/a
n/a
$17m

$7m
$3m

n/a

Next year
Assets
Current Assets
Fixed Assets
Total Assets
Liab. and Equity
Accounts Payable
Accrued Expenses
Notes Payable
Long Term Debt
Total Liabilities
Common Stock
Retained Earnings
Equity
Total Liab. & Equity

$10m
$20m
$30m
$5m
$5m
$1m
$6m

% of $40m
25%
50%

12.5%
12.5%
n/a
n/a
$17m

$7m
$3m

n/a
$10m

Next year
Assets
Current Assets
Fixed Assets
Total Assets
Liab. and Equity
Accounts Payable
Accrued Expenses
Notes Payable
Long Term Debt
Total Liabilities
Common Stock
Retained Earnings
Equity
Total Liab. & Equity

$10m
$20m
$30m
$5m
$5m
$1m
$6m

% of $40m
25%
50%

12.5%
12.5%
n/a
n/a
$17m

$7m
$3m

n/a
$10m
$27m

Next year
Assets
Current Assets
Fixed Assets
Total Assets
Liab. and Equity
Accounts Payable
Accrued Expenses
Notes Payable
Long Term Debt
Total Liabilities
Common Stock
Retained Earnings
Equity
Total Liab. & Equity

$10m
$20m
$30m
$5m
$5m
$1m
$6m

% of $40m
25%
50%

12.5%
How
much
12.5%
Discretionary
n/a
Financing
n/a
$17m

$7m
$3m
$10m
$27m

will we
Need?
n/a

Next year
Assets
Current Assets
Fixed Assets
Total Assets
Liab. and Equity
Accounts Payable
Accrued Expenses
Notes Payable
Long Term Debt
Total Liabilities
Common Stock
Retained Earnings
Equity
Total Liab. & Equity

$10m
$20m
$30m
$5m
$5m
$1m
$6m

% of $40m
25%
50%

12.5%
How
much
12.5%
Discretionary
n/a
Financing
n/a
$17m

$7m
$3m
$10m
$27m

will we
Need?
n/a

Next year
Assets
Current Assets
Fixed Assets
Total Assets
Liab. and Equity
Accounts Payable
Accrued Expenses
Notes Payable
Long Term Debt
Total Liabilities
Common Stock
Retained Earnings
Equity
Total Liab. & Equity

$10m
$20m
$30m
$5m
$5m
$1m
$6m

% of $40m
25%
50%

12.5%
How
much
12.5%
Discretionary
n/a
Financing
n/a
$17m

$7m
$3m
$10m
$27m

will we
Need?
n/a

Predicting Discretionary
Financing Needs

Predicting Discretionary
Financing Needs
Discretionary Financing Needed =

Predicting Discretionary
Financing Needs
Discretionary Financing Needed =
projected
total
assets

projected
total
liabilities

projected
owners
equity

Predicting Discretionary
Financing Needs
Discretionary Financing Needed =
projected
total
assets

projected
total
liabilities

projected
owners
equity

$30 million -

$17 million - $10 million

Predicting Discretionary
Financing Needs
Discretionary Financing Needed =
projected
total
assets

projected
total
liabilities

projected
owners
equity

$30 million -

$17 million - $10 million

= $3 million in discretionary financing

Sustainable Rate of Growth

Sustainable Rate of Growth

g* = ROE (1 - b)

where

Sustainable Rate of Growth

g* = ROE (1 - b)

where

b = dividend payout ratio

(dividends / net income)

Sustainable Rate of Growth

g* = ROE (1 - b)

where

b = dividend payout ratio

(dividends / net income)
ROE = return on equity
(net income / common equity) or

Sustainable Rate of Growth

g* = ROE (1 - b)

where

b = dividend payout ratio

(dividends / net income)
ROE = return on equity
(net income / common equity) or
net income
sales
ROE = sales
x assets

assets
x common equity

Budgets
Budget: a forecast of future events.

Budgets
Budgets indicate the amount and
timing of future financing needs.
Budgets provide a basis for taking
corrective action if budgeted and
actual figures do not match.
Budgets provide the basis for
performance evaluation.

