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Value creation is impossible unless the company has a well articulated plan. Projected financial statements have three important uses: 1.To Estimate the free cash flows to measure the current value and to investigate the impact of proposed changes in strategy and operations. 2. To Plan for financing that will be required to execute the operating plans. 3. To provide a basis for a compensation plan

I. II. III. IV. Formulating corporate objectives Formation of corporate goals Stating the corporate strategies Stating corporate policies
a. Marketing b. Manufacturing c. Finance ( Working capital policy, dividend policy, capital structure policy)

V. Preparing Long term strategic plans VI. Financial Budgets a.Projected financial statements b.Capital budget c.Cash budget d.External financing plan

The financial planning model can be used to test the feasibility of the planned growth rate. INGREDIENTS OF A FINANCIAL PLANNING MODEL I.Macroeconomic Variables : Industry growth, inflation rate, FX forecasts, interest rate forecasts 2.Industry Variables : Industry growth rate, market share, rate of change in the industry. 3.Firm variables: a.capacity constraints b.restrictions on debt policy,current ratio and coverage ratios c.constraints in funds availability d.constraints in skilled personnel 4.Sales forecasts which are converted to sales plans when judgements are added.

1.Review sales over the past 5-10 years. 2.Estimate the level of economic activity and demand . 3.Estimate market share for each product line in each market under consideration taking into account the firms constraints, competitors capacities and pricing strategies.So , a combination of sales units and prices lead to estimation of the growth rate in sales. 4.Forecast the exchange rates , government policies on trade etc. for foreign markets. 5. Estimate the need for advertising campaigns, promotions, determine credit terms. 6.Decide if the firm resources can meet the marketing expenses estimated to reach the forecasted sales levels 7.Prepare a sales plan using a breakdown by geographical areas and by products


1. Projected Balance Sheet 2. Projected Income Statement 3. Cash Flow Statement 4. Cash Budget 5. Financing Plan Projected financial statements are used to analyze the effects of the operating plans on the projected profits and financial ratios. to determine the amount of external funds needed to establish a system of controls governing the allocation and use of funds to develop a feedback loop which triggers modification of plans in case of unexpected changes To establish a performance based compensation system To determine the value of the company using the free cash flows generated from the forecasted statements.
The projected statements can be analyzed to determine how much value the plan creates for shareholders.The price of the stock as of the end of the forecasted year should be estimated. If the statements do not meet the targets,that is, if the value is not acceptable ,then the elements of the plan should be studied to see if changes should be made.

Qualitative Factors Analysts Should Consider When Evaluating a Companys Future Financial Performance
1. Are the companys revenues tied to one key customer? 2. To what extent are the companys revenues tied to one key product? 3. To what extent does the company rely on a single supplier? 4. What percentage of the companys business is generated overseas? 5. Competition 6. Future Prospects 7. Legal and regulatory environment



Forecasting future cash needs is called a cash budget.The cash budget is the tabulation of the plans of the firm in terms of their impact on the receipts and disbursements of cash.The basic aim is to predict when and in what quantity payments of cash will be made. In most cash forecasts , receipts and payments are broken down by months.If uneven inflows and outflows are anticipated within the monthly intervals, it may be necessary to break the forecast down into weekly or even daily periods. The most critical estimate in cash flow forecasting is the forecast of sales.Most cash receipts and payments are closely related with sales. Cash budgeting involves projection of cash inflows, outflows and financing needs.Cash budgeting is directly linked with the lag between transactions and the related cash flows,with cash needs and with excess cash.



A cash budget consists of two parts: 1.The planned cash receipts 2.The planned cash disbursements Evaluation of the cash position may indicate: 1.The need for financing to cover the cash deficit 2.The need for planning to put excess cash to profitable use. The cash budget is closely related to the sales plan, expense budgets, and capital expenditures budget.


