UNIVERSITY OF BOHOL

PROFESSIONAL STUDIES

FINANCIAL FORECASTING AND PLANNING

August 17, 2022

Report submitted to:

Dr. AMMON DENIS R. TIROL, DM, CPA
as partial fulfillment of the requirements in
BA204 – FINANCIAL MANAGEMENT
Summer AY 2021-2022

KEZIAH REVE B. RODRIGUEZ

MASTER OF SCIENCE IN BUSINESS ADMINISTRATION
Financial Forecasting and Planning
BA204 Financial Management
University of Bohol Graduate School and Professional Studies

Table of Contents
Chapter Outline 3
Relevant Terms used in this Chapter 3
Financial Planning – an Overview 3
Developing a Long-Term Financial Plan 4
Sources of Spontaneous Financing – Accounts Payable and Accrued Expenses 7
Sources of Discretionary Financing 7
Summarizing SureBuy’s Financial Forecast 7
Developing a Short-Term Financial Plan 9
Uses of Cash Budget 11
References 13

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Financial Forecasting and Planning
BA204 Financial Management
University of Bohol Graduate School and Professional Studies

Chapter Outline

1. An overview of Financial Planning

a. Understand the goals of financial planning
2. Developing a Long-term Financial Plan
a. Use the percent-of-sales method to forecast the financial requirements of a
firm, including its discretionary financing needs
3. Developing a Short-term Financial Plan
a. Prepare a cash budget and use it to evaluate the amount and timing of a
firm’s short-term financing requirements

Relevant Terms used in this Chapter

• Cash Budget – a plan for a future period that details the sources of cash a firm
anticipates receiving and the amounts and timing of cash it plans to spend
• Long-term Financial Plan – a detailed estimate of a firm’s sources and uses of
financing for a period that extends three to five years into the future
• Short-term Financial Plan – a forecast of a firm’s sources of cash and planned
uses of cash spanning the next 12 months or less
• Strategic Plan – a general description of the firm, its products and services, and
how it plans to compete with other firms in order to sell those products and services
• Discretionary Financing Needs (DFN) – the total amount of financing a firm
estimates it will need for a future period that will not be funded by the retention of
earnings or by increases in the firm’s accounts payable and accrued expenses
• Discretionary Sources of Financing – sources of financing that require explicit
action by the firm’s management
• Percent-of-sales Method – a financial forecasting technique that uses the portion
of the item being forecasted to the level of firm sales as the basis for predicting the
future level of the item
• Pro-forma Balance Sheet – a forecast of each of the elements of a firm’s income
statement
• Sources of Spontaneous Financing – sources of financing that arise automatically
out of changes in the firm’s sales

Financial Planning – an Overview

Financial planning is the process of estimating the capital required and determining
its competition. It is the process of framing financial policies in relation to procurement,
investment, and administration of funds of an enterprise (Financial Planning - Definition,
Objectives and Importance, n.d.).

The primary objective of preparing financial plans is to estimate the future financing
requirements in advance of when the financing will be needed. The process of planning is

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Financial Forecasting and Planning
BA204 Financial Management
University of Bohol Graduate School and Professional Studies

critical to force managers to think systematically about the future despite the uncertainty of
the future.

Key Terms:

• Most firms engage in three types of planning:

o Strategic Planning – how the firm plans to make money in the future. This
serves as a guide for all other plans
o Long-term Financial Plan – encompasses a period of three to five years
and incorporates estimates of the firm’s income statements and balance
sheets for each year of the planning horizon
o Short-term Financial Plan – spans a period of one year or less and is a
very detailed description of the firm’s anticipated cash flows
• The format of a financial plan typically is in a form of a cash budget which contains
detailed revenue projections and expenses in the month in which they are expected
to occur for each operating unit of the company
• Financial plan is used as the base plan that is consistent with the firm’s long-term
goals and strategy. The planning process is more than the actual plan that helps
firm prepare for an uncertain future.

