A comprehensive evaluation of an investor's current and future financial state by using currently known variables to predict future cash flows, asset values and withdrawal plans. Most individuals work in conjunction with an investment or tax professional and use current net worth, tax liabilities, asset allocation, and future retirement and estate plans in developing the plan. These will be used along with estimates of asset growth to determine if a person's financial goals can be met in the future, or what steps need to be taken to ensure that they are.

1. Financial Planning
a nd forecasting
“Those who fail to plan, plan to
fail”
George Hewell

2. Financial Planning
One-third of entrepreneurs run their
companies without any kind of financial plan!
Only 11 percent of small business owners
analyze their companies’ financial
statements!

3. Basic Financial Reports
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NNeett IInnccoommee == SSaalleess RReevveennuuee -- EExxppeennsseess
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ffuunnddss aanndd tthhee uusseess ooff tthheessee ffuunnddss..

4. Financial Planning
The projection of :
 Sales
 Income
 Assets
Alternative
Production &
Marketing
Strategies
It also deals with the determination of resources
needed to achieve these projections!

5. Benefits of Financial Planning
Illustrate the ‘Bottom Line’ of the
Firm
Optimal structure of financing
Optimal utilization of resources
To control and feedback

6. Financial Control
The phase in which financial plans are
implemented
Compare the budgeted and actual numbers in
different headings
Control deals with the feedback
and adjustment process
required to ensure
adherence to plans and
modification of plans
because of unforeseen changes

7. Steps in Financial Planning

8. Forecasting

9. Sales Forecasts
A forecast of a firm’s unit and dollar sales for some
future period

10. Sales Forecasts
Generally based on recent sales trends plus
forecasts of the economic prospects for the nation,
region, industry, and so forth

11. Financial Statements Forecasting
Once sales have been forecasted, future balance
sheets and income statements must be forecasted.
The most commonly used technique is the
Percentage of Sales Method or, Constant Ratio
Method.
Some business firms use the Budgeted Expenses
Method as well as Combination of both these
methods.

12. Financial Statement forecasting contd.
A method of forecasting financial requirements
based on forecasted financial statements
 1. Forecast the Income Statement
 2. Forecast the Balance Sheet
 Adjust for spontaneously generated funds obtained from routine
business transactions

13. Forecasting Contd.
Step 1: Forecast income statement
Step 2: Forecast the balance sheet
Step 3: Find out the Additional fund needed (AFN)
AFN = Projected Total assets – Projected liabilities
and capital

14. AFN Formula
Funds that a firm must raise externally through
borrowing or by selling new common or preferred
stock
Assumptions:
1.Present assets levels are optimal with respect to
present sales

15. AFN contd.
2. Most of the Balance Sheet items increase in
proportion to sales and
3.The firm’s profit margin on sales, Expenses Ratio on
Sales and DPR remains constant.
AFN = (A*/S0)ΔS – (L*/S0)ΔS-M×S1×RR

16. AFN contd.
Where,
A* = Assets that are tied directly to sales
A*/S0 = Assets that must increase if sales are to
increase
L* = Liabilities that increase spontaneously

17. AFN contd.
L*/S0 = Liabilities that increase spontaneously as a
percentage of sales.
S1 = Total expected sales for the year
S0 = Last year’s sales
ΔS = Change in sales = S1 – S0
M = Profit margin
RR = Retention ratio or 1 – DPR

18. Example:
Trading Corporation’s sales are expected to increase from Rs. 5
million in 2013 to Rs. 6 million in 2014, or by 20 percent. Its assets
totaled Rs. 3 million at the end of 2013. Corporation is at full
capacity, and its assets must grow in proportion to projected sales.
At the end of 2013, current liabilities are Rs. 1.5 million, consisting
of Rs. 300,000 of accounts payable, Rs. 650,000 of notes payable,
and Rs. 550,000 of accrued liabilities. The after tax profit margin
is forecasted to be 5 percent, and the forecasted retention ratio is
30 percent.
Required:
a. Forecast the corporation’s additional funds needed for the
coming year.
b. What would the additional funds needed be if the
corporation’s year-end 2013 assets had been Rs. 4 million? Assume
that all other numbers are the same. Is the capital intensity the
same or different with that calculated in (a) above?
c. Assume that the corporation pays no dividends. Under this
assumption what would be the additional funds needed for the
coming year, assuming all other numbers are the same? Why the
forecasted additional fund is different from the one you found in
(a) above?
Bibek Risal - LBEF

19. Example contd.
Ans:
a.340,000
b.540,000
c.130,000

20. ABC’s 2013 financial statements are shown below:
Balance Sheet As on 31-12-2013 (thousands of Rs.)
Assets Amount Liabilities & Equities Amount
Cash 1,800 A/C Payable 7,200
A/C Receivable 10,800 Notes payable 3,472
Inventories 12,600 Accruals 2,520
Total Current Assets 25,200 Total Current liabilities 13,192
Net fixed assets 21,600 Mortgage bond 5,000
Bibek Risal - LBEF
Common Stock 2,000
Retained earning 26,608
46,800 46,800
Particulars Amoun
t
Sales 36,000
Les
s
Operating Costs 30,783
EBIT 5,217
Les
s
Interest 1,017
EBT 4,200
Les
s
Tax 40% 1,680
Net income 2,520
Les
s
Dividend 60 1,512
Addition to Retained Earning 1,008
Assume that the company was
operating at full capacity in 2013
which means all the assets are
being utilized to 100 percent of
capacity.
If ABC can increase its sales by
25% in 2014; forecast the Income
Statement and Balance Sheet for
2014 and estimate the EFN.
Redo assuming that ABC’s Fixed
Assets were utilized up to 60% only.
ABC’s Income Statement For December 31-12- 2013 ( in ‘000’)

21. Factors affecting Financial Planning

22. Capitalization
1. Accounting: Recording of a cost as a fixed asset (
written off as depreciation over several
accounting periods) instead of an expense (charged off
against earnings in one accounting period).
2. Corporate: Conversion of the retained earnings of a firm
into capital through a new issue of stock.
3. Finance: Structure and amount of long-term equity and
debt capitals of a firm expressed as percentage of the
total (equity and debt) capital.

23. Theories of Capitalization
Cost Theory Earning Theory
Total amount of
capitalization for a new
company is the sum of :
Cost of Fixed Assets
Cost of Establishing
the Business
Amount of Working
Capital Required
Two simple steps to
estimate capitalization :
Estimate the Avg .Annual
Future Earnings
Estimation of normal
earning rate of the
industry to which the
company belongs

24. Capitalization
Overcapitalization Undercapita
lization