Financial%20Planning - PowerPoint PPT Presentation

About This Presentation
Title:

Financial%20Planning

Description:

Financial Planning Financial Planning The Financial Planning Process Liquidity Working Capital Inventories Capital Budgeting Capital Structure Dividends 3 Rules of ... – PowerPoint PPT presentation

Number of Views:318
Avg rating:3.0/5.0
Slides: 58
Provided by: Haw76
Category:

less

Transcript and Presenter's Notes

Title: Financial%20Planning


1
  • Financial Planning

2
  • Financial Planning

Portions taken from Emery and Finnerty Corporate
Financial Management Chapter 22 Edited and
expanded by Del Hawley
3
The Financial Planning Process
A firms financial plan involves decisions
about
  • Liquidity
  • Working Capital
  • Inventories
  • Capital Budgeting
  • Capital Structure
  • Dividends

4
3 Rules of Financial Management
What are the three primary rules of
successful financial management?
5
3 Rules of Financial Management
What are the three primary rules of
successful financial management?
  1. Get the cash
  2. Get the cash
  3. Get the cash

6
The Cash Plumbing System

Equity
LT Debt
Taxes
Dividends
7
The Cash Plumbing System

Equity
LT Debt
Taxes
Dividends
8
The Cash Plumbing System

Equity
LT Debt
Taxes
Dividends
9
The Cash Plumbing System

Equity
LT Debt
Taxes
Dividends
10
The Cash Plumbing System

Equity
LT Debt
Taxes
Dividends
11
The Cash Plumbing System

Equity
Operating Expenses
LT Debt
Taxes
Dividends
12
The Cash Plumbing System

Equity
Operating Expenses
LT Debt
Taxes
ST Debt Mktl Sec
Dividends
13
The Cash Plumbing System

Equity
Operating Expenses
LT Debt
Taxes
ST Debt Mktl Sec
Dividends
Accts Payl
Fixed Assets
Materials/Inventory
Sale
Labor
Finished Goods
14
The Cash Plumbing System

Equity
Operating Expenses
LT Debt
Taxes
ST Debt Mktl Sec
Dividends
Accts Payl
Fixed Assets
Materials/Inventory
Sale
Labor
Finished Goods
15
The Cash Plumbing System

Equity
Operating Expenses
LT Debt
Taxes
ST Debt Mktl Sec
Dividends
Accts Payl
Fixed Assets
Materials/Inventory
Sale
Labor
Finished Goods
16
The Cash Plumbing System

Equity
Operating Expenses
LT Debt
Taxes
ST Debt Mktl Sec
Dividends
Accts Payl
Fixed Assets
Materials/Inventory
Sale
Labor
Finished Goods
17
The Cash Plumbing System

Equity
Operating Expenses
LT Debt
Taxes
ST Debt Mktl Sec
Dividends
Accts Payl
Accounts Recl
Fixed Assets
Materials/Inventory
Sale
Labor
Finished Goods
18
The Cash Plumbing System

Equity
Operating Expenses
LT Debt
Taxes
ST Debt Mktl Sec
Dividends
Accts Payl
Accounts Recl
Fixed Assets
Materials/Inventory
Sale
Labor
Finished Goods
19
Cash Conversion Cycle
Collect Acct. Receivable
Purchase Inventory
Sale on Credit
Inventory Conversion Period
Receivables Collection Period
Time
Cash Conversion Cycle
Payment of Accts. Payable
Payables Deferral Period
20
Cash Conversion Cycle
Collect Acct. Receivable
Purchase Inventory
Sale on Credit
Inventory Conversion Period
Receivables Collection Period
Time
Cash Conversion Cycle
Payment of Accts. Payable
Payables Deferral Period
21
Cash Conversion Cycle
Collect Acct. Receivable
Purchase Inventory
Sale on Credit
Inventory Conversion Period
Receivables Collection Period
Time
Cash Conversion Cycle
Payment of Accts. Payable
Payables Deferral Period
22
Cash Conversion Cycle
Collect Acct. Receivable
Purchase Inventory
Sale on Credit
Inventory Conversion Period
Receivables Collection Period
Time
Cash Conversion Cycle
Payment of Accts. Payable
Payables Deferral Period
23
Cash Conversion Cycle
Collect Acct. Receivable
Purchase Inventory
Sale on Credit
Inventory Conversion Period
Receivables Collection Period
Time
Cash Conversion Cycle
Payment of Accts. Payable
Payables Deferral Period
24
The Financial Plan
  • Financial planning is the process of evaluating
    the impact of alternative investing and financing
    decisions of the firm.
  • Every financial plan has three components
  • A model
  • Inputs
  • Outputs