The purposes of preparing cash budgets may be summarized as: 1.To indicate the probable cash position as a result of planned operations. 2. To indicate cash excess and shortages 3.To indicate the need for borrowing or the availability of idle cash for investment. 4.To coordinate cash with (1) total working capital (2) sales (3)investment (4) debt 5.To establish a sound basis for credit 6.To establish a sound basis for control of the cash position. The cash budget is concerned with timing of cash inflows and outflows whereas other budgets are concerned with the timing of transactions.( accrual basis).This is the basic distinction of cash budgets form other projected statements.


1.Long term: The timing is in accord (1) with the time dimensions of the capital expenditure projects(2) time dimension of the 5 year plan. 2.Short term: The timing is in accord with tha annual profit plan.It forms the basis for assessing the credit needs and for cash control during the year.


The deviations of actual cash balance from the budgets may result from: 1.variation in factors affecting cash 2.unexpected changes influencing operations 3.lack of cash control Cash control can be based on two procedures: 1.A continuous evaluation of both present and probable cash position on a monthly basis This involves reporting monthly actual cash position to date which helps reprojection of cash flows taking into consideration the unexpected developments. 2.Evaluation of daily cash fluctuations. This is useful in companies having widely fluctuating cash demands.


The main inputs of the cash budgets are: 1. Sales forecasts 2. The percentage of credit sales 3. Receivables collection policy 4. Payments for purchases policy 5. Capital expenditures for the year that are generated from capital budgets. 6. Dividend payment policy 7. Cash inflows from rent, dividend receipts, sales of assets 8. Outflows revealed by the expense budgets


1.An important limitation to effective cash forecasting is the need for comprehensive and detailed planning data. 2.The difficulty of predicting the future due to high variability. As the degree of uncertainty increases , the management should recognize margins for error inherent in its forecasts cash budgets can be prepared based on different scenarios with varying underlying assumptions. simulation techniques can be used with clear definition of the assumptions upon which forecasts are based.

Cash Budget: Purpose and Timing

Purpose: Forecasts cash inflows, outflows, and ending cash balances. Used to plan loans needed or funds available to invest. Timing: Daily, weekly, or monthly, depending upon purpose of forecasts. Monthly for annual planning, daily for actual cash management.

A. 1. 2. 3. 4.
B. 1. 2. 3.

Other Potential Cash Inflows Besides Collections: Proceeds from sale of fixed assets Proceeds from stock and bond sales Interest earned Court settlements
How can interest earned or paid be incorporated in the cash budget? Interest earned: Add line in the collections section. Interest paid: Add line in the payments section. Calculation: Interest rate x surplus or loan of cash budget for preceding month.

C. How are bad debts included in cash budget? Collections would be reduced by the amount of the bad debt losses.


A funds flow statement is a useful aid to a financial manager or a creditor in evaluating the use of funds by a firm and in determining how these uses are financed.The analyst can evaluate the future flows by means of a projected funds flow statement which is based on forecasts.Such a statement provides an efficient method for assessing the growth of the firm, and its resulting needs and to determine the best way to finance those needs. Funds may be defined in several ways depending on the purpose of analysis.Although they are mostly defined as cash,many analysts treat funds as working capital. The flow of funds is a continuous process. The assets of the firm represent net uses of funds; its liabilities and net worth represent net sources.

A cash flow cycle for a typical manufacturing company:

EQUITY ASSETS asset Asset Purchases sales CASHRAW MATERIALSWIP FINISHED Stock repurchases CASH SALES GOODS COLLECTIONS CREDIT SALES (A/R) DEBT A finished good is produced by a variety of inputs-raw material, net fixed assets, and labor.These inputs are paid in cash. The product is sold either for cash or on credit. A credit sale involves a receivable, when collected becomes cash.The reservoir of cash fluctuates over time with the production schedule, sales, collections, capital expenditures and financing.


Cash flow statement is a means by which we study the net funds flow between two points in time. These two points conform to the beginning and ending financial statement dates for whatever examination period is relevanta quarter, a year, or five years.The cash flow statement represents the net rather than gross changes between two comparable statements at two different dates. A statement of cash flows is prepared by : 1.Classifying net balance sheet changes that ocur between two points in time into changes that increase cash and changes that decrease cash 2.Classifying from the income statement the factors that increase and decrease cash. 3.Consolidating the changes into a financial statement form.

SOURCES OF CASH: 1.A net decrease in any asset other than cash or fixed assets 2.A gross decrease in fixed assets 3.A net increase in any liability 4.Proceeds from sale of common stock 5.Funds provided by operations.( Net income+ Depreciation) USES OF CASH: 1.Any net increase in any asset other than cash or fixed assets. 2.A gross increase in fixed assets. 3.A net decrease in any liability 4.Dividend payments 5.Net losses

The statement separates the activities into three categories:

1.Operating activities, which include net income,changes in current assets and current liabilities other than cash,short-term investments and short-term debt. 2.Investing activities, which includes investments in or sales of fixed assets 3.Financing activities,which includes raising cash by selling short-term investments, or by issuing short-term debt, long-term debt or stock.Dividends paid, retirement of bonds are transactions that are included.
When the total sources of cash is subtracted from total uses , the difference should be equal to the change in cash between the two statement dates.If it does not, the analyst should search for the discrepancy. Frequently, it is due to the surplus adjustments.

Depreciation is not a source of funds, for funds are generated only from operations. Depreciation is a noncash outlay and because it was deducted from revenues, it should be added back as a source of funds.Accumulated depreciation account in the balance sheet is treated as a liability account and an increase in accumulated depreciation is a source of funds.To avoid double counting, gross changes in fixed assets are considered.

Conversion of net income from accrual to cash basis: ( An example) Reported net income Add: Depreciation Amortization of intangibles Losses on sale of assets Decrease in accounts receivable Decrease in prepaid expenses Increase in income taxes payable Deduct: Increase in inventories Decrease in accounts payable Gains from sale of assets Equals: Net income on cash basis An increase in retained earnings account may be the result of: 1.Net income only 2.Net income minus dividends 3.Net income dividends+/- corrections of prior years earnings 4.Some similar combination. xxxx


A financial manager may detect imbalances in the use of funds and undertake appropriate action. An out of proportionate growth in one of the assets relative to sales, uncovers inefficiencies in asset management. Another use of cash flow statement is its use in evaluation of financing.An analysis of the major sources of funds reveals what portion is financed externally.In addition, the kind of financing policy that the management adopts is identified and evaluated in terms of its impact on corporate return and risk. The cash flow statement also reveals if the company has expanded at a very fast rate and whether financing is strained.The kind of financing used at present will restrict the future financing policies . An analysis of forecasted cash flow statement is valuable to the manager in planning intermediate and long term financing of the firm. It reveals the firms total prospective need for funds, and the investments for which they will be used.



Entrac Company is preparing its cash budget for the first six months of Year 2.The sales data for Year 1 and the sales forecasts for January through July of Year 2 are : Actual Sales, Year 1 November $350 December 400 Sales forecast, Year 2 January February March April May June July $450 500 700 800 600 450 300

All sales are made on credit,with 70% collected in the first month following the sale and 30% collected in the second month.Purchases are 60% of the following months sales and are paid in the following month.Monthly expenses equal to 30% of the current months sales and are paid in the current month.Beginning cash is $ 100 and should not be permitted to fall below this level in any of the following months.Bank borrowing is used to bring cash to this level when necessary.Whenever cash exceeds $100 level ,the excess cash is used to pay off bank loans outstanding.Prepare the cash budget for this company for the first six months of Year 2 .


Cash Budget Entrac Company

January February Sales Collections: one month two months Total Purchases Cash Payments for Purchases Expenses Total Payments Net Gain (Loss) Beginning Cash Cumulative Cash Less:Desired Level of Cash Loans needed Surplus
450 280 105 385 300 270 135 405 (20) 100 80 -100 (20) 500 315 120 435 420 300 150 450 (15) 80 65 -100 (35)

700 350 135 485 480 420 210 630 (145) 65 (80) -100 (180)

800 490 150 640 360 480 240 720 (80) -80 (160) -100 (260)

600 560 210 770 270 360 180 540 230 -160 70 -100 (30)

