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

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

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

. • 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. Cash Budget 5. if the value is not acceptable . Financing Plan Projected financial statements are used • to analyze the effects of the operating plans on the projected profits and financial ratios. Projected Balance Sheet 2.that is. Projected Income Statement 3. Cash Flow Statement 4.OUTPUTS OF FINANCIAL PLANNING: 1.then the elements of the plan should be studied to see if changes should be made.The price of the stock as of the end of the forecasted year should be estimated. The projected statements can be analyzed to determine how much value the plan creates for shareholders. If the statements do not meet the targets.

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

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

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

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

Short –term: The timing is in accord with tha annual profit plan.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.It forms the basis for assessing the credit needs and for cash control during the year.TIME HORIZONS IN CASH PLANNING 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.Evaluation of daily cash fluctuations. This is useful in companies having widely fluctuating cash demands. 2.lack of cash control Cash control can be based on two procedures: 1.unexpected changes influencing operations 3.CONTROL OF THE CASH POSITION The deviations of actual cash balance from the budgets may result from: 1.variation in factors affecting cash 2.

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

• simulation techniques can be used with clear definition of the assumptions upon which forecasts are based. 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.An important limitation to effective cash forecasting is the need for comprehensive and detailed planning data. 2.BASIC PROBLEMS IN EFFECTIVE CASH FORECASTING 1. .The difficulty of predicting the future due to high variability.

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

Calculation: Interest rate x surplus or loan of cash budget for preceding month. C. 3. 4. 2.A. B. . 2. How are bad debts included in cash budget? Collections would be reduced by the amount of the bad debt losses. 1. 1. Interest paid: Add line in the payments section. 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.

and its resulting needs and to determine the best way to finance those needs.The analyst can evaluate the future flows by means of a projected funds flow statement which is based on forecasts. its liabilities and net worth represent net sources. The assets of the firm represent net uses of funds.III. Funds may be defined in several ways depending on the purpose of analysis. . SOURCES AND USES OF FUNDS STATEMENT 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.many analysts treat funds as working capital. The flow of funds is a continuous process.Such a statement provides an efficient method for assessing the growth of the firm.Although they are mostly defined as cash.

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

Classifying net balance sheet changes that ocur between two points in time into changes that increase cash and changes that decrease cash 2. 3.Consolidating the changes into a financial statement form. or five years. A statement of cash flows is prepared by : 1.The cash flow statement represents the net rather than gross changes between two comparable statements at two different dates.Classifying from the income statement the factors that increase and decrease cash.STATEMENT OF CASH FLOWS 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 relevant—a quarter. . a year.

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

Dividends paid.Financing activities.Accumulated depreciation account in the balance sheet is treated as a liability account and an increase in accumulated depreciation is a source of funds. Frequently. When the total sources of cash is subtracted from total uses . the analyst should search for the discrepancy. it should be added back as a source of funds.short-term investments and short-term debt. . retirement of bonds are transactions that are included. or by issuing short-term debt.which includes raising cash by selling short-term investments.changes in current assets and current liabilities other than cash. which includes investments in or sales of fixed assets 3.To avoid double counting.Investing activities. which include net income. the difference should be equal to the change in cash between the two statement dates.Operating activities. gross changes in fixed assets are considered. long-term debt or stock. for funds are generated only from operations.If it does not. it is due to the surplus adjustments.The statement separates the activities into three categories: 1. 2. Depreciation is a noncash outlay and because it was deducted from revenues. Depreciation is not a source of funds.

Net income – dividends+/.Net income minus dividends 3.Some similar combination.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.corrections of prior years’ earnings 4.Net income only 2. xxxx .