25
The Financial Plan
  • The model is a set of mathematical relationships
    between the inputs and the outputs.
  • Inputs to the model may include
  • Projected sales
  • Collections
  • Costs
  • Interest rates
  • Exchange rates

26
The Financial Plan
  • The outputs of the financial plan are
  • Cash Budget
  • Pro forma (projected) financial statements
  • Projections for external funding requirements

27
Components of the Financial Plan
  • Every financial plan should have
  • Clearly stated strategic, operating and financial
    objectives.
  • Assumptions on which the plan is based.
  • Description of underlying strategies.
  • Contingency plans to deal with the variances from
    expectations.

28
Benefits of Financial Planning
  • Future (strategic) orientation
  • Identify and quantify assumptions
  • Prepare for contingencies (risk analysis)
  • Identify funding requirements
  • Assess performance

29
Cash Budgets
  • Cash budgets
  • project and summarize cash inflows and outflows
  • show monthly cash balances
  • show any short-term borrowing needed to cover
    cash shortfalls
  • Are based on sales forecasts.
  • Are usually constructed on a monthly basis.

30
Preparing a Cash Budget
  • Prepare a cash budget for Tyler Paints for the
    months of April, May and June, given the
    information in the information provided in the
    following slides.

31
Sales Recent and Forecast
  • The recent and projected sales for the company
    are

Feb 500,000
Mar 600,000
Apr 1,200,000
May 1,000,000
Jun 1,000,000
32
Sales Recent and Forecast
  • The recent and projected sales for the company
    are

Feb 500,000
Mar 600,000
Apr 1,200,000
May 1,000,000
Jun 1,000,000
For your project, the sales projections are the
culmination of the marketing analysis.
33
Collections Forecast
  • On average, 20 of the companys sales are for
    cash and the rest is carried as accounts
    receivable with 45 of a given months sales
    collected one month following the sale and the
    remainder collected two months following the
    sale.

34
Collections on Sales
  • Collections in April are
  • 20 of April Sales
  • 45 of March Sales
  • 35 of February Sales
  • 20(1,200,000) 240,000
  • 45(600,000) 270,000
  • 35(500,000) 175,000
  • 685,000

35
Collections on Sales
36
Collections on Sales
For your project, you will need to think about
the timing of collections. You may sell
everything for cash, or you may give your
customers payment terms.
37
Pro-Forma Accounts Receivable
  • Uncollected sales at the end of April
    (Accounts Receivable) will be
  • 35(March Sales) (80 of April Sales)
  • 35(600,000) 80(1,200,000)
  • 1,170,000
  • A/R for May 1,220,000
  • A/R for June 1,150,000

38
Payment Forecasts
  • The cost of production materials averages 50 of
    sales. Payment is made for the materials one
    month after purchase.
  • Wages average 20 of sales.
  • Fixed costs are 120,000 per month
  • A quarterly tax payment of 200,000 is due in
    April

39
Cash Payments
  • Cash Payments in April
  • Materials 50(March Sales)
  • Wages 20(April Sales)
  • Other Fixed Expenses of 120,000
  • 50 x 600,000
  • 20 x 1,200,000
  • 120,00
  • 920,000

40
Cash Payments
41
Cash Payments
Heres where you will have LOTS of fun! You have
to think of all of the ways that money will need
to be spent, list and justify all assumptions,
and project it all out for at least three years.
42
Cash Budget
43
Cash Budget
44
Cash Budget
45
Cash Budget
  • Tyler will have to borrow 125,000 in April.
  • Tyler can repay 30,000 in May, leaving an
    outstanding loan balance of 155,000.
  • The short-term loan can be fully repaid in June.

