C18 - Financial Rations - Lecture 4.doc

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Department
Management and Organizational Studies
Course
Management and Organizational Studies 2310A/B
Professor
Daniel Brou
Semester
Fall

Description
CHAPTER 18: FINANCIAL PLANNING & FORECASTING Motivation: • What is the process of financial planning – Long­term plans – Short­term plans** • Three “outputs” – Cash budget – Pro forma income statement – Pro forma balance sheet – (statement of external financing required) • Discuss inputs needed to produce the outputs B. FINANCIAL PLANNING PROCESS Definition: Financial planning process refers to the development of long­term strategic financial plans that guide the  preparation of short­term operating plans and budgets. Notes:  •  Long term: 2­10 years •  Short term:  immediate 75% credit sales ­> next month table of forecasted numbers Outflows Purchases (A/P) 60% of sales this month Table of expenses Balance? Target balance $100,000 Summary  • The Cash Budget: a statement of the firm’s planned inflows and outflows of cash  – estimate its short­term cash requirements • Sales forecast: external vs. internal • Two basic categories:  – Cash Receipts – Cash Disbursements • Produces: – Net Cash Flows – Ending period cash – Any required total financing needs or excess cash balances • Usefulness: – Indicates expected cash shortage or surplus • Handling uncertainties about sales forecasts: – Sensitivity analysis 2. Pro forma income statement and balance sheet  Definition: Pro forma statements are projected (forecasted) statements for analyzing future profitability and overall financial  performance. Notes: • Need: – Financial statement from past years – Sales forecast for forecast year – Forecasts for other financial s
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