The format of the balance sheet and income statement can be used as a format for planning the next period. This form of planning is called Pro-Forma financial statements. It can be as simple or complex as the situation and time warrants. The simplest format is the best to start the analysis. More omplications can be added later to better simulate the real situation.
This method simply takes the last available year and uses the balance sheet and income statement to forecast next year by assuming that most items on the statements will have to go up if sales go up.
Big assumption! The company is efficiently run and
has just the ideal amount of assets and liabilities for the existing situation.
This assumption will have to be faced later. Keep it in mind for now.
Some liability and equity accounts can be tapped by
the financial manager for any external financing needed. This is
called negotiated sources. It is the amount that you plug in somewhere to
make the balancesheet balance. The accounts that will go up with sales are
called spontaneous.
The % of sales column is calculated based on 1996 account proportions to sales. Multiply the Percentage by the forecasted 1997 sales.
The 1997 Sales = 1 + the sales growth rate times 1996 Sales.
External financing needed is equal to the amount of extra money needed because assets increase minus the money provided by increased liabilities and minus the amount of increase in retained earnings for 1997 minus less any dividends paid.
EFN= (SalesInc X Asset%) -( SalesInc X Liability%) -( Net Profit -Dividends)
EFN= (5011766 X .08) X .93)) - (5011766 X .08) X .17) - (5412707 X .02 X .5)= 252060
Using the values in the table below may differ a little because of rounding in the % of Sales shown.
| Balance Sheet | |||
| 12-31-96 | %of Sales | 1997 Forecast | |
| ASSETS | |||
| Cash | 175500 | 4 | 189540 |
| Accounts Receivable | 1875250 | 37 | 2025270 |
| Inventory | 146890 | 29 | 1573441 |
| Plant and Equipment | 1155250 | 23 | 1247670 |
| Total Assets | 4662890 | 5035921 | |
| Liabilities & Capital | |||
| Accruals | 275000 | 5 | 297000 |
| Accounts Payable | 560550 | 11 | 605394 |
| Notes Payable [current] | 800000 | negotiated | |
| Mortgage Bonds | 1000000 | negotiated | 1000000 |
| Preferred Stock | 225000 | negotiated | 225000 |
| Common Stock | 300000 | negotiated | 300000 |
| Retained Earnings | 1502340 | from income statement | |
| Total Lia. & capital | 4662890 | 5035921 | |
| Other Data for Planning | |
| Net profit margin on sales | .02 |
| Rate of growth in Sales | .08 |
| Dividend Payout ratio | .50 |
| 1996 Sales | 5011766 |
| Assume all external financing needed is secured by new notes payable | |
Notice that the retained earnings go up by the amount
of profit minus dividends and that the EFN was added to the Notes Payable
,plugged. The balance sheet balances !
If the Financial manager is unable to get this full
amount of financing somewhere the company will run out of money or
inventory and be unable to make the projected sales growth.
Once this simple method is used to forecast each balance sheet item the same process can be used for the income statement. More realistic estimates will probably have to be substituted for Plant and Equipment increases as they tend to be lumpy and not really just a percentage of sales. For example, if there is excess manufacturing capacity, no increase in Plant and Equipment may be necessary and this would substantially reduce the EFN requirement.
Comments and Suggestions should may be sent togramborw@tiger.uofs.edu