FINANCIAL FORECASTING FOR Examples: Notes Payable, LT-Bonds, Preference Share,
STRATEGIC GROWTH Common Shares
4. Determine if additional funds will be needed by using
the following formula.
Financial Planning
Formulates the way in which financial goals are to be AFN (Additional Funds Needed)
achieved.
AFN =
Benefits of Financial Planning Required Increase in Assets - Spontaneous Increase in
1. Provides a rational way of planning options or Liabilities -
alternatives. Increase in Retained Earnings
2. Interactions or linkages between investment proposals
are carefully examined. Required increase in assets =
3. Possible problems related to the proposal projects are Changes in Sales *(Current Assets/Sales)
identified actions to address then are studied.
4. Feasibility and internal consistency are ensured Spontaneous Increase in Liabilities =
5. Managers are forced to think about goals and establish Change in Sales * (Current Liabilities/Sales)
priorities.
Increase in Retained Earnings
Financial Planning Models Earnings after Taxes - Dividend Payment
1. Economic Environment Assumption
2. Sales Forecast
3. Pro forma Statements
4. Asset Requirements
5. Financial Requirement Step 3: Raising the Additional Funds
6. Additional Funds Needed a. Target Capital Structure
b. Effect of Short-term Borrowing on its current ratio;
The Projected Financial Statement Method c. Conditions in the debt and equity markets; or
a. Determining how much money the firm will need during d. Restrictions imposed by existing debt agreements.
a given
period Step 4: Consider Financing Feedbacks
b. Determining how much money the firm will generate Apply the iteration process using the available
internally financing mix until AFN would become so small that
during the same period. the forecast can be considered complete.
c. Subtracting funds generated from the funds required to
determine
the external financial requirements.
THE PROJECTED FINANCIAL STATEMENT
METHOD PROCEDURE
Step 1: Forecast the Income Statement
1. Establish a sales projection
2. Prepare the production schedule and projected the
corresponding production costs;
a. Direct Materials
b. Direct Labor
c. Overhead
3. Estimate selling and administrative expenses
4. Consider financial expenses, if any.
5. Determine the net profit.
Step 2: Forecast the Statement of Financial
Position
1. Project the assets that will be needed to support
projected sales.
2. Project funds that will be spontaneously generated (AP
and Accruals) and Retained Earnings.
3. Project liability and SHE accounts that will not rise
spontaneously will sales but may change due to financing
decisions that will made later.
The firm is expecting a 20% increase in sales next year, and
management is concerned about the company's need for
external funds. The increase in sales is expected to be carried
out without any expansion of fixed assets, but rather through
more efficient asset utilization in the existing store. Among
liabilities, only current liabilities vary directly with sales.
Additional Information
1. Historical Sales for the Last 5 Years. (In Thousand Pesos).
2. Assets and spontaneous liabilities will increase by 10%
3. Ordinary shares outstanding, 50,000
4. Ordinary share dividends are projected at 2.50 per share
5. Market value per share at the end of 20X2 is 46.47
Assume that after considering all relevant factors, Tamarind decided
on the following funds financing mix to raise the AFN of P224,000:
