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Chapter 15

Financial Forecasting for Strategic Growth


Financial Planning is a series of steps or goals used by an individual or business, the
progressive and cumulative attainment of which is designed to accomplish a financial goal or
set of circumstances, e.g. elimination of debt, retirement preparedness, etc.
Perspective/Dimension of Financial Planning:
1. Planning Horizon amount of time an organization will look into the future when preparing
a strategic plan.
a.) Short-run planning covers the coming 12 months.
b.) Long-run planning covers the coming two to five years.
2.) Aggregation - process whereby a number of a firm's smaller projects are combined and
treated as an individual project.
- involves the determination of all of the individual projects together with the
investment required that the firm will undertake and adding up these investment proposals to
determine the total needed investment which is treated as one big project.
Benefits of Financial Planning
1. Provides a rational way of planning options or alternatives.
2. Interactions or linkages between investment proposals are carefully examined.
3. Possible problems related to the proposal projects are identified actions to address them are
studied.
4. Feasibility and internal consistency are ensured.
5. Managers are forced to think about goals and establish priorities.
Financial Planning Models the process by which a firm constructs a financial representation
of some, or all, aspects of the firm or given security. The model is usually characterized by
performing calculations, and makes recommendations based on that information. The model
may also summarize particular events for the end user and provide direction regarding possible
actions or alternatives.
Common elements of Financial Planning Models:
a.) Economic Environment Assumption explicit statement of the economic environment in
which the firms expects to reside over the life of the plan. (i.e. inflation rates, level of interest
rates, firms tax rate)
Financial Management 1
Technological Institute of the Philippines Manila

b.) Sales Forecast - planning is focused on projected future sales and the assets and financing
need to support the sales. Oftentimes, it is given as the growth rate in sales rather than as an
explicit sales figure.
c.) Pro-forma statements financial plan will have a forecast statement of financial position,
income statement, statement of cash flows, and statement of stockholders equity.
d.) Asset Requirements financial plan will describe projected capital spending. (i.e. changes in
total fixed assets and net working capital)
e.) Financial Requirements financial plan will include a section about the necessary financing
requirements. (i.e. discussion of dividend policy and debt policy.)
f.) Additional Funds Needed some amount of new financing will often be necessary because
projected total assets will exceed total liabilities and equity.
Steps in making the Projected Financial Statement:
1. Forecast the Income Statement
2. Forecast the Statement of Financial Position
3. Raising the additional funds needed.
4. Consider financing feedbacks.
Formula for Additional Funds Needed (AFN)
AFN= Required Increase in Assets Spontaneous Increase in Liabilities Increase in Retained
Earnings

Financial Management 1
Technological Institute of the Philippines Manila

Illustrative Examples:
Financial Forecasting (Percent of Sales Method)
The Liue Vhien Company has presented its average income statement and financial position for
5 years.
Income Statement
Sales
Cost of Sales
Gross Profit
Operating Expenses
Earnings before interest and taxes
Interest Expenses
Earnings before taxes
Taxes (30%)
Earnings after taxes

3,000,000.00
(1,800,000.00)
1,200,000.00
(570,000.00)
630,000.00
(105,000.00)
525,000.00
(157,500.00)
367,500.00

Dividents

220,500.00

Statement of Financial Position

Assets
Cash
Accounts Receivable
Inventory
Fixed Assets

Total

Liabilities and Equity


125,400.00
810,000.00
664,200.00
500,000.00

2,099,600.00

Accounts Payable
Accrued Wages
Notes Payable - bank
Long term debt
Ordinary Shares
Retained Earnings
Total

150,000.00
82,800.00
50,000.00
759,000.00
800,000.00
257,800.00
2,099,600.00

The Company is expecting a 25% increase in sales next year and is concerned about the need to
raise external funds. The increase in the sales is accompanied by more efficient asset utilization
in the existing store without any additional purchase of fixed assets. Among the liabilities, the
current liabilities vary directly with sales.

Financial Management 1
Technological Institute of the Philippines Manila

Solution:
Sales
Cost of Sales
Gross Profit
Operating Expenses
Earnings before interest and taxes
Interest Expenses
Earinings before taxes
Taxes (30%)
Earnings after tax

477,750.00

Dividends

277,750.00

Assets

Liabilities and Equity

Cash
Accounts Receivable
Inventory
Fixed Assets

Accounts Payable
Accrued Wages
Notes Payable - bank
Long term debt
Ordinary Shares
Retained Earnings
Total

Total

2,499,500.00

AFN = Increase in Assets Increase in Liabilities Increase in Retained Earnings

Financial Management 1
Technological Institute of the Philippines Manila

2,357,800.00