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Slide 1 - Chapter 12 Financial Planning and Control © 2005 Thomson/South-Western
Slide 2 - Chapter 12 Financial Planning and Control © 2005 Thomson/South-Western 2 Financial Planning and Control Financial Planning: The projection of sales, income, and assets based on alternative production and marketing strategies, as well as the determination of the resources needed to achieve these projections Financial Control The phase in which financial plans are implemented, control deals with the feedback and adjustment process required to ensure adherence to plans and modification of plans because of unforeseen changes.
Slide 3 - Chapter 12 Financial Planning and Control © 2005 Thomson/South-Western 2 Financial Planning and Control Financial Planning: The projection of sales, income, and assets based on alternative production and marketing strategies, as well as the determination of the resources needed to achieve these projections Financial Control The phase in which financial plans are implemented, control deals with the feedback and adjustment process required to ensure adherence to plans and modification of plans because of unforeseen changes. 3 Financial Planning: The Sales Forecast A forecast of a firm’s unit and dollar sales for some future period, generally based on recent sales trends plus forecasts of the economic prospects for the nation, region, industry, etc.
Slide 4 - Chapter 12 Financial Planning and Control © 2005 Thomson/South-Western 2 Financial Planning and Control Financial Planning: The projection of sales, income, and assets based on alternative production and marketing strategies, as well as the determination of the resources needed to achieve these projections Financial Control The phase in which financial plans are implemented, control deals with the feedback and adjustment process required to ensure adherence to plans and modification of plans because of unforeseen changes. 3 Financial Planning: The Sales Forecast A forecast of a firm’s unit and dollar sales for some future period, generally based on recent sales trends plus forecasts of the economic prospects for the nation, region, industry, etc. 4 Projected (Pro Forma) Financial Statements A method of forecasting financial requirements based on forecasted financial statements AFN = additional funds needed to support the level of forecasted operations
Slide 5 - Chapter 12 Financial Planning and Control © 2005 Thomson/South-Western 2 Financial Planning and Control Financial Planning: The projection of sales, income, and assets based on alternative production and marketing strategies, as well as the determination of the resources needed to achieve these projections Financial Control The phase in which financial plans are implemented, control deals with the feedback and adjustment process required to ensure adherence to plans and modification of plans because of unforeseen changes. 3 Financial Planning: The Sales Forecast A forecast of a firm’s unit and dollar sales for some future period, generally based on recent sales trends plus forecasts of the economic prospects for the nation, region, industry, etc. 4 Projected (Pro Forma) Financial Statements A method of forecasting financial requirements based on forecasted financial statements AFN = additional funds needed to support the level of forecasted operations 5 Projected Financial Statements Determine how much money the firm will need in a given period. Determine how much money the firm will generate internally during the same period. Subtract the funds generated internally from the funds required to determine the external financial requirements.
Slide 6 - Chapter 12 Financial Planning and Control © 2005 Thomson/South-Western 2 Financial Planning and Control Financial Planning: The projection of sales, income, and assets based on alternative production and marketing strategies, as well as the determination of the resources needed to achieve these projections Financial Control The phase in which financial plans are implemented, control deals with the feedback and adjustment process required to ensure adherence to plans and modification of plans because of unforeseen changes. 3 Financial Planning: The Sales Forecast A forecast of a firm’s unit and dollar sales for some future period, generally based on recent sales trends plus forecasts of the economic prospects for the nation, region, industry, etc. 4 Projected (Pro Forma) Financial Statements A method of forecasting financial requirements based on forecasted financial statements AFN = additional funds needed to support the level of forecasted operations 5 Projected Financial Statements Determine how much money the firm will need in a given period. Determine how much money the firm will generate internally during the same period. Subtract the funds generated internally from the funds required to determine the external financial requirements. 6 Step 1. Forecast the 2010 Income Statement Assumptions: Unilate operated at full capacity in 2009. Sales are expected to grow by 10%. Variable cost ratio is 82% (same as 2009). 2010 dividend per share is the same as 2009. AFN is raised by 60% short-term debt with 10% cost and 40% long-term debts with 12% cost.