WORKSEET________________________ _ DCT___________________________________
Sales
55,000
Collections;
First month (30%)
Second month (70%)
Total collections
Purchases (60% of next months sales)
Payments (one-month lag)
CASH
BUDGET______________________________________________________________
Cash receipt
Collections (see above)
CASH
DISBURSEMENTS______________________________________________________
Purchases
Wages and salaries
Rent
other expenses
Interest expenses on existing debt
Taxes
Purchases of equipment
Loan repayment
Total disbursements___________________________________________________________
Net monthly change
Plus: beginning cash balance
Less: interest on short-term borrowing
Equals: ending cash balance before
short term borrowing
Financing needed (a)
Ending cash balance__________________________________________________________

WORKSEET________________________ _ OCT__________ NOVEMBER____ DECEMBER _____

Sales
55,000
$62,000
$50,000
Collections;
First month (30%)
Second month (70%)
Total collections
Purchases (60% of next months sales)
$30,000
Payments (one-month lag)
CASH
BUDGET______________________________________________________________________
Cash receipt
Collections (see above)
CASH DISBURSEMENTS_____________________________________________________________
Purchases
Wages and salaries
Rent
other expenses
Interest expenses on existing debt
Taxes
Purchases of equipment
Loan repayment
Total
disbursements___________________________________________________________________
Net monthly change
Plus: beginning cash balance
Less: interest on short-term borrowing
Equals: ending cash balance before
short term borrowing
Financing needed (a)
Ending cash balance__________________________________________________________________

WORKSEET________________________ _ DCT__________ NOVEMBE________ DECEMBER____

Sales
55,000
$62,000
$50,000
Collections;
First month (30%)
$18,600
Second month (70%)
$38,500
Total collections
$57,100
Purchases (60% of next months sales)
$30,000
$36,000
Payments (one-month lag)
$30,000
CASH BUDGET______________________________________________________________________
Cash receipt
Collections (see above)
$57,100
CASH DISBURSEMENTS_____________________________________________________________
Purchases
$30,000
Wages and salaries
Rent
other expenses
Interest expenses on existing debt
Taxes
Purchases of equipment
Loan repayment
Total disbursements___________________________________________________________________
Net monthly change
Plus: beginning cash balance
Less: interest on short-term borrowing
Equals: ending cash balance before
short term borrowing
Financing needed (a)
Ending cash balance__________________________________________________________________
Cumulative borrowing_________________________________________________________________

WORKSEET______________________ DCT____ NOVEMBE________ DECEMBER____ JANUARY_______

Sales
$55,000
$62,000
$50,000
$60,000
Collections;
First month (30%)
$18,600
$15,000
Second month (70%)
$38,50
$43,400
Total collections
$57,100
$58,400
Purchases (60% of next months sales)
$30,000
$36,000
$48,000
Payments (one-month lag)
$30,000
$36,000
CASH BUDGET_____________________________________________________________________________
Cash receipt
Collections (see above)
$57,100
$58,400
CASH DISBURSEMENTS_____________________________________________________________________
Purchases
$30,000
$36,000
Wages and salaries
$4,000
Rent
$3,000
other expenses
$1,000
Interest expenses on existing debt
$4,000
Taxes
Purchases of equipment
$10,000 (capital
budgeting)
Loan repayment
Total disbursements__ _________________________________________________________ $58,000_______
Net monthly change
Plus: beginning cash balance
Less: interest on short-term borrowing
Equals: ending cash balance before
short term borrowing
Financing needed (a)
Ending cash balance_________________________________________________________________________
Cumulative borrowing________________________________________________________________________

WORKSEET_____________________DCT___ NOV____ DEC___ JAN__________________

Sales
$55,000 $62,000 $50,000 $60,000
Collections;
First month (30%)
$18,600 $15,000
Second month (70%)
$38,50 $43,400
Total collections
$57,100 $58,400
Purchases (60% of next months sales)
$30,000 $36,000 $48,000
Payments (one-month lag)
$30,000 $36,000
CASH BUDGET__________________________________________________________________
Cash receipt
Collections (see above)
$57,100 $58,400
CASH DISBURSEMENTS__________________________________________________________
Purchases
$30,000 $36,000
Wages and salaries
$4,000
Rent
$3,000
other expenses
$1,000
Interest expenses on existing debt
$4,000
Taxes
Purchases of equipment
$10,000 (capital budgeting)
Loan repayment
Total disbursements__ ___________________________________ $58,000__________________
Net monthly change
$400
Plus: beginning cash balance
$10,000
Less: interest on short-term borrowing
0______
Equals: ending cash balance before
$10,400
short term borrowing
Financing needed (a)
$0
Ending cash balance ____________________________________$10,400__________________
Cumulative borrowing_____________________________________0________________________

