Chapter 6 - Financial Planning: Long-Term and Short-Term

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Chapter 6

FINANCIAL PLANNING: LONG-TERM AND SHORT-

TERM

© 2003 South-Western College Publishing

ENTREPRENEURIAL FINANCE Leach & Melicher

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CHAPTER 6:LEARNING OBJECTIVES

Understand the concept of a sustainable sales growth rate

Understand the process of identifying when and how much additional funds will be needed to support the venture’s sales forecasts

Develop an understanding of the impact of varying sales growth rates on the amount and timing of additional funds needed

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CHAPTER 6:LEARNING OBJECTIVES

Describe the percent of sales method for preparing long-term financial plans

Explain why projected statements of cash flows are important to the entrepreneur

Describe how projected statements of cash flow relate to cash budgets

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VENTURE LIFE CYCLE

DEVELOPMENT STAGE

STARTUP STAGE

SURVIVAL STAGE

LIQUIDATERESTRUCTURE

RAPID GROWTH STAGE

GO PUBLICSELL OR MERGE

MATURITY STAGE

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VENTURE LIFE CYCLE: OPERATING AND FINANCIAL DECISIONS

Development Stage:

Screen Business Ideas

Prepare Business Plan

Obtain Seed Financing Startup Stage:

Choose Organizational Form

Prepare Initial Financial Statements

Obtain First Round Financing

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Survival Stage:Monitor Financial PerformanceProject Cash NeedsObtain First Round Financing>Possible Actions: Liquidate v.

Restructure Rapid Growth Stage:

Create and Build ValueObtain Additional FinancingExamine Exit Opportunities>Possible Actions: Go Public v.

Sell/Merge

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Maturity Stage:

Manage Ongoing Operations

Maintain and Add Value

Obtain Seasoned Financing

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FORECASTING SALES OR REVENUES

Forecasting for Early Stage Ventures: Firms that are in either

their development, startup, or survival stage, or just entering

into their rapid growth stage of their life cycle.

Industry Probability of Sales Component

Sales Scenario Occurrence Growth Rate Weight

Optimistic forecast .30 X 60% = 18.0%

Most likely forecast .40 X 50% = 20.0%

Pessimistic forecast .30 X 40% = 12.0%

1.00 Expected Value = 50.0%

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ESTIMATING SUSTAINABLE SALES GROWTH RATES

Internally Generated Funds: Net income or profits after taxes earned over an accounting period

Sustainable Sales Growth Rate: Rate at which a firm can grow sales based on the retention of profits in the business

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Equity Beginning

EquityIn Changeg

quityBeginningE

quityBeginningEtyEndingEquig

Equity Beginning

Equityg

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RR x )(NI/E g

RR x )(NI/EE/E

RateRetention x IncomeNet E

beg

beg beg

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MultiplierEquity Turnover xAsset Margin x Profit Net ROE

FP ROA g

Policies Financial ePerformanc Operating g

RR CE

TA

TA

NS

NS

NIg

CE

TA

TA

NS

NS

NI

CE

NIROE

beg

X

X

XXX

XX

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ESTIMATING ADDITIONAL FINANCING NEEDED TO SUPPORT GROWTH

Financing Capital Needed (FCN): financial funds needed to acquire assets necessary to support a firm’s sales growth

Spontaneously Generated Funds: increases in accounts payables and accruals (wages and taxes) that occur with a sales increase

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ESTIMATING ADDITIONAL FINANCING NEEDED TO SUPPORT GROWTH

Additional Funds Needed (AFN): financial funds still needed to finance asset growth after spontaneously generated funds and any increase in retained earnings have been used

AFN = Required Increase in Assets – Spontaneously Generated Funds – Increase in Retained Earnings

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AFN EQUATION

RateRetention RR

IncomeNet NI

sliabilitie Accrued AL

payable Accounts AP

yearcurrent andyear next between salesnet in Change NS

salesNet NS

assets Total TA :where

)(RR NS

NI)(NS - NS)(

NS

AL AP - NS)(

NS

TAAFN o

o

o1

o

oo

o

o

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AFN CALCULATIONS

Sales last year = $1,600,000 Asset investment = $1,000,000 Net Income = $160,000 Current Assets = $520,000 Fixed Assets = $480,000 Accounts Payable = $48,000 Accrued Liabilities = $32,000 Projected next year sales = $2,080,000

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AFN CALCULATIONS

$68,000

)(.10)(1.00$2,080,000 - 00).05($480,0 -00)625($480,0.