Slide 7 - Chapter 12 Financial Planning and Control © 2005 Thomson/South-Western 2 Financial Planning and Control Financial Planning: The projection of sales, income, and assets based on alternative production and marketing strategies, as well as the determination of the resources needed to achieve these projections Financial Control The phase in which financial plans are implemented, control deals with the feedback and adjustment process required to ensure adherence to plans and modification of plans because of unforeseen changes. 3 Financial Planning: The Sales Forecast A forecast of a firm’s unit and dollar sales for some future period, generally based on recent sales trends plus forecasts of the economic prospects for the nation, region, industry, etc. 4 Projected (Pro Forma) Financial Statements A method of forecasting financial requirements based on forecasted financial statements AFN = additional funds needed to support the level of forecasted operations 5 Projected Financial Statements Determine how much money the firm will need in a given period. Determine how much money the firm will generate internally during the same period. Subtract the funds generated internally from the funds required to determine the external financial requirements. 6 Step 1. Forecast the 2010 Income Statement Assumptions: Unilate operated at full capacity in 2009. Sales are expected to grow by 10%. Variable cost ratio is 82% (same as 2009). 2010 dividend per share is the same as 2009. AFN is raised by 60% short-term debt with 10% cost and 40% long-term debts with 12% cost. 7 Step 1. Forecast the 2010 Income Statement ($ millions) Unilate Textiles
Slide 8 - Chapter 12 Financial Planning and Control © 2005 Thomson/South-Western 2 Financial Planning and Control Financial Planning: The projection of sales, income, and assets based on alternative production and marketing strategies, as well as the determination of the resources needed to achieve these projections Financial Control The phase in which financial plans are implemented, control deals with the feedback and adjustment process required to ensure adherence to plans and modification of plans because of unforeseen changes. 3 Financial Planning: The Sales Forecast A forecast of a firm’s unit and dollar sales for some future period, generally based on recent sales trends plus forecasts of the economic prospects for the nation, region, industry, etc. 4 Projected (Pro Forma) Financial Statements A method of forecasting financial requirements based on forecasted financial statements AFN = additional funds needed to support the level of forecasted operations 5 Projected Financial Statements Determine how much money the firm will need in a given period. Determine how much money the firm will generate internally during the same period. Subtract the funds generated internally from the funds required to determine the external financial requirements. 6 Step 1. Forecast the 2010 Income Statement Assumptions: Unilate operated at full capacity in 2009. Sales are expected to grow by 10%. Variable cost ratio is 82% (same as 2009). 2010 dividend per share is the same as 2009. AFN is raised by 60% short-term debt with 10% cost and 40% long-term debts with 12% cost. 7 Step 1. Forecast the 2010 Income Statement ($ millions) Unilate Textiles 8 Step 2. Forecast the 2010 Balance Sheet ($ millions) Unilate Textiles
Slide 9 - Chapter 12 Financial Planning and Control © 2005 Thomson/South-Western 2 Financial Planning and Control Financial Planning: The projection of sales, income, and assets based on alternative production and marketing strategies, as well as the determination of the resources needed to achieve these projections Financial Control The phase in which financial plans are implemented, control deals with the feedback and adjustment process required to ensure adherence to plans and modification of plans because of unforeseen changes. 3 Financial Planning: The Sales Forecast A forecast of a firm’s unit and dollar sales for some future period, generally based on recent sales trends plus forecasts of the economic prospects for the nation, region, industry, etc. 4 Projected (Pro Forma) Financial Statements A method of forecasting financial requirements based on forecasted financial statements AFN = additional funds needed to support the level of forecasted operations 5 Projected Financial Statements Determine how much money the firm will need in a given period. Determine how much money the firm will generate internally during the same period. Subtract the funds generated internally from the funds required to determine the external financial requirements. 6 Step 1. Forecast the 2010 Income Statement Assumptions: Unilate operated at full capacity in 2009. Sales are expected to grow by 10%. Variable cost ratio is 82% (same as 2009). 2010 dividend per share is the same as 2009. AFN is raised by 60% short-term debt with 10% cost and 40% long-term debts with 12% cost. 7 Step 1. Forecast the 2010 Income Statement ($ millions) Unilate Textiles 8 Step 2. Forecast the 2010 Balance Sheet ($ millions) Unilate Textiles 9 Unilate has decided that any additional funds needed to support future operations will be raised mainly by issuing new common stock. Step 3. Raising the Additional Funds Needed Higher sales must be supported by higher assets. Asset increase can be financed by spontaneous increases in accounts payable and accruals and by retained earnings. Any short fall must be financed from external sources--by borrowing or by selling new stock.