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


Beginning cash is $ 100 and should not be permitted to fall below this level in any of the following months.with 70% collected in the first month following the sale and 30% collected in the second month.Purchases are 60% of the following month’s sales and are paid in the following month.Monthly expenses equal to 30% of the current month’s sales and are paid in the current month.Prepare the cash budget for this company for the first six months of Year 2 . Year 2 January February March April May June July $450 500 700 800 600 450 300 All sales are made on credit.Whenever cash exceeds $100 level . .The sales data for Year 1 and the sales forecasts for January through July of Year 2 are : Actual Sales.CASH BUDGET : ENTRAC COMPANY Entrac Company is preparing its cash budget for the first six months of Year 2. Year 1 November $350 December 400 Sales forecast.Bank borrowing is used to bring cash to this level when necessary.the excess cash is used to pay off bank loans outstanding.


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) March 700 350 135 485 480 420 210 630 (145) 65 (80) -100 (180) April 800 490 150 640 360 480 240 720 (80) -80 (160) -100 (260) May 600 560 210 770 270 360 180 540 230 -160 70 -100 (30) June 450 420 240 660 180 270 135 405 255 70 325 -100 July 300 315 180 495 180 90 270 225 325 550 -100 225 450 .

ALKA A. NAKİT BÜTÇESİ ALKA A. bütçe hazırlanması sırasında gerekli yerlerde tahsilat.Ş. ödeme planı gibi temel politikalarda bazı değişiklikler yapılmıştır. bunun altında kalması halinde bankadan kısa vadeli borçlanma yapılacaktır. Üç değişik senaryo için geliştirilen varsayımlar kullanılarak nakit bütçeleri hazırlanmaktadır. İşletmesinin nakit bütçesine temel teşkil eden bazı varsayımların dökümü yapılmıştır.Ş.000 (Şubat'ta) En iyi %10 artar Satışların %85'i %100'ü 30 günde . İşletme her ay kasada 10.000 TL nakit bulundurmayı hedeflemektedir. Öncelikle nakit akımları hesaplanmış.000 (Şubat'ta) %3 düşer 150. Bu miktarı aşan nakit menkul kıymetlere yatırılacak. KOŞULLAR VARSAYIMLAR En kötü Satış gelirleri Kredili Satışlar Tahsilatlar %5 azalır Satışların%95'i %80'i 30 günde %10'u 60 günde %10 tahsil edilemeyen Harcamalar Yatırım Giderleri %5 artar 0 Normal Geçen yıl ile aynı Satışların %90'ı %85'i 30 günde %10'u 60 günde %5'i tahsil edilemeyen Geçen yıl ile aynı 100.

000 5.000 25.6.000 HAZİRAN 25.000 67.000) 45.000 70.000) 75.000) 40.000 16.000 5.000 52.000 MAYIS (5.000) 75.000 55.000 25. .000 40.1.000 100.ALKA A.000 15.000 10.000 (5.000 83.000 25.000 5.000 65.20X1 (Normal Koşullar Altında) I.000 * Veriler ekonominin normal koşullar altında olduğu varsayımına dayalıdır.000 2.000 25.000 75.000 16.000 25.000 146.000 ŞUBAT 16. NAKİT BÜTÇESİ* 1.000 23.000 5.000 75.000 MART (63.000 5.000 92.000 5.000 50.000) 65.000 25.000 (63.000) 72.000 15.000 NİSAN (3.000 5.000 10.000 5.Ş.000 25.000 (3.000 25.000 25.000 2.000 65.000 4. GELİRLER Başlangıç nakit Nakit Satışlar ve Tahsilatlar Kira Kar Payı ve Faiz Toplam Nakit Girişi Mevcut Toplam Nakit II.000 70.000 2.000 37.000 OCAK 20. NAKİT ÇIKIŞLARI Ücretler Maaşlar Hammadde Ödemeleri Kar Payı Gelir Vergisi Yeni Makina Toplam Nakit Çıkışı Nakit (Açığı) Fazlası 59.000 100.000 67.000 67.000 2.20X1 – 30.