Objectives of Financial Planning

Financial Planning has got many objectives to look forward to including:

a. Determining capital requirements – capital requirements must be looked with both
aspects of short-term and long-term requirements
b. Determining capital structure – includes decisions of debt-to-equity ratio both for
short-term and long-term
c. Framing financial policies with regards to cash control, lending, borrowings, etc.
d. A finance manager ensures that the scarce financial resources are maximally
utilized in the best possible manner at least cost to get maximum returns on
investment

Developing a Long-Term Financial Plan

Forecasting a firm’s future financing needs using a long-term financial plan can be
thought of in terms of three basic steps:

1. Construct a sales forecast

2. Prepare pro-forma financial statements
3. Estimate the firm’s financing needs

Sales Forecast

The process of estimating future revenues by predicting the amount of product or

services of a sale unit will sell in the next week, month, quarter, or year.

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 Financial Forecasting and Planning
BA204 Financial Management
University of Bohol Graduate School and Professional Studies

Step 1: Construct a Sales Forecast

Sales forecast is generally based on:

1. Past trend in sales; and
2. The influence of any anticipated events that might materially affect that trend

Step 2: Prepare Pro-forma Financial Statements

• Pro-forma financial statements help forecast a firm’s asset requirements needed to

support the forecast of revenues (refer to Step 1)
• The most common technique is percent of sales method that expresses expenses,
assets, and liabilities for a future period as a percentage of sales

Step 3: Estimate the Firm’s Financing Needs

Using the pro-forma statements, extract the cash flow requirements of the firm

Illustrative Example

Using the Percent-of-sales Method to forecast SureBuy Inc’s financing requirements for
2022

Income Statement Calculation % of Income Statement Calculation

for 2021 2021 for 2022
Sales
Sales P 10, 000,000 Sales growth rate = 20%
Sales P10M x P 12, 000,000
(1+.20)
Net Income 500, 000 .5M/10M 5.0% Net Income P12M x (.05) = P 600, 000

Balance Sheet for Calculation % of Pro Forma Balance Calculation

2021 2021 Sheet for 2022
Sales
Current Assets P 2, 000, 000 2M/10M 20.0% Current Assets .20 x 12M P 2, 400, 000
Net Fixed Assets 4, 000, 000 4M/10M 40.0% Net Fixed Assets .40 x 12M 4, 800, 000
Total Assets P 6, 000,000 Total Assets P 7, 200, 000

Liabilities & Owner’s Equity Liabilities & Owner’s Equity

Accounts Payable P 1, 000, 000 1M/10M 10.0% Accounts Payable .10 x 12M P 1,200, 000
Accrued 1, 000, 000 1M/10M 10.0% Accrued .10 x 12M 1, 200, 000
Expenses Expenses
Notes Payable 500, 000 Notes Payable 500, 000
Total Current Liab. P 2, 500, 000 Total Current Liab P 2, 900, 000
Long-term Debt 2, 000,000 Long-term Debt 2, 000,000
Total Liabilities P 4, 500, 000 Total Liabilities P 4, 900, 000
Common Stock 100, 000 Common Stock 100,000

Paid-in Capital 200, 000 Paid-in Capital 200, 000

Retained Earnings 1, 200, 000 Retained 1, 500, 000
Earnings

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 Financial Forecasting and Planning
BA204 Financial Management
University of Bohol Graduate School and Professional Studies

Total Equity P 1,500, 000 Total Equity P 1, 800, 000

Total Liab & OE P 6, 000, 000 Projected Sources P 6, 700, 000
of Financing
Discretionary P 500,000
Financing needs
Total Financing P 7, 200, 000
Needs = Total
Assets

Background: Preparation of SureBuy’s financial forecast for 2022 begins with a forecast of
firm sales for the year. This forecast is followed by a projection of assets required to support
the projected level of sales. Offsetting the firm’s need for discretionary financing is the
financing that the firm receives from accounts payable and accrued expenses, which arise
automatically (or spontaneously) as a result of the firm’s having made a sale. SureBuy’s
financial analysts forecast P12 million in sales for 2022, which will require that the firm invest
a total of P7.2 million in assets. The P1.2 million increase in assets will be financed partially
by the P400,000 increase in the levels of accounts payable and accrued expenses (equal
to P2.4 million 2 P2.0 million). In addition, the analysts expect the firm to generate another
P300,000 from the firm’s retention of one-half the firm’s 2022 net income. The firm’s
discretionary financing need of P500,000 is calculated by subtracting the P400,000 in
accounts payable and accrued expenses and the P300,000 increase in retained earnings
from the total increase in financing needs of P1.2 million.