Slide 10 - Chapter 12 Financial Planning and Control © 2005 Thomson/South-Western 2 Financial Planning and Control Financial Planning: The projection of sales, income, and assets based on alternative production and marketing strategies, as well as the determination of the resources needed to achieve these projections Financial Control The phase in which financial plans are implemented, control deals with the feedback and adjustment process required to ensure adherence to plans and modification of plans because of unforeseen changes. 3 Financial Planning: The Sales Forecast A forecast of a firm’s unit and dollar sales for some future period, generally based on recent sales trends plus forecasts of the economic prospects for the nation, region, industry, etc. 4 Projected (Pro Forma) Financial Statements A method of forecasting financial requirements based on forecasted financial statements AFN = additional funds needed to support the level of forecasted operations 5 Projected Financial Statements Determine how much money the firm will need in a given period. Determine how much money the firm will generate internally during the same period. Subtract the funds generated internally from the funds required to determine the external financial requirements. 6 Step 1. Forecast the 2010 Income Statement Assumptions: Unilate operated at full capacity in 2009. Sales are expected to grow by 10%. Variable cost ratio is 82% (same as 2009). 2010 dividend per share is the same as 2009. AFN is raised by 60% short-term debt with 10% cost and 40% long-term debts with 12% cost. 7 Step 1. Forecast the 2010 Income Statement ($ millions) Unilate Textiles 8 Step 2. Forecast the 2010 Balance Sheet ($ millions) Unilate Textiles 9 Unilate has decided that any additional funds needed to support future operations will be raised mainly by issuing new common stock. Step 3. Raising the Additional Funds Needed Higher sales must be supported by higher assets. Asset increase can be financed by spontaneous increases in accounts payable and accruals and by retained earnings. Any short fall must be financed from external sources--by borrowing or by selling new stock. 10 The effects on the income statement and balance sheet of actions taken to finance forecasted increases in assets Step 4. Financing Feedbacks
Slide 11 - Chapter 12 Financial Planning and Control © 2005 Thomson/South-Western 2 Financial Planning and Control Financial Planning: The projection of sales, income, and assets based on alternative production and marketing strategies, as well as the determination of the resources needed to achieve these projections Financial Control The phase in which financial plans are implemented, control deals with the feedback and adjustment process required to ensure adherence to plans and modification of plans because of unforeseen changes. 3 Financial Planning: The Sales Forecast A forecast of a firm’s unit and dollar sales for some future period, generally based on recent sales trends plus forecasts of the economic prospects for the nation, region, industry, etc. 4 Projected (Pro Forma) Financial Statements A method of forecasting financial requirements based on forecasted financial statements AFN = additional funds needed to support the level of forecasted operations 5 Projected Financial Statements Determine how much money the firm will need in a given period. Determine how much money the firm will generate internally during the same period. Subtract the funds generated internally from the funds required to determine the external financial requirements. 6 Step 1. Forecast the 2010 Income Statement Assumptions: Unilate operated at full capacity in 2009. Sales are expected to grow by 10%. Variable cost ratio is 82% (same as 2009). 