450 420 240 660 180 270 135 405 255 70 325 -100

300 315 180 495

180 90 270 225 325 550 -100




ALKA A.. letmesinin nakit btesine temel tekil eden baz varsaymlarn dkm yaplmtr. deiik senaryo iin gelitirilen varsaymlar kullanlarak nakit bteleri hazrlanmaktadr. ncelikle nakit akmlar hesaplanm, bte hazrlanmas srasnda gerekli yerlerde tahsilat, deme plan gibi temel politikalarda baz deiiklikler yaplmtr. letme her ay kasada 10,000 TL nakit bulundurmay hedeflemektedir. Bu miktar aan nakit menkul kymetlere yatrlacak, bunun altnda kalmas halinde bankadan ksa vadeli borlanma yaplacaktr.
KOULLAR VARSAYIMLAR En kt Sat gelirleri Kredili Satlar Tahsilatlar %5 azalr Satlarn%95'i %80'i 30 gnde %10'u 60 gnde %10 tahsil edilemeyen Harcamalar Yatrm Giderleri %5 artar 0 Normal Geen yl ile ayn Satlarn %90' %85'i 30 gnde %10'u 60 gnde %5'i tahsil edilemeyen Geen yl ile ayn 100,000 (ubat'ta) %3 der 150,000 (ubat'ta) En iyi %10 artar Satlarn %85'i %100' 30 gnde

ALKA A.. NAKT BTES* 1.1.20X1 30.6.20X1

(Normal Koullar Altnda)
I. GELRLER Balang nakit Nakit Satlar ve Tahsilatlar Kira Kar Pay ve Faiz Toplam Nakit Girii Mevcut Toplam Nakit II. NAKT IKILARI cretler Maalar Hammadde demeleri Kar Pay Gelir Vergisi Yeni Makina Toplam Nakit k Nakit (A) Fazlas 59,000 16,000 23,000 5,000 4,000 2,000 25,000 100,000 146,000 (63,000) 40,000 (3,000) 72,000 (5,000) 45,000 25,000 40,000 52,000 25,000 5,000 16,000 25,000 5,000 10,000 25,000 5,000 15,000 2,000 25,000 25,000 5,000 15,000 25,000 5,000 10,000 5,000 55,000 75,000 2,000 67,000 83,000 100,000 37,000 OCAK 20,000 50,000 UBAT 16,000 65,000 MART (63,000) 75,000 25,000 5,000 70,000 67,000 75,000 70,000 2,000 67,000 92,000 NSAN (3,000) 65,000 MAYIS (5,000) 75,000 HAZRAN 25,000 65,000

* Veriler ekonominin normal koullar altnda olduu varsaymna dayaldr.

ALKA A.. DZELTLM NAKT BTES 1.1.20X1 30.6.20X1

I. NAKT GRLER Balang Nakit Tahsilat Kar Pay Kar Pay ve Faiz Vadesi Gelen Menkul Ky.* Toplam Nakit Girii Toplam Nakit Mevcudu II. NAKT IKILARI cret Maa Hammadde Kar Pay Vergi Bor Faizi** Yeni Makina Toplam Nakit k Nakit (A) Fazlas Minimum Nakit Nakit (A) Fazlas 55,000 20,000 10,000 10,000 34,000 53,100 10,000 43,100 100,000 146,000 7,531 10,000 (2,469) 69,506 10,494 10,000 494 45,000 40,498 10,000 30,498 45,000 62,803 10,000 52,803 2,000 25,000 23,000 5,000 25,000 5,000 4,000 25,000 5,000 16,000 25,000 5,000 10,000 2,000 25,000 2,506** 25,000 5,000 15,000 25,000 5,000 15,000 5,000 2,000 10,100* 55,000 75,000 77,100 87,100 43,531* 143,531 153,531 70,000 80,000 OCAK 20,000 50,000 UBAT 10,000 65,000 MART 10,000 75,000 25,000 5,000 498 75,498 85,498 2,000 30,803 97,803 107,803 NSAN 10,000 65,000 MAYIS 10,000 75,000 HAZRAN 10,000 65,000

*Nakit fazlasnn aylk olarak %1 faizden yatrld varsaylmtr. **Borlanma bir ay iin yaplm ve faiz aylk %1.5 olarak hesaplanarak Nisan aynda geri denmitir. Bir nceki btedeki baz varsaymlar deitirilmitir. 1-Yatrm ubat ayndan Mart ayna alnmtr. 2-Hammadde demeleri 30 gn geciktirilmitir. 3-letme her ay en az 10,000 TL kasa bulundurmay hedeflemektedir.