Step 1: Forecast Revenues and Expenses

• SureBuy’s financial analyst estimate the firm will earn 5% on the projected sales of
P12M in 2022
• SureBuy plans to retain half of its earnings and distribute the other half as dividends

Step 2: Prepare Pro-Forma Financial Statements

• The firm’s need for assets to support firm sales is forecasted using percent of sales
method where each item in the balance sheet is assumed to vary in accordance with
the of sales in 2022

Step 3: Estimate the Firm’s Financing Requirements

• This involves comparing the projected level of assets needed to support the sales
forecast to the available sources of financing
• In essence, forecast the liabilities and owner’s equity section of the pro-forma
balance sheet
Analysis:

• The table above illustrates how SureBuy uses the percent of sales method to
construct pro-forma income statement and pro-forma balance sheet
• The company uses the three-step approach to financial planning

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Financial Forecasting and Planning
BA204 Financial Management
University of Bohol Graduate School and Professional Studies

Sources of Spontaneous Financing – Accounts Payable and Accrued Expenses

• Accounts Payable and Accrued Expenses are typically the only liabilities that vary
directly with sales
• Accounts Payable and Accrued Expenses are referred to as sources of
spontaneous financing. The percent of sales method can be used to forecast the
levels of both these sources of financing

Sources of Discretionary Financing

• Raising financing with notes payable, long-term debt and common stock requires
managerial discretion and hence these sources of financing are called
discretionary sources of financing
• The retention of earnings is also a discretionary source as it is the result of firm’s
discretionary dividend policy

Summarizing SureBuy’s Financial Forecast

• Discretionary Financing Needs (DFN)
= {Total Financing Needs} – {Projected Source of Financing}
= (P7.2M (increase in Assets)} – {P2.4M in Spontaneous financing + P2.5M in
Short and Long-term Debt + P1.8 Million in Equity}
= P7.2 million – P6.7 million
= P 500, 000
• The firm has to raise P500, 000 with some combination of borrowing (short-term or
long-term) or the issuance of stock
• Since they require a managerial decision, they are referred to as the firm’s
discretionary financing needs (DFN)

Analyzing the Effects of Profitability and Dividend Policy on the Firm’s DFN
• After projecting DFN, evaluate the sensitivity of DFN to changes in key variables
• The table below will show that as dividend payout ratios and net profit margin vary,
DFN also changes significantly from a negative P40, 000 to P 764, 000.
• DFN for Various Net Profit Margins and Dividend Payout Ratio (DPR)

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 Financial Forecasting and Planning
BA204 Financial Management
University of Bohol Graduate School and Professional Studies

Net Profit Margin DPR = 30% DPR = 50% DPR = 70%

1% P 716, 000 P 740, 000 P 764, 000
5% P 380, 000 P 500, 000 P 620, 000
10% (P 40, 000) P 200, 000 P 440, 000

Analyzing on the Effects of Sales Growth on a Firm’s DFN

• Table below considers the impact of sales growth rates of 0%, 20%, and 40% on
DFN
• It is observed that DFN ranges from (P250,000) at 0% growth rate to P1, 250, 000
at 40% growth rate. A negative DFN indicates that the firm has surplus pesos in
financing

Income Calculation % of Income Statement Calculation

Statement for 2021 for 2022
2021 Sales
Sales P 10, 000,000 Sales growth rate 0% 20%
Sales P10M x P 10, 000,000 P 12, 000,000
(1+.20)
Net Income 500, 000 .5M/10M 5.0% Net Income P12M x (.05) P 500,000 P 600, 000