WORKSEET_____________________DCT___ NOV____ DEC___ JAN______FEB_______

Sales
$55,000 $62,000 $50,000 $60,000
$80,000
Collections;
First month (30%)
$18,600 $15,000
$18,000
Second month (70%)
$38,50 $43,400
$35,000
Total collections
$57,100 $58,400
$53,000
Purchases (60% of next months sales)
$30,000 $36,000 $48,000
$51,000
Payments (one-month lag)
$30,000 $36,000
$48,000
CASH BUDGET_______________________________________________________________
Cash receipt
Collections (see above)
$57,100 $58,400
$53,000
CASH DISBURSEMENTS_______________________________________________________
Purchases
$30,000 $36,000
$48,000
Wages and salaries
$4,000
$5,000
Rent
$3,000
$3,000
other expenses
$1,000
$500
Interest expenses on existing debt
$4,000
Taxes
Purchases of equipment
(capital budgeting) $10,000
Loan repayment
Total disbursements__ ___________________________________ $58,000__ $56,500____
Net monthly change
$400
$(3,500)
Plus: beginning cash balance
$10,000
$10,400
Less: interest on short-term borrowing
0______
0______
Equals: ending cash balance before
$10,400
$6,900
short term borrowing
Financing needed (a)
$0
$3,100
Ending cash balance ____________________________________$10,400__ $10,000____
Cumulative borrowing_____________________________________0_______
3,100______

WORKSEET_____________________DCT___ NOV____ DEC___ JAN______FEB_____ MARCH

Sales
$55,000 $62,000 $50,000 $60,000
$80,000 $85,000
Collections;
First month (30%)
$18,600 $15,000
$18,000
$24,000
Second month (70%)
$38,50 $43,400
$35,000
$42,000
Total collections
$57,100 $58,400
$53,000
$66,000
Purchases (60% of next months sales)
$30,000 $36,000 $48,000
$51,000
$42,000
Payments (one-month lag)
$30,000 $36,000
$48,00_
$51,000
CASH BUDGET_____________________________________________________________________
Cash receipt
Collections (see above)
$57,100 $58,400
$53,000
$66,000
CASH DISBURSEMENTS_____________________________________________________________
Purchases
$30,000 $36,000
$48,000
$51,000
Wages and salaries
$4,000
$5,000
$6,000
Rent
$3,000
$3,000
$3,000
other expenses
$1,000
$500
$1,200
Interest expenses on existing debt
$4,000
$200
Taxes
$5,200
Purchases of equipment
(capital budgeting) $10,000
Loan repayment
$8,000
Total disbursements__ ___________________________________ $58,000__ $56,500
$74,600
Net monthly change
$400
$(3,500) $(8,600)
Plus: beginning cash balance
$10,000
$10,400
Less: interest on short-term borrowing
0______
0______
Equals: ending cash balance before
$10,400
$6,900
short term borrowing
Financing needed (a)
$0
$3,100
Ending cash balance ____________________________________$10,400__ $10,000
Cumulative borrowing_____________________________________0_______
3,100____

$10,000
31_____
$1,369
$8,631
$10,000_
11,731__

WORKSEET_____________________DCT___ NOV____ DEC___ JAN______FEB_____ MARCH__ APRIL

Sales
$55,000 $62,000 $50,000 $60,000
$80,000 $85,000
$70,000
Collections;
First month (30%)
$18,600 $15,000
$18,000
$24,000
$25,500
Second month (70%)
$38,50 $43,400
$35,000
$42,000
$56,000
Total collections
$57,100 $58,400
$53,000
$66,000
$81,500
Purchases (60% of next months sales)
$30,000 $36,000 $48,000
$51,000
$42,000
$39,000
Payments (one-month lag)
$30,000 $36,000
$48,00_
$51,000
$42,000
CASH BUDGET_____________________________________________________________________
Cash receipt
Collections (see above)
$57,100 $58,400
$53,000
$66,000
$81,500
CASH DISBURSEMENTS_____________________________________________________________
Purchases
$30,000 $36,000
$48,000
$51,000
$42,000
Wages and salaries
$4,000
$5,000
$6,000
$4,000
Rent
$3,000
$3,000
$3,000
$3,000
other expenses
$1,000
$500
$1,200
$1,500
Interest expenses on existing debt
$4,000
$200
Taxes
$5,200
Purchases of equipment
(capital budgeting) $10,000
Loan repayment
$8,000
Total disbursements__ ___________________________________ $58,000__ $56,500
$74,600
$50,500
Net monthly change
$400
$(3,500) $(8,600) $31,000
Plus: beginning cash balance
Less: interest on short-term borrowing
Equals: ending cash balance before
short term borrowing
Financing needed (a)