803 10.000 146.000 OCAK 20.498 10. DÜZELTİLMİŞ NAKİT BÜTÇESİ 1.000 30.531 10.6.Ş.531* 143. 1-Yatırım Şubat ayından Mart ayına alınmıştır.000 65.20X1 I.000 75.ALKA A.000 2.000 HAZİRAN 10.000 25.000 65. 2-Hammadde ödemeleri 30 gün geciktirilmiştir.000 53.000 65.506 10. 3-İşletme her ay en az 10.20X1 – 30.000 TL kasa bulundurmayı hedeflemektedir. Bir önceki bütçedeki bazı varsayımlar değiştirilmiştir.100 10.498 2.100 100.000 52.000 *Nakit fazlasının aylık olarak %1 faizden yatırıldığı varsayılmıştır.000 16. **Borçlanma bir ay için yapılmış ve faiz aylık %1.000 5.498 45.000 75.803 NİSAN 10.469) 69.498 85.000 50.000 34. NAKİT GİRİŞLERİ Başlangıç Nakit Tahsilat Kar Payı Kar Payı ve Faiz Vadesi Gelen Menkul Kıy.000 25.000 25.531 70.100 87.000 7.000 MAYIS 10.5 olarak hesaplanarak Nisan ayında geri ödenmiştir.* Toplam Nakit Girişi Toplam Nakit Mevcudu II.000 25.000 10.000 75.000 10.000 2.531 153.506** 25.000 5.000 15.000 25.000 5.000 23.000 77.000 10.803 2.100* 55.000 ŞUBAT 10.000 494 45.100 43.000 5.803 97.000 25.000 4.000 498 75.000 5.000 25. NAKİT ÇIKIŞLARI Ücret Maaş Hammadde Kar Payı Vergi Borç Faizi** Yeni Makina Toplam Nakit Çıkışı Nakit (Açığı) Fazlası Minimum Nakit Nakit (Açığı) Fazlası 55.000 2.000 5.1.494 10.000 80.000 30.000 40.000 5.000 20. .000 62.000 MART 10.000 (2.000 43.000 15.000 5.000 10.803 107.


3) 117.0 (2716.0 ) 263.0 (60.00 2.0 (81.0 $26.0 (53.shares) Retained Earnings Total Equity Total Liabilities and Equity 60 110 140 310 754 1064 40 130 766 896 2000 YEAR 1 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 3000.8 (78.0 90.0) 65.0 2497.06 16.0) 122.0 ) 195.8 (88.0) 118.27 1.5 (57.0 $ 23.80 .0 (2587.15 17.0 (4.5 (4.92 YEAR 1 2850.000shares) Common Stock (50mil.BALANCE SHEETS ( mıl $) 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 LIABILITIES AND EQUITY YEAR 2 Accounts Payable Notes Payable Accruals Total Current Liabilities Long Term Bonds Total Debt Preferred Stock (400.2 100.5) 56.0) 203.• • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • MICRO DRIVE INC.36 1.0 2616.2) 283.00 2.0) 113.

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 Use 60 200 230 _______ $ 490 .

0 (61.5 100.0 (60.0) 65.MICRODRIVE STATEMENT OF CASH FLOWS YEAR 2 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 (5.0 50.0 10.5) (230.0 .0) $ (2.0 174.0) 15.5) $ 227.0) (200.0 10.0 30.

*The company had positive operating profits which increased by 8%.5 million of cash shortfall from operations. financing with short-term funds may reduce costs . It covered this shortfall by liquidating marketable securities and borrowing long-term and short-term loans. As can be seen in the above statements .A company may boost profits by accounting tactics . 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. So. . which cause the cash flow from operations to be negative despite the increases in payables and accruals. Lower investment in working capital can help improve the cash flow from operations.especially in inventories.The most important item in the cash flow statement is the cash from operations. assuming short-term interest rates are below long-term rates. the company should improve its ROIC and/or reduce its cost of capital. In such cases . a company may report profits until the time it declares bankruptcy. A reduction in asset investment may reduce TOC and improve EVA while improving asset turnover and profitability of the firm as well. the company makes excessive investment in current assets . 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. However. So. but EVA was negative because of the faster increase (26%) in the cost of financing .

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