2010 dividend per share is the same as 2009. AFN is raised by 60% short-term debt with 10% cost and 40% long-term debts with 12% cost. 7 Step 1. Forecast the 2010 Income Statement ($ millions) Unilate Textiles 8 Step 2. Forecast the 2010 Balance Sheet ($ millions) Unilate Textiles 9 Unilate has decided that any additional funds needed to support future operations will be raised mainly by issuing new common stock. Step 3. Raising the Additional Funds Needed Higher sales must be supported by higher assets. Asset increase can be financed by spontaneous increases in accounts payable and accruals and by retained earnings. Any short fall must be financed from external sources--by borrowing or by selling new stock. 10 The effects on the income statement and balance sheet of actions taken to finance forecasted increases in assets Step 4. Financing Feedbacks 11 Other Considerations in Forecasting: Excess Capacity Suppose in 2009 fixed assets had been operated at only 80% of capacity:
Slide 12 - Chapter 12 Financial Planning and Control © 2005 Thomson/South-Western 2 Financial Planning and Control Financial Planning: The projection of sales, income, and assets based on alternative production and marketing strategies, as well as the determination of the resources needed to achieve these projections Financial Control The phase in which financial plans are implemented, control deals with the feedback and adjustment process required to ensure adherence to plans and modification of plans because of unforeseen changes. 3 Financial Planning: The Sales Forecast A forecast of a firm’s unit and dollar sales for some future period, generally based on recent sales trends plus forecasts of the economic prospects for the nation, region, industry, etc. 4 Projected (Pro Forma) Financial Statements A method of forecasting financial requirements based on forecasted financial statements AFN = additional funds needed to support the level of forecasted operations 5 Projected Financial Statements Determine how much money the firm will need in a given period. Determine how much money the firm will generate internally during the same period. Subtract the funds generated internally from the funds required to determine the external financial requirements. 6 Step 1. Forecast the 2010 Income Statement Assumptions: Unilate operated at full capacity in 2009. Sales are expected to grow by 10%. Variable cost ratio is 82% (same as 2009). 2010 dividend per share is the same as 2009. AFN is raised by 60% short-term debt with 10% cost and 40% long-term debts with 12% cost. 7 Step 1. Forecast the 2010 Income Statement ($ millions) Unilate Textiles 8 Step 2. Forecast the 2010 Balance Sheet ($ millions) Unilate Textiles 9 Unilate has decided that any additional funds needed to support future operations will be raised mainly by issuing new common stock. Step 3. Raising the Additional Funds Needed Higher sales must be supported by higher assets. Asset increase can be financed by spontaneous increases in accounts payable and accruals and by retained earnings. Any short fall must be financed from external sources--by borrowing or by selling new stock. 10 The effects on the income statement and balance sheet of actions taken to finance forecasted increases in assets Step 4. Financing Feedbacks 11 Other Considerations in Forecasting: Excess Capacity Suppose in 2009 fixed assets had been operated at only 80% of capacity: 12 Changes in variable cost ratio affect the addition to retained earnings which affects the amount of AFN. Other Considerations in Forecasting: Economies of Scale Unilate’s variable cost ratio is 82% of sales. Ratio might decrease to 80% if operations increase significantly.