(1.00) $1,600,000

$160,0000)($2,080,00 - ($480,000)

$1,600,000

$80,000 - ($480,000)

$1,600,000

$1,000,000

AFN

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PROJECTING OR FORECASTING FINANCIAL STATEMENTS

Percent of Sales Method: make projections based on the assumption that certain costs and selected balance sheet items are best expressed as a percentage of sales

Constant Ratio Method: variant of the percent of sales method that projects selected cost and balance items at the same growth rate as sales

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PROJECTING OR FORECASTING FINANCIAL STATEMENTS

FINANCIAL FORECASTING PROCESS TO PROJECT FINANCIAL STATEMENTS

1. Forecast sales

2. Project income statement

3. Project balance sheet

4. Project statement of cash flows

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GAME TOY INCOME STATEMENTS (2001 Actual, 2002 Projected)

ACTUAL FORECAST2001 2002

Sales $1,600,000 1.3 x 2001 sales $2,080,000CGS 960,000 .60 x 2002 sales 1,248,000 Gross Profit 640,000 832,000Marketing Exp 160,000 .10 x 2002 sales 208,000G & A Exp 152,000 Fixed costs 152,000Deprec. Exp 48,000 .030 x 2002 sales 62,400 EBIT 280,000 409,600Less Interest 13,300 Initially fixed 13,300 EBT 266,700 396,300Less Taxes @ 40% 106,700 40% of EBT 158,500Net Income 160,000 237,800-Cash Distrib. 0 0\__________ \__________Added RE $160,000 $237,800

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GAME TOY BALANCE SHEETS (2001 Actual, 2002 Projected)

ACTUAL FORECAST2001 2002

Cash $16,000 .01 x 2002 sales $20,800A/R 184,000 .115 x 2002 sales 239,200Inventories 320,000 .20 x 2002 sales 416,000 Total C/A 520,000 .325 x 2002 sales 676,000Net P & E 480,000 .300 x 2002 sales 624,000 Total Assets 1,000,000 .625 x 2002 sales 1,300,000 __- __-A/P 48,000 .03 x 2002 sales 62,400Accrued Liabilities 32,000 .02 x 2002 sales 41,600Bank Loan 120,000 120,000 Total C/L 200,000 224,000Common Equity 800,000 +237800 1,037,800Addt'l Funds Needed 0 38,200Total Liab & OE $1,000,000 $1,300,000 ___ ___

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SHORT-TERM CASH PLANNING TOOLS

Sales Schedule Purchase Schedule Wages and Commission Schedule Cash Budget

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PDC COMPANY OPERATING & CASH BUDGET

SALES SCHEDULE MARCH APRIL MAY JUNE

Schedule 1:Sales Forecast $92,000 $115,000 $184,000 $138,000 Credit sales, 40% 36,800 46,000 73,600 55,200 Credit sales, 60% 55,200 69,000 110,400 82,800

Schedule 2:Cash Collections Cash sales this month 69,000 110,400 82,800 100% last month's credit sales 36,800 46,000 73,600 Total colections 105,800 156,400 156,400

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PDC COMPANY OPERATING & CASH BUDGETPURCHASES SCHEDULES

MARCH APRIL MAY JUNESchedule 3:PurchasesEnding inventory $110,400 $149,040 $123,280 $110,400+CGS 64,400 80,500 128,800 96,600=Total needed 174,800 229,540 252,080 207,000-Beginning inventory 97,520 110,400 149,040 123,280=Purchases 77,280 119,140 103,040 83,720

Schedule 4:Purchase Disbursements50% last mos purch 38,640 59,570 51,520+50% this mos purch 59,570 51,520 41,860=Disbursements for purchases 98,210 111,090 93,380

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WAGES & COMMISSIONS SCHEDULE MARCH APRIL MAY JUNE

Schedule 5:Wages & Commiss. Wages (fixed) $5,750 $5,750 $5,750 $5,750 +Commissions 15% of current sales 13,800 17,250 27,600 20,700=Total 19,550 23,000 33,350 26,450

Schedule 6:Disbursements-Wages/Commiss.50% last mos exp. 9,775 11,500 16,675+50% this mos exp. 11,500 16,675 13,225=Total 21,275 28,175 29,900

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CASH BUDGET APRIL MAY JUNE JULY

Begin. Cash $23,000 $23,000 $23,000 $23,000Cash receipts: Customer collections 105,800 156,400 156,400 124,200Totl cash before financing 128,800 179,400 179,400 147,200Cash disbursements: Merchandise 98,210 111,090 93,380 75,670 Wages & Comm 21,275 28,175 29,900 24,725 Misc Exp 5,750 9,200 6,900 5,750 Rent 4,600 4,600 4,600 4,600 Truck Purchase 6,900 0 0 0Total Disbursements 136,735 153,065 134,780 110,745

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APRIL MAY JUNE JULYTotal Disbursements 136,735 153,065 134,780 110,745 Min. cash balance 23,000 23,000 23,000 23,000 Total cash needed 159,735 176,065 157,780 133,745 Excess of total cash -$30,935 $3,335 $21,620 $13,455Financing New borrowing $30,935 $0 $0 $0 Repayments 2,871 21,199 6,865 Loan balance $30,935 $28,064 $6,865 $0 Interest 0 464 421 103Total effects of financing $30,935 -$3,335 -$21,620 -$6,968Cash balance 23,000 23,000 23,000 29,487

Documents

Chapter 6 - Financial Planning: Long-Term and Short-Term