Balance Sheet Calculation % of Pro Forma Calculation

for 2021 2021 Balance Sheet for
Sales 2022
Current Assets P 2, 000, 000 2M/10M 20.0% Current Assets .20 x 12M P 2, 000, 000 P 2, 400, 000
Net Fixed 4, 000, 000 4M/10M 40.0% Net Fixed Assets .40 x 12M 4, 000,000 4, 800, 000
Assets
Total Assets P 6, 000,000 Total Assets P 6, 000, 000 P 7, 200, 000

Liabilities & Owner’s Equity Liabilities & Owner’s Equity

Accounts P 1, 000, 000 1M/10M 10.0% Accounts .10 x Sales P 1, 000, 000 P 1,200, 000
Payable Payable
Accrued 1, 000, 000 1M/10M 10.0% Accrued .10 x Sales 1, 000, 000 1, 200, 000
Expenses Expenses
Notes Payable 500, 000 Notes Payable 500, 000 500, 000
Total Current P 2, 500, 000 Total Current Liab P 2, 500, 000 P 2, 900, 000
Liab.
Long-term Debt 2, 000,000 Long-term Debt 2, 000, 000 2, 000,000
Total Liabilities P 4, 500, 000 Total Liabilities P 4, 500, 000 P 4, 900, 000
Common Stock 100, 000 Common Stock 100, 000 100,000

Paid-in Capital 200, 000 Paid-in Capital 200, 000 200, 000
Retained 1, 200, 000 Retained 1, 450, 000 1, 500, 000
Earnings Earnings
Total Equity P 1,500, 000 Total Equity P 1, 750, 000 P 1, 800, 000
Total Liab & OE P 6, 000, 000 Projected Sources P 6,250, 000 P 6, 700, 000
of Financing
Discretionary (P250, 000) P 500,000
Financing needs
Total Financing P 6, 000, 000 P 7, 200, 000
Needs = Total
Assets

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 Financial Forecasting and Planning
BA204 Financial Management
University of Bohol Graduate School and Professional Studies

Developing a Short-Term Financial Plan

Key Points:
• Unlike a long-term financial plan that is prepared using pro forma income statements
and balance sheets, short-term financial plan is typically presented in the form of a
cash budget that contains details concerning the firm’s cash receipts and
disbursements
• Cash budget includes the following main elements:
o Cash receipts
o Cash disbursements
o Net change in cash
o New financing needed

Illustrative Example

Use the Cash Budget of Teavana Inc for the six months ended June 30, 2022

OCT NOV DEC JAN FEB MAR APR MAY JUN JUL AUG
Worksheet
Sales(forecast) 55,000 62,000 50,000 60,000 75,000 88,000 100,000 110,000 100,000 80,000 75,000
Purchases 56,250 66,000 75,000 82,500 75,000 60,000 56,250
(75% in 2mths)

Cash Receipts
Collections:

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 Financial Forecasting and Planning
BA204 Financial Management
University of Bohol Graduate School and Professional Studies

First month 15,000 18,000 22,500 26,400 30,000 33,000

(30%)
Second month 31,000 25,000 30,000 37,500 44,000 50,000
(50%)
Third month 11,000 12,400 10,000 12,000 15,000 17,600
(20%)
Total Cash 57,000 55,400 62,500 75,900 89,000 100,600
Receipts

Cash
Disbursements
Payments (1- 56,250 66,000 75,000 82,500 75,000 60,000
month lag)
Wages and 3,000 10,000 7,000 8,000 6,000 4,000
Salaries
Rent 4,000 4,000 4,000 4,000 4,000 4,000
Other 1,000 500 1,200 1,500 1,500 1,200
Expenses
Interest 600 7,500
expense on
existing debt
Taxes 4,460 5,200
Purchases & 14,000
Equipment
Loan 12,000
repayment
Total Cash 64,250 94,500 91,660 96,000 99,100 81,900
disbursement
Net change in (7,250) (39,100) (29,160) (20,100) (10,100) 18,700
cash
Beg. Cash 20,000 12,750 10,000 10,000 10,000 10,000
Interest on 0 0 (364) (659) (866) (976)
Short Term
Borrowing
End Cash Bal 12,750 (26,250) (19,524) (10,759) (966) 27,724

