chapter17 - financial planning and control

8/10/2019 Chapter17 - Financial Planning and Control

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Chapter 17Financial Planning

and Control

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Financial Planning and Control

Financial Planning:

The projection of sales, income, and assets based

on alternative production and marketing

strategies, as well as the determination of theresources needed to achieve these projections

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Financial Planning and Control

Financial Control

The phase in which financial plans are

implemented, control deals with the feedback and

adjustment process required to ensure adherenceto plans and modification of plans because of

unforeseen changes.

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Financial Planning: The Sales Forecast

A forecast of a firm’s unit and dollar sales for

some future period, generally based on

recent sales trends plus forecasts of the

economic prospects for the nation, region,industry, etc.

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Projected (Pro Forma)Financial Statements A method of forecasting financial

requirements based on forecasted financial

statements

AFN = additional funds needed to support thelevel of forecasted operations

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Projected Financial Statements

Determine how much money the firm will

need in a given period.

Determine how much money the firm will

generate internally during the same period.

Subtract the funds generated internally from

the funds required to determine the external

financial requirements.

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Step 1. Forecast the 2013 IncomeStatement: Unilate Textiles

Assumptions:

Unilate operated at full capacity in 2012.

Sales are expected to grow by 10 percent.

The variable cost ratio remains at 82 percent

(same as 2012).

2013 dividend per share will be the same as

in 2012.

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Step 1. Forecast the 2013 Income Statement

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Step 2. Forecast the 2013 Balance Sheet

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Step 3. Raising the Additional Funds Needed (AFN)

Higher sales must be supported by higherassets.

Asset increase can be financed by

spontaneous increases in accounts payableand accruals and by retained earnings.

Any short fall must be financed from external

sources--by borrowing or by selling new

stock.

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Step 4. Financing Feedbacks

The effects on the income statement and

balance sheet of actions taken to finance

forecasted increases in assets

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2013 Adjusted Forecast of Income Statement

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a The upper portion of the income statement is not affected by financing feedbacks.b The adjustment to RE shows up in the balance sheet as well.



2013 Adjusted Forecast of Balance Sheet

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b The adjustment to RE shows up in the balance sheet as well.c Total AFN = $45.0 million, which equals $42.7 million plus the $2.3 million decrease in RE.



Unilate Textiles: Adjusted Key Ratios

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Other Considerations in Forecasting:Excess Capacity

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Other Considerations in Forecasting:Economies of Scale

Unilate’svariable cost ratio is 82% of sales.

Ratio might decrease to 80% if operations

increase significantly.

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Changes in variable cost ratio affect theaddition to retained earnings which affects theamount of AFN.



Other Considerations in Forecasting:Lumpy Assets

Assets that cannot be acquired in small

increments, but must be obtained in large,

discrete amounts

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How Different Factors Affect the AFNForecast. Dividend payout ratio changes.

If reduced, more RE, reduce AFN.

Profit margin changes.

If increases, total and retained earnings increase, reduce AFN.

Plant capacity changes.

Less capacity used, less need for AFN.

Payment terms increased to 60 days.

Accounts payable would double, increasing liabilities, reduce

AFN.

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Financial Control -Budgeting and Leverage The phase in which financial plans are

implemented; control deals with the feedback

and adjustment processes required to

ensure the firm is following the right financialpath to accomplish its goals, and, if not, to

make necessary corrections.

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Operating Breakeven Analysis

An analytical technique for studying the

relationship between sales revenues, operating

costs, and profits

Operating breakeven analysis deals only with the

upper portion of the income statement —the

portion from sales to NOI

At the operating breakeven point, EBIT = 0

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Unilate’s 2013 Forecasted OperatingIncome

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Operating Breakeven Chart

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Breakeven Computation

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For the proposal to break even, Unilate must sell 57

million units or $855.6 million of product.



Operating Leverage

The existence of fixed operating costs, suchthat a change in sales will produce a larger

change in operating income (EBIT)

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Degree of Operating Leverage

The percentage change in NOI(or EBIT) associated with a given percentage

change in sales

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Calculating the Degree of OperatingLeverage

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Operating Income/Leverage at SalesLevels of 110 and 121 Million Units

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Financial Breakeven Analysis

Determining the operating income (EBIT) thefirm needs to just cover all of its fixed

financing costs and produce earnings per

share equal to zero At the financial breakeven point, EPS = 0

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Financial Breakeven Graph

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Financial Breakeven Computation

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Financial Breakeven Computation

The financial breakeven point for Unilate

Textiles in 2013 is:

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Financial Leverage

The existence of fixed financial costs such asinterest and preferred dividends when a

change in EBIT results in a larger change in

EPS

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Degree of Financial Leverage

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Degree of Financial Leverage

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EPS/Financial Leverage at Sales Levels of110 and 121 Million Units

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Degree of Total Leverage

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Importance of Forecasting and ControlFunctions

If projected operating results are not satisfactory,management can reformulate its plans.

If funds required to meet sales forecast cannot be

obtained, management can scale back projected

levels of operations.

If required funds can be raised, it is best to plan for

their acquisition in advance.

Any deviation from projections needs to be handledto improve future forecasts.

chapter17 - financial planning and control

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