MICRO DRIVE INC.BALANCE SHEETS ( ml $) ASSETS YEAR 2 YEAR 1 Cash and Equivalents Short Term Investments Accounts Receivable Inventories Total Current Assets 10 0 375 615 1000 15 65 315 415 810


Accounts Payable Notes Payable Accruals Total Current Liabilities Long Term Bonds Total Debt Preferred Stock (400,000shares) Common Stock (50mil.shares) Retained Earnings Total Equity Total Liabilities and Equity 60 110 140 310 754 1064 40 130 766 896 2000

30 60 130 220 580 800 40 130 710 840 1680

Net Plant and Equipment Total Assets

1000 2000

870 1680

MICRO DRIVE INCOME STATEMENTS Net Sales Costs Excluding Depreciation Depreciation Total Operating Costs Earnings Before Interest and Taxes Interest Earninge Before Taxes Taxes (40%) Net Income Before Preferred Dividends Preferred Dividends Earnings Available to Shareholders Common Dividends Addition to Retained Earnings Per Share Data Common Stock Price Earnings Per Share Dividends per Share Book Value Per Share

YEAR 2 3000.0 2616.2 100.0 (2716.2) 283.8 (88.0 ) 195.8 (78.3) 117.5 (4.0) 113.5 (57.5) 56.0 $ 23.00 2.27 1.15 17.92

YEAR 1 2850.0 2497.0 90.0 (2587.0 ) 263.0 (60.0) 203.0 (81.0) 122.0 (4.0) 118.0 (53.0) 65.0 $26.00 2.36 1.06 16.80

Source Decrease in cash 5 Decrease in short term investments 65 Increase in receivables Increase in inventories Gross increase in fixed assets Increase in accumulated depreciation 100 Increase in accounts payable 30 Increase in notes payable 50 Increase in accruals 10 Increase in long-term debt 174 Increase in retained earnings 56 Total $ 490


60 200 230

_______ $ 490


Cash Flow from Operating Activities:

Net Income Additions to net income: Depreciation Changes in net working capital: Increase in accounts payable Increase in accruals Increase in accounts receivable Increase in inventories Net cash provided by operations Long Term Investments: Fixed asset investments Financing Activities: Sale of short-term investments Increase in notes payable Increase in bonds outstanding Dividend payments Net cash provided by Financing Activities Summary: Net change in cash Cash at the beginning of the year Cash at the end of the year $ 117.5 100.0 30.0 10.0 (60.0) (200.0) $ (2.5)


65.0 50.0 174.0 (61.5) $ 227.5

(5.0) 15.0 10.0

The most important item in the cash flow statement is the cash from operations.A company may boost profits by accounting tactics . So, a company may report profits until the time it declares bankruptcy. In such cases , the cash flow from operations start deteriorating much earlier and analysts can predict trouble by analyzing the trend in cash provided by operations. Microdrive has $ 2.5 million of cash shortfall from operations. It covered this shortfall by liquidating marketable securities and borrowing long-term and short-term loans.

Microdrive finances some portion of its fixed assets by long-term debt and some by short-term debt which may be risky if the firm can not generate funds in the short run. However, financing with short-term funds may reduce costs , assuming short-term interest rates are below long-term rates. As can be seen in the above statements , the company makes excessive investment in current assets ,especially in inventories, which cause the cash flow from operations to be negative despite the increases in payables and accruals.
*The company had positive operating profits which increased by 8%, but EVA was negative because of the faster increase (26%) in the cost of financing . So, the company should improve its ROIC and/or reduce its cost of capital. A reduction in asset investment may reduce TOC and improve EVA while improving asset turnover and profitability of the firm as well. Lower investment in working capital can help improve the cash flow from operations.