Financial Planning

Blueprint of what the firm plans to do in future

Three-ten years
Economic assumptions
Sales forecast
Proforma statements
Asset requirements
Financing Plan
Sales Forecast-Proforma
statements
 Methods for preparing Proforma Profit &
Loss
Percent of Sales Method
Budgeted expense Method
Combination Method (budget method and percent of
sales)
Proforma Balance Sheet
Balancing item
If assets>liabilities =External funds reqd

If liabilities>assets =surplus funds available

External Financing Requirement
Surplus funds available = m(S1)(1-d)- A/S(ΔS)
 +(L/S)(ΔS)
The following information is available for ABC
Limited : A/S = 0.6,
S = Rs.300 million,
 L/S = 0.30,
 m = 0.08, S1 = Rs.350 million, and d = 0.5.

What is the external funds requirement for the

forthcoming year?
= 0.6 x 50 – 0.3 x 50 - .08 x 350 x 0.5
= Rs.1 million
The following information is available for XYZ
Limited : A/S = 0.5, S = Rs.35 million,
 L/S = 0.20, m = 0.04, S1 = Rs.55 million, and d = 0.6.

What is the external funds requirement for the

forthcoming year?
0.5 x 20 – 0.2 x 20 - .04 x 55 x 0.4
= Rs.5.12 million
(0.15) x 131,014x (1-0.5) - (A/100,780-
14,300/100780)*30234 =7,000

9826- 7000 = 2,826

100,780
A = 2,826 x 100,780/30,234 + 14,300 = 23,720
∴ The total assets of Meridian must be 23,720
The following information is given for ABC Company:
Assets to sales ratio = 0.80
Spontaneous liabilities to sales ratio = 0.40
Profit margin = 8 per cent
Dividend payout ratio = 0.5
Previous year’s sales = 24,000

What is the maximum sales growth rate that can be

financed without raising external funds?
EFR = A/S* (ΔS)-L/S* (ΔS)-mS1(1-d)
Dividing both sides by ΔS
EFR/ ΔS=A/S-L/S-m(1-d)S1/ ΔS
0= 0.8-0.4 -.08*.5* S1/ ΔS
0= .4-.04*S1/ ΔS
S1/ ΔS = .4/.04 =10
S1= S+ ΔS
S1= 24000+ ΔS
24000/ ΔS + ΔS/ ΔS =10
24000/ ΔS =9
 ΔS= 24000/9 =2667
G =2667/24000*100 =11.11%

g =0.4/.36 = 11.11%
The following information is given for Rahul
Associates.:
Assets to sales ratio = 0.90
Spontaneous liabilities to sales ratio = 0.50
Profit margin = 11 per cent
Dividend payout ratio = 0.7
Previous year’s sales = 45,360
What is the maximum sales growth rate that can be
financed without raising external funds?
Ans = 8.99%
 Forecasting when B/S Ratios
change
Economies of Scale
Lumpy Assets
Forecasting errors
 Growth Rates
Internal Growth Rate
Sustainable Growth Rate
 Internal Growth Rate

Maximum growth rate that can be achieved with no

external financing(No debt or loans).That is ,the
company only uses retained earnings.

Maxm growth rate that a company can achieve is it

does not borrow any money and does not issue equity
shares.
IGR = NP after tax RATIO *AT*Ploughback ratio
 1- Npafter tax RATIO *AT*Ploughback ratio


IGR = ROA*Ploughback ratio
 1- ROA*Ploughback ratio

NP=Net profit ratio= PAT/SALES

AT= Asset turnover ratio=SALES/TOTAL SALES
ROA=Return on Assets =PAT/TOTAL SALES
Ploughtback ratio =(1-d) = (1- dividend payout ratio)
NP AFTER TAX = PAT/SALES
ATO=SALES/TOTAL ASSETS

ROA=NP/TOTAL ASSTES
ROA= NP AFTER TAX/TOTAL ASSETS

NP=NET PROFIT AFTER TAX/SALES

AT= SALES/TOTAL ASSETS

 Sustainable Growth Rate
Maximum growth rate that can be achieved with no
external equity financing.

Maxm growth rate that a company can achieve If you

use retained earnings and borrowings
If the ROE and plough back ratio of Z ltd is 15% and
70% respectively,what is the SGR?

.15*.7/(1*.15*.7) =11.7%
 SGR
SGR = NP*ploughback ratio*A/E
 ---------------------------------------
A/S0 –NP*ploughback ratio *A/E

D= dividend payout ratio

AE=Asset equity ratio
NP=Net profit margin
A/S0=Asset sales ratio
Ploughback ratio =1-dividend payout ratio
8,000
10,000

16,000 /8000 = 2

16,000/10000 =1.6
Maharaja Limited has the following financial ratios:
Net profit margin ratio = 8 percent .Target dividend
payout ratio = 40 percent Assets-to-equity ratio = 3.0
Assets-to-sales ratio = 1.8.Find SGR.

.08*(1-.4)*3/(1.8-.08*(1-0.4)*3)
.144/