Class notes
Chapter 4: Financial Forecasting
- Course
- BFIN 241 (BFIN241)
- Institution
- Capilano University (CapU )
Chapter 4: Financial Forecasting
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Ch 4 - Financial ForecastingWhat it is?
Glossary
Formula
1) Earnings After Taxes (EAT)
2) Production Requirement
3) Cash Receipts / Account receivable
4) Value of ending inventory
5) Require New Funds (RNF)
6) Sustainable Growth Rate (SGR)
Pro forma income statement
Involves the following 4 steps:
Basic for Sales Projections
Production (or Purchases) Schedule
Cash Budget
Pro forma balance sheet
Percent of sales method
Sustainable Growth Rate (SGR)
Summary and Conclusions
Practice Questions
Financial planning is a key component in he development of a focused corporate
strategy that is necessary for a firm’s success.
What it is?
→ is looking ahead to develop a financial plan
→ important for the strategic growth of a firm
provides lead time to make necessary adjustments before actual events
occur.
Helps to plan for significant growth in firm
Can be used as a target for measuring performance
Often required by bankers and other lenders
→ The financial planning process involve the following steps:
Ch 4 - Financial Forecasting 1
, Thinking, decisions, planning and performance
Without realistic financial forecasts, the small business in particular will likely:
have liquidity problems (lack of funds)
demonstrate poor management planning and control measures
Have difficulty securing business loans
Face possible business failure
Glossary
Pro forma income statement - a projection of anticipated (dự đoán trước) sales,
expenses, and income
Cash budget - a series of monthly or quarterly budgets that indicate cash
receipts, cash payments, and borrowing requirements for meeting financial
requirements. it is constructed from the pro forma income statement and other
supporting schedules.
Sustainable growth rate - the level of growth in sales that can be maintained by a
corporation without seeking additional debt or equity financing to support the
increasing investment in assets
Formula
1) Earnings After Taxes (EAT)
Ch 4 - Financial Forecasting 2
, Operating profit
-
Interest expense
Earning before taxes (EBT)
-
Taxes (tax rate ___%)
Earning after taxes (EAT)
eg. A firm’s operating profit is $50,000, interest expense is $4,000, the tax rate is
35%, and common stock dividends are $2,500. Calculate the firm’s earnings after
Ch 4 - Financial Forecasting 3
, taxes:
50,000 - 4,000 = 46,000
Tax rate: 35% → 46,000 x 0.35 = 16,100
46,000 - 16,100 = 29,900
2) Production Requirement
Units
+ Projected sales
+ Desired ending inventory
- Beginning inventory
= Production requirement
eg. The firm projects sales at 500,000 units and requires an ending inventory of
25,000 units. If the firm’s beginning inventory is 50,000 units, what is the firm’s
production requirement for the period?
500,000 + 25,000 - 50,000 = 475,000
3) Cash Receipts / Account receivable
Ch 4 - Financial Forecasting 4
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