New Financing 0 36,350 29,524 20,759 10,966 (17,724)

Needed
Ending Cash 12,750 10,000 10,000 10,000 10,000 10,000
Bal
Cum. 0 36,350 65,874 86,633 97,599 79,875
Borrowing

From the information above, the cash budget of Teavana Inc. consists of four
components: (1) cash receipts, including cash received from sales made during the month
of the budget as well as from sales made in previous months; (2) cash disbursements made
during the month for various categories of expenses, such as labor (wages and salaries),
rent, and interest and principal for the firm’s debt; (3) the change in cash for the month,
which is simply cash receipts less cash disbursements; and (4) new financing need to
maintain the firm’s desired cash balance.

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Financial Forecasting and Planning
BA204 Financial Management
University of Bohol Graduate School and Professional Studies

Uses of Cash Budget

Key Points:

• It is a useful tool for predicting the amount and timing of the firm’s future financing
requirements.
• It is useful tool to monitor and control the firm’s operations.
• The actual cash receipts and disbursements can be compared to budgeted
estimates, bringing to light any significant differences.
• In some cases, the differences may be caused by cost overruns or poor collection
from credit customers. Remedial action can be taken.

Chapter Checkpoint

In the summer of 2017, the Stoic Publishing Company established a custom

publishing business for its business clients. These clients consisted principally of small- to
medium-size companies in Round Rock, Texas. However, the company’s plans were
disrupted when it landed a large printing contract from Dell Inc., which it expects will run for
several years. Specifically, the new contract will increase firm revenues by 100 percent.
Consequently, Stoic’s managers know they will need to make some significant changes in
firm capacity—and quickly. The following balance sheet for 2016 and pro forma balance
sheet for 2017 reflect the firm’s estimates of the financial impact of the 100 percent revenue
growth:

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Financial Forecasting and Planning
BA204 Financial Management
University of Bohol Graduate School and Professional Studies

Find:
a. How much new discretionary financing will Stoic require based on the above
estimates?
b. Given the nature of the new contract and the specific needs for financing than the
firm expects, what recommendations might you offer to the firm’s CFO as to the
specific sources of financing the firm should seek to fulfill its DFN?

Solve:
a. The discretionary financing needed is given by:

Discretionary financing needed = Total Assets – Total L&E

Discretionary Financing Needed = $60M - $34M

Discretionary Financing Needed = $26, 000,000

b. Some of the sources of financing for Stoic are long-term debt, notes payable,
retained earnings, and common stock

Analysis:

For Stoic Publishing to increase its sales so drastically, it will need significant
discretionary financing. Since it wishes to increase total assets to $60M, but will only have
$34M provided, it will need to find another $26M. Some of the sources of financing for Stoic
are:

1. Notes Payable: The firm has not yet increased its notes payable, despite doubling
sales
2. Long-term Debt: Similarly, the firm has not yet increased its long-term borrowing
3. Retained Earnings: The firm has apparently not retained any of its new, higher
earnings, despite doubling sales
4. Common Stock: Stoic could issue stock to raise funds, should it prefer not to borrow
additional money or decrease dividends.

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Financial Forecasting and Planning
BA204 Financial Management
University of Bohol Graduate School and Professional Studies

References
Financial Planning - Definition, Objectives and Importance. (n.d.). Retrieved from
Management Study Guide: https://www.managementstudyguide.com/financial-
planning.htm

Titman, S., Keown, A., & Martin, J. (2017). Financial Management: Principles and
Applications. Pearson.

What is sales forecasting? . (n.d.). Retrieved from Anaplan:

https://www.anaplan.com/blog/sales-forecasting-
guide/#:~:text=What%20is%20sales%20forecasting%3F,month%2C%20quarter%
2C%20or%20year.

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