46
SPREADSHEET
  • The next lesson is on creating a spreadsheet
    model for the Tyler Paints cash budget.
    Intstructions are on the class web page.

47
Cash Budget
  • We will also work with Problem C-1 (linked on
    the web page) in a spreadsheet to build a model
    that produces a cash budget, an income statement,
    and a balance sheet that are all integrated.

48
Pro Forma Financial Statements
  • Pro Forma Statements
  • Show the effect of the firms decisions on its
    future financial statements.
  • Effects of alternative decisions and sensitivity
    to changes in assumptions can be examined.

49
Percent of Sales Forecasting Method
  • Assumes that some IS/BS items stay constant as a
    percent of sales as sales vary.
  • In general, Accounts Receivable, Inventory,
    Accounts Payable (on the balance sheet), and cost
    of goods sold and some operating expenses (on the
    income statement) vary with sales (maintain the
    same percentage of sales) or cost of goods sold.
  • Other items are either fixed with respect to
    changes in sales or they are plug figures.

50
Percent of Sales Forecasting Method
  • Sales growth results in
  • increase in current and fixed assets
  • increase in spontaneous short-term financing
  • increase in profitability
  • The increase in current assets must be financed
    from internally generated funds or external
    funds.
  • Note WELL You can go BUST by letting GROWTH
    outrun your CASH.

51
Percent of Sales Forecasting Method
  • If internally generated funds are insufficient
    to finance the growth, the firm may
  • Reduce the growth rate
  • Sell assets not required to run the firm
  • Obtain new external financing
  • Reduce or stop paying cash dividends.

52
Additional Financing Needed (AFN)
  • Let
  • A/S the increase in assets per dollar increase
    in sales.
  • L/S the increase in spontaneous liabilities
    per dollar increase in sales.
  • S0 current level of sales.
  • g projected growth rate in sales.
  • M net profit margin on sales.
  • D cash dividends planned for common stock.

53
Additional Financing Needed (AFN)
  • Additional Financing Needed (AFN)
  • Required increase in assets
  • - Increase in (spontaneous) liabilities
  • - Increase in retained earnings
  • NOTE This a PERMANENT increase in the funding
    requirement.

54
Additional Financing Needed (AFN)
  • Additional Financing Needed (AFN)
  • Required increase in assets
  • - Increase in (spontaneous) liabilities
  • - Increase in retained earnings
  • AFN (A/S)gS0 - (L/S)gS0 - M(1g)S0 - D
  • Note A/S, L/S, and AFN/g are NOT CONSTANTS and
    MAY NOT BE LINEAR or CONTINUOUS.

55
Additional Financing Needed
  • Peak Plastics expects rapid sales growth next
    year. Sales for the current year were 4 million,
    and are expected to grow by 20 next year. Peak
    wants to estimate the external capital that will
    be required to finance this growth. The firm
    estimates that additional assets equal to 50 of
    the increase in sales will be required.
    Liabilities will increase by 18 of sales. The
    net profit margin is 6 and Peak expects to pay
    84,000 in dividends to its common stockholders.

56
Additional Financing Needed
(A/S)gS0 400,000 (L/S)gS0 144,000 M(1g)S0
- D 204,000 AFN 52,000
Do problems 2, 5 and 6 in the text
57
  • Financial Planning

Portions taken from Emery and Finnerty Corporate
Financial Management Chapter 22 Edited and
Expanded by Del Hawley
Write a Comment
User Comments (0)
About PowerShow.com