FINANCIAL PLANNING AND FORECASTING

• Key factors


  • Sales growth
  • Capital intensity
  • Spontaneous liabilities-to-sales ratio
  • Profit margin
  • Retention ratio
• Sales growth


  Rapidly growing companies require LARGE increases in assets
• Capital intensity ratio


  Companies with high assets to sales ratio require MORE assets for a given increase in sales ; hence, have a GREATER need for external financing
• Spontaneous liabilities-to-sales ratio


  Companies that spontaneously generate a large amount of funds from accounts payable and accrued liabilities have a REDUCED need for external financing
• Profit margin


  The higher the profit margin, the larger the net income available to support increases in assets ; hence, the LOWER the need for external financing
• Retention ratio


  (1 – payout ratio) Companies that retain a high percentage of earnings rather than paying them out as dividends generate more retained earnings; thus LESS external financing
• AFN

  Additional Funds Needed
• AFN Equation


  AFN = Projected increase in assets - Projected increase in spontaneous liabilities - Increase in retained earnings
• Projected increase in assets


  = (CY Assets / CY Sales) x Peso change in sales
• Projected increase in spontaneous liabilities


  = (CY spontaneous liabilities / CY sales) x Peso change in sales
• Increase in retained earnings


  = (Projected sales x forecasted profit margin) x (1-payout ratio)
• Sustainable Growth Rate 


  the maximum achievable growth rate without the firm having to raise external funds
• AFN or EFN is zero when the firm only has a SUSTAINABLE GROWTH RATE
• Regression Analysis


  a statistical technique that fits a line to observed data points so that the resulting equation can be used to forecast other data points