Slide 13 - Chapter 12 Financial Planning and Control © 2005 Thomson/South-Western 2 Financial Planning and Control Financial Planning: The projection of sales, income, and assets based on alternative production and marketing strategies, as well as the determination of the resources needed to achieve these projections Financial Control The phase in which financial plans are implemented, control deals with the feedback and adjustment process required to ensure adherence to plans and modification of plans because of unforeseen changes. 3 Financial Planning: The Sales Forecast A forecast of a firm’s unit and dollar sales for some future period, generally based on recent sales trends plus forecasts of the economic prospects for the nation, region, industry, etc. 4 Projected (Pro Forma) Financial Statements A method of forecasting financial requirements based on forecasted financial statements AFN = additional funds needed to support the level of forecasted operations 5 Projected Financial Statements Determine how much money the firm will need in a given period. Determine how much money the firm will generate internally during the same period. Subtract the funds generated internally from the funds required to determine the external financial requirements. 6 Step 1. Forecast the 2010 Income Statement Assumptions: Unilate operated at full capacity in 2009. Sales are expected to grow by 10%. Variable cost ratio is 82% (same as 2009). 2010 dividend per share is the same as 2009. AFN is raised by 60% short-term debt with 10% cost and 40% long-term debts with 12% cost. 7 Step 1. Forecast the 2010 Income Statement ($ millions) Unilate Textiles 8 Step 2. Forecast the 2010 Balance Sheet ($ millions) Unilate Textiles 9 Unilate has decided that any additional funds needed to support future operations will be raised mainly by issuing new common stock. Step 3. Raising the Additional Funds Needed Higher sales must be supported by higher assets. Asset increase can be financed by spontaneous increases in accounts payable and accruals and by retained earnings. Any short fall must be financed from external sources--by borrowing or by selling new stock. 10 The effects on the income statement and balance sheet of actions taken to finance forecasted increases in assets Step 4. Financing Feedbacks 11 Other Considerations in Forecasting: Excess Capacity Suppose in 2009 fixed assets had been operated at only 80% of capacity: 12 Changes in variable cost ratio affect the addition to retained earnings which affects the amount of AFN. Other Considerations in Forecasting: Economies of Scale Unilate’s variable cost ratio is 82% of sales. Ratio might decrease to 80% if operations increase significantly. 13 Other Considerations in Forecasting: Lumpy Assets Assets that cannot be acquired in small increments, but must be obtained in large, discrete amounts
Slide 14 - Chapter 12 Financial Planning and Control © 2005 Thomson/South-Western 2 Financial Planning and Control Financial Planning: The projection of sales, income, and assets based on alternative production and marketing strategies, as well as the determination of the resources needed to achieve these projections Financial Control The phase in which financial plans are implemented, control deals with the feedback and adjustment process required to ensure adherence to plans and modification of plans because of unforeseen changes. 3 Financial Planning: The Sales Forecast A forecast of a firm’s unit and dollar sales for some future period, generally based on recent sales trends plus forecasts of the economic prospects for the nation, region, industry, etc. 4 Projected (Pro Forma) Financial Statements A method of forecasting financial requirements based on forecasted financial statements AFN = additional funds needed to support the level of forecasted operations 5 Projected Financial Statements Determine how much money the firm will need in a given period. Determine how much money the firm will generate internally during the same period. Subtract the funds generated internally from the funds required to determine the external financial requirements. 6 Step 1. Forecast the 2010 Income Statement Assumptions: Unilate operated at full capacity in 2009. Sales are expected to grow by 10%. Variable cost ratio is 82% (same as 2009). 2010 dividend per share is the same as 2009. AFN is raised by 60% short-term debt with 10% cost and 40% long-term debts with 12% cost. 7 Step 1. Forecast the 2010 Income Statement ($ millions) Unilate Textiles 8 Step 2. Forecast the 2010 Balance Sheet ($ millions) Unilate Textiles 9 Unilate has decided that any additional funds needed to support future operations will be raised mainly by issuing new common stock. Step 3. Raising the Additional Funds Needed Higher sales must be supported by higher assets. Asset increase can be financed by spontaneous increases in accounts payable and accruals and by retained earnings. Any short fall must be financed from external sources--by borrowing or by selling new stock. 10 The effects on the income statement and balance sheet of actions taken to finance forecasted increases in assets Step 4. Financing Feedbacks 11 Other Considerations in Forecasting: Excess Capacity Suppose in 2009 fixed assets had been operated at only 80% of capacity: 12 Changes in variable cost ratio affect the addition to retained earnings which affects the amount of AFN. Other Considerations in Forecasting: Economies of Scale Unilate’s variable cost ratio is 82% of sales. Ratio might decrease to 80% if operations increase significantly. 13 Other Considerations in Forecasting: Lumpy Assets Assets that cannot be acquired in small increments, but must be obtained in large, discrete amounts 14 Summary: How different factors affect the AFN forecast. Dividend payout ratio changes. If reduced, more RE, reduce AFN. Profit margin changes. If increases, total and retained earnings increase, reduce AFN. Plant capacity changes. Less capacity used, less need for AFN. Payment terms increased to 60 days. Accts. payable would double, increasing liabilities, reduce AFN.
