Financial Planning and

Forecasting Financial Statements

Presented By Bright Minds:

Dalia Mohamed
Heba-tullah Azzam
Mohamed Abdel Tawab
Rasha Khedr

With Dr. Samia Kamel

CHAPTER 14
CONTENTS
Financial

planning definition,
importance and types.

Cash

budget.

Pro

forma income statement.

Pro

forma balance sheet.

DEFINITION:

FINANCIAL PLANNING

The task of determining how the organization will afford to achieve its
strategic goals.
Created immediately after the vision and objectives have been
determined.
Describes activities, resources, equipment, and materials needed to
achieve an
organization's objectives as well as the timeframe.

BENEFITS:

Developing a financial plan is critical to the success of any

organization.
It validates the business plan, by confirming that the objectives set are
achievable from a financial point of view.

Financial
Planning

Long-term, or
strategic
financial plans

Guides

Cash planning
(preparing the
cash budget)

Short-term, or
operating plans
and budgets

Profit
planning
(preparing the
pro forma
statements).

CASH PLANNING: CASH BUDGET

Statement

of the firms planned inflows and outflows of cash that is

used
to estimate its short-term cash requirements.
Covers

The

a 1-year period, divided into smaller time intervals.

number of intervals depend on the nature of the business.

The more seasonal and uncertain a firms cash flows, the greater the
number of intervals.

THE GENERAL FORMAT OF THE

CASH BUDGET

PROFIT PLANNING: PRO FORMA

STATEMENTS
Pro

forma statements: Projected, or forecast, income statements

and
balance sheets.

Two

inputs are required for preparing pro forma statements:

(1) Financial statements for the preceding year.
(2) The sales forecast for the coming year.

VECTRA MANUFACTURING PRO FORMA

INCOME STATEMENT
A simple method for developing a pro forma income statement
is the
percent-of-sales method.
It forecasts sales and then expresses the various income
statement items as percentages of projected sales.
The percentages used are likely to be the percentages of sales
for those items in the previous year.

Sales Forecast for Vectra

Manufacturing 2016
Unit sales
Model X
Model Y

1,500
1,950

Dollar sales
Model X ($25/unit)
Model Y ($50/unit)
Total

$ 37,500
97,500
$135,000

Vectra Manufacturings Income Statement

for the Year Ended
December 31, 2015
$100,000
Sales
Less: Cost of goods sold
Labor
Material A
Material B
Overhead
Total cost of goods sold
Gross profits
Less: Operating expenses
Operating profits
Less: Interest expense

$ 28,500
8,000
5,500
38,000
$ 80,000
$ 20,000
10,000
$ 10,000
1,000

Net profits before taxes

9,000
Less: Taxes (0.15 * $9,000)
Net profits after taxes
Less: Common stock dividends

1,350
$ 7,650
4,000

A Pro Forma Income Statement,

Using the Percent-of-Sales method, for Vectra
Manufacturing
for the year Ended December
31, 2016
Sales revenue
$135,000
Less: Cost of goods sold (0.80)
108,000
Gross profits
$ 27,000
Less: Operating expenses (0.10)
13,500
Operating profits
$ 13,500
Less: Interest expense (0.01)
1,350
Net profits before taxes
12,150
Less: Taxes (0.15 * $12,150)
1,823

PREPARING THE PRO FORMA

BALANCE SHEET

A number of simplified approaches are available for preparing the pro

forma balance sheet.

One involves estimating all balance sheet accounts as a strict

percentage of sales.

A better and more popular approach is the judgmental approach as the

financial Manager puts his judgments and assumptions, under which
the firm estimates the values of certain balance sheet accounts and
uses its external financing as a balancing, or plug, figure.

TO APPLY THE JUDGMENTAL APPROACH TO PREPARE VECTRA MANUFACTURINGS

2016 PRO FORMA BALANCE SHEET, BELOW ASSUMPTIONS ARE MADE:

Minimum cash balance of $6,000 is desired.

Marketable securities will remain unchanged from their current level of $4,000.

Accounts receivable on average represent about 45 days of sales (about 1/8 of a year)..
Because Vectras annual sales are projected to be $135,000, accounts receivable should
average $16,875 (1/8 * $135,000).

The ending inventory should remain at a level of about $16,000.

A new machine costing $20,000 will be purchased with total depreciation for the year is
$8,000. Adding the $20,000 acquisition to the existing net fixed assets and subtracting the
depreciation of $8,000 yields net fixed as- sets of $63,000.

Accounts payable should equal one-fifth purchases which is assumed to be 30 percent of

annual sales which is $8100

Taxes payable will equal one-fourth of the current years tax liability.

Notes payable will remain unchanged from their current level, and no change in other
current liabilities is expected.

A PRO FORMA BALANCE SHEET, USING THE

JUDGMENTAL APPROACH, FOR VECTRA
MANUFACTURING (DECEMBER 31, 2016)

THANKS FOR YOUR ATTENTION