$10,000
0______
$10,400

$10,400
0______
$6,900

$10,000
31_____
$1,369

$10,000
$117__
$40,883

$0

$3,100

$8,631

$(11,731)

Ending cash balance ____________________________________$10,400__

Cumulative borrowing_____________________________________0_______

$10,000
$10,000__ $29,152
3,100____ 11,731______0____

WORKSEET_____________________DCT___ NOV____ DEC___ JAN______FEB_____ MARCH__ APRIL

Sales
$55,000 $62,000 $50,000 $60,000
$80,000 $85,000
$70,000
Collections;
First month (30%)
$18,600 $15,000
$18,000
$24,000
$25,500
Second month (70%)
$38,50 $43,400
$35,000
$42,000
$56,000
Total collections
$57,100 $58,400
$53,000
$66,000
$81,500
Purchases (60% of next months sales)
$30,000 $36,000 $48,000
$51,000
$42,000
$39,000
Payments (one-month lag)
$30,000 $36,000
$48,00_
$51,000
$42,000
CASH BUDGET_____________________________________________________________________
Cash receipt
Collections (see above)
$57,100 $58,400
$53,000
$66,000
$81,500
CASH DISBURSEMENTS_____________________________________________________________
Purchases
$30,000 $36,000
$48,000
$51,000
$42,000
Wages and salaries
$4,000
$5,000
$6,000
$4,000
Rent
$3,000
$3,000
$3,000
$3,000
other expenses
$1,000
$500
$1,200
$1,500
Interest expenses on existing debt
$4,000
$200
Taxes
$5,200
Purchases of equipment
(capital budgeting) $10,000
Loan repayment
$8,000
Total disbursements__ ___________________________________ $58,000__ $56,500
$74,600
$50,500
Net monthly change
$400
$(3,500) $(8,600) $31,000
Plus: beginning cash balance
Less: interest on short-term borrowing
Equals: ending cash balance before
short term borrowing
Financing needed (a)

$10,000
0______
$10,400

$10,400
0______
$6,900

$10,000
31_____
$1,369

$10,000
$117__
$40,883

$0

$3,100

$8,631

$(11,731)

Ending cash balance ____________________________________$10,400__

Cumulative borrowing_____________________________________0_______

$10,000
$10,000__ $29,152
3,100____ 11,731______0____

WORKSEET_______________________DCT______NOV____DEC______ JAN_
Sales
55,000 $62,000
$50,000
$60,000
30%
Collect
70% 30% $18,600
First month (30%)
$15,000
Second month (70%)
$38,500 70% $43,400
Total collections
$57,100
$58,400
Purchases (60% of next months sales)
$30,000
$36,000
$48,000
Payments (one-month lag)
$30,000
CASH BUDGET_______________________________________________________
Cash receipt
Collections (see above)
CASH DISBURSEMENTS_______________________________________________
Purchases
Wages and salaries
Rent
other expenses
Interest expenses on existing debt
Taxes
Purchases of equipment
Loan repayment
Total disbursements_______________________________________________

JAN
FEB
$400
$(3,500)
10,000
10,400
0
0
10,400
6,900

MARCH
$(8,600)
10,000
31
1,369

APRIL
$31,000
10,000
117
40,883

Net monthly change

Plus: beginning cash balance
Less: interest on short-term borrowing
Equals: ending cash balance before
short term borrowing
Financing needed (a)
0
3,100
8,631
(11,731)
Ending cash balance_______________10,400____10,000____10,000____29,152__
Cumulative borrowing__________________0_____3,100_____11,731_______0___