Slide 15 - Chapter 12 Financial Planning and Control © 2005 Thomson/South-Western 2 Financial Planning and Control Financial Planning: The projection of sales, income, and assets based on alternative production and marketing strategies, as well as the determination of the resources needed to achieve these projections Financial Control The phase in which financial plans are implemented, control deals with the feedback and adjustment process required to ensure adherence to plans and modification of plans because of unforeseen changes. 3 Financial Planning: The Sales Forecast A forecast of a firm’s unit and dollar sales for some future period, generally based on recent sales trends plus forecasts of the economic prospects for the nation, region, industry, etc. 4 Projected (Pro Forma) Financial Statements A method of forecasting financial requirements based on forecasted financial statements AFN = additional funds needed to support the level of forecasted operations 5 Projected Financial Statements Determine how much money the firm will need in a given period. Determine how much money the firm will generate internally during the same period. Subtract the funds generated internally from the funds required to determine the external financial requirements. 6 Step 1. Forecast the 2010 Income Statement Assumptions: Unilate operated at full capacity in 2009. Sales are expected to grow by 10%. Variable cost ratio is 82% (same as 2009). 2010 dividend per share is the same as 2009. AFN is raised by 60% short-term debt with 10% cost and 40% long-term debts with 12% cost. 7 Step 1. Forecast the 2010 Income Statement ($ millions) Unilate Textiles 8 Step 2. Forecast the 2010 Balance Sheet ($ millions) Unilate Textiles 9 Unilate has decided that any additional funds needed to support future operations will be raised mainly by issuing new common stock. Step 3. Raising the Additional Funds Needed Higher sales must be supported by higher assets. Asset increase can be financed by spontaneous increases in accounts payable and accruals and by retained earnings. Any short fall must be financed from external sources--by borrowing or by selling new stock. 10 The effects on the income statement and balance sheet of actions taken to finance forecasted increases in assets Step 4. Financing Feedbacks 11 Other Considerations in Forecasting: Excess Capacity Suppose in 2009 fixed assets had been operated at only 80% of capacity: 12 Changes in variable cost ratio affect the addition to retained earnings which affects the amount of AFN. Other Considerations in Forecasting: Economies of Scale Unilate’s variable cost ratio is 82% of sales. Ratio might decrease to 80% if operations increase significantly. 13 Other Considerations in Forecasting: Lumpy Assets Assets that cannot be acquired in small increments, but must be obtained in large, discrete amounts 14 Summary: How different factors affect the AFN forecast. Dividend payout ratio changes. If reduced, more RE, reduce AFN. Profit margin changes. If increases, total and retained earnings increase, reduce AFN. Plant capacity changes. Less capacity used, less need for AFN. Payment terms increased to 60 days. Accts. payable would double, increasing liabilities, reduce AFN. 15 Financial Control - Budgeting and Leverage The phase in which financial plans are implemented; control deals with the feedback and adjustment processes required to ensure the firm is following the right financial path to accomplish its goals, and, if not, to make necessary corrections.
Slide 16 - Chapter 12 Financial Planning and Control © 2005 Thomson/South-Western 2 Financial Planning and Control Financial Planning: The projection of sales, income, and assets based on alternative production and marketing strategies, as well as the determination of the resources needed to achieve these projections Financial Control The phase in which financial plans are implemented, control deals with the feedback and adjustment process required to ensure adherence to plans and modification of plans because of unforeseen changes. 3 Financial Planning: The Sales Forecast A forecast of a firm’s unit and dollar sales for some future period, generally based on recent sales trends plus forecasts of the economic prospects for the nation, region, industry, etc. 4 Projected (Pro Forma) Financial Statements A method of forecasting financial requirements based on forecasted financial statements AFN = additional funds needed to support the level of forecasted operations 5 Projected Financial Statements Determine how much money the firm will need in a given period. Determine how much money the firm will generate internally during the same period. Subtract the funds generated internally from the funds required to determine the external financial requirements. 6 Step 1. Forecast the 2010 Income Statement Assumptions: Unilate operated at full capacity in 2009. Sales are expected to grow by 10%. Variable cost ratio is 82% (same as 2009). 2010 dividend per share is the same as 2009. AFN is raised by 60% short-term debt with 10% cost and 40% long-term debts with 12% cost. 7 Step 1. Forecast the 2010 Income Statement ($ millions) Unilate Textiles 8 Step 2. Forecast the 2010 Balance Sheet ($ millions) Unilate Textiles 9 Unilate has decided that any additional funds needed to support future operations will be raised mainly by issuing new common stock. Step 3. Raising the Additional Funds Needed Higher sales must be supported by higher assets. Asset increase can be financed by spontaneous increases in accounts payable and accruals and by retained earnings. Any short fall must be financed from external sources--by borrowing or by selling new stock. 10 The effects on the income statement and balance sheet of actions taken to finance forecasted increases in assets Step 4. Financing Feedbacks 11 Other Considerations in Forecasting: Excess Capacity Suppose in 2009 fixed assets had been operated at only 80% of capacity: 12 Changes in variable cost ratio affect the addition to retained earnings which affects the amount of AFN. Other Considerations in Forecasting: Economies of Scale Unilate’s variable cost ratio is 82% of sales. Ratio might decrease to 80% if operations increase significantly. 13 Other Considerations in Forecasting: Lumpy Assets Assets that cannot be acquired in small increments, but must be obtained in large, discrete amounts 14 Summary: How different factors affect the AFN forecast. Dividend payout ratio changes. If reduced, more RE, reduce AFN. Profit margin changes. If increases, total and retained earnings increase, reduce AFN. Plant capacity changes. Less capacity used, less need for AFN. Payment terms increased to 60 days. Accts. payable would double, increasing liabilities, reduce AFN. 15 Financial Control - Budgeting and Leverage The phase in which financial plans are implemented; control deals with the feedback and adjustment processes required to ensure the firm is following the right financial path to accomplish its goals, and, if not, to make necessary corrections.  16 Operating Breakeven Analysis An analytical technique for studying the relationship between sales revenues, operating costs, and profits Operating breakeven analysis deals only with the upper portion of the income statement - the portion from sales to NOI
Slide 17 - Chapter 12 Financial Planning and Control © 2005 Thomson/South-Western 2 Financial Planning and Control Financial Planning: The projection of sales, income, and assets based on alternative production and marketing strategies, as well as the determination of the resources needed to achieve these projections Financial Control The phase in which financial plans are implemented, control deals with the feedback and adjustment process required to ensure adherence to plans and modification of plans because of unforeseen changes. 3 Financial Planning: The Sales Forecast A forecast of a firm’s unit and dollar sales for some future period, generally based on recent sales trends plus forecasts of the economic prospects for the nation, region, industry, etc. 4 Projected (Pro Forma) Financial Statements A method of forecasting financial requirements based on forecasted financial statements AFN = additional funds needed to support the level of forecasted operations 5 Projected Financial Statements Determine how much money the firm will need in a given period. Determine how much money the firm will generate internally during the same period. Subtract the funds generated internally from the funds required to determine the external financial requirements. 6 Step 1. Forecast the 2010 Income Statement Assumptions: Unilate operated at full capacity in 2009. Sales are expected to grow by 10%. Variable cost ratio is 82% (same as 2009). 2010 dividend per share is the same as 2009. AFN is raised by 60% short-term debt with 10% cost and 40% long-term debts with 12% cost. 7 Step 1. Forecast the 2010 Income Statement ($ millions) Unilate Textiles 8 Step 2. Forecast the 2010 Balance Sheet ($ millions) Unilate Textiles 9 Unilate has decided that any additional funds needed to support future operations will be raised mainly by issuing new common stock. Step 3. Raising the Additional Funds Needed Higher sales must be supported by higher assets. Asset increase can be financed by spontaneous increases in accounts payable and accruals and by retained earnings. Any short fall must be financed from external sources--by borrowing or by selling new stock. 10 The effects on the income statement and balance sheet of actions taken to finance forecasted increases in assets Step 4. Financing Feedbacks 11 Other Considerations in Forecasting: Excess Capacity Suppose in 2009 fixed assets had been operated at only 80% of capacity: 12 Changes in variable cost ratio affect the addition to retained earnings which affects the amount of AFN. Other Considerations in Forecasting: Economies of Scale Unilate’s variable cost ratio is 82% of sales. Ratio might decrease to 80% if operations increase significantly. 13 Other Considerations in Forecasting: Lumpy Assets Assets that cannot be acquired in small increments, but must be obtained in large, discrete amounts 14 Summary: How different factors affect the AFN forecast. Dividend payout ratio changes. If reduced, more RE, reduce AFN. Profit margin changes. If increases, total and retained earnings increase, reduce AFN. Plant capacity changes. Less capacity used, less need for AFN. Payment terms increased to 60 days. Accts. payable would double, increasing liabilities, reduce AFN. 15 Financial Control - Budgeting and Leverage The phase in which financial plans are implemented; control deals with the feedback and adjustment processes required to ensure the firm is following the right financial path to accomplish its goals, and, if not, to make necessary corrections.  16 Operating Breakeven Analysis An analytical technique for studying the relationship between sales revenues, operating costs, and profits Operating breakeven analysis deals only with the upper portion of the income statement - the portion from sales to NOI 17 Unilate’s 2010 Forecasted Operating Income ($ millions)
Slide 18 - Chapter 12 Financial Planning and Control © 2005 Thomson/South-Western 2 Financial Planning and Control Financial Planning: The projection of sales, income, and assets based on alternative production and marketing strategies, as well as the determination of the resources needed to achieve these projections Financial Control The phase in which financial plans are implemented, control deals with the feedback and adjustment process required to ensure adherence to plans and modification of plans because of unforeseen changes. 3 Financial Planning: The Sales Forecast A forecast of a firm’s unit and dollar sales for some future period, generally based on recent sales trends plus forecasts of the economic prospects for the nation, region, industry, etc. 4 Projected (Pro Forma) Financial Statements A method of forecasting financial requirements based on forecasted financial statements AFN = additional funds needed to support the level of forecasted operations 5 Projected Financial Statements Determine how much money the firm will need in a given period. Determine how much money the firm will generate internally during the same period. Subtract the funds generated internally from the funds required to determine the external financial requirements. 6 Step 1. Forecast the 2010 Income Statement Assumptions: Unilate operated at full capacity in 2009. Sales are expected to grow by 10%. Variable cost ratio is 82% (same as 2009). 2010 dividend per share is the same as 2009. AFN is raised by 60% short-term debt with 10% cost and 40% long-term debts with 12% cost. 7 Step 1. Forecast the 2010 Income Statement ($ millions) Unilate Textiles 8 Step 2. Forecast the 2010 Balance Sheet ($ millions) Unilate Textiles 9 Unilate has decided that any additional funds needed to support future operations will be raised mainly by issuing new common stock. Step 3. Raising the Additional Funds Needed Higher sales must be supported by higher assets. Asset increase can be financed by spontaneous increases in accounts payable and accruals and by retained earnings. Any short fall must be financed from external sources--by borrowing or by selling new stock. 10 The effects on the income statement and balance sheet of actions taken to finance forecasted increases in assets Step 4. Financing Feedbacks 11 Other Considerations in Forecasting: Excess Capacity Suppose in 2009 fixed assets had been operated at only 80% of capacity: 12 Changes in variable cost ratio affect the addition to retained earnings which affects the amount of AFN. Other Considerations in Forecasting: Economies of Scale Unilate’s variable cost ratio is 82% of sