Drafting a Budget

Dates 18/07/2023

Trainer:
Mohammed Bayyoud
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Long-Term Financial Planning +
growth and budgeting

•Nobody plans to fail,

but many fail to plan

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A Financial Planning Model: The Ingredients

1. Sales forecast

2. Pro forma statements

3. Asset requirements
4. Financial requirements
5. Plug
6. Economic assumptions

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What is Financial Planning and how related
to capital budgeting ?

•The financial plan identifies methods for

achieving the firm’s financial goals.
•The appropriate goal for financial
managers is maximize the shareholders’
value (i.e., maximize equity). Growth by
itself is not an appropriate goal.

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Continued

• The financial plan will describe projected capital

spending.
• In addition, it will the discuss the proposed uses of net
working capital.
• The plan will include a section on financing
arrangements.
• Dividend policy and capital structure policy should be
addressed.
• If new funds are to be raised, the plan should consider
what kinds of securities must be sold and what methods
of issuance are most appropriate.
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The Steps in Estimation of Pro Forma
Balance Sheet

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Example

- Finance for job Company is thinking of acquiring a new machine.

The machine will increase sales from $20 million to $22 million—
10% growth.
- The firm believes that its assets and liabilities grow directly with its
level of sales. Its profit margin on sales is 10%, and its dividend-
payout ratio is 50%.
- Will the firm be able to finance growth in sales with retained earnings
and forecast increases in debt?

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Example Balance sheet

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The Percentage Sales Method: EFN

• This method is used to make sure that you have got the correct result
when using the Balance Sheet Approach.

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The Internal Growth Rate and its
importance in any organization

• The first growth rate of interest is the maximum growth rate

that can be achieved with no external financing of any kind.
We will call this the internal growth rate because this is
the rate the firm can maintain with internal financing only.

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Sustainable growth rate

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Full capacity

• Example will be discussed in the classroom

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Case Study
 
• You have the following financial statements for MADA Corp. You have been hired
by the company top management to do a pro-forma financial statements for the
year 2020.
• The top management announced that the growth rate for this company will be 15%.
• Requirements:
•  
1. Can you prepare the Pro-forma financial statements for the corp.?
2. Identify how much additional funds needed to support the growth of 15%
3. If you need additional funds, where are you going to get the funds from?
4. The company cannot eliminate the dividends policy, so they want to keep paying
the dividends to shareholders as usual.
5. Accruals will change with the growth, the long- term debt will remain constant.
6. Suggest for the corp. where do they get the additional funds needed.
7. Prepare another pro-forma financial statements for top management showing
after financing results.
8. If the interest on additional funds needed is 10% per year. How much interest will
be the corp. paying? Can you show the interest change in the Pro-forma Income
statement and what happens to the R.E.
•  

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Case Study

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Case Study Question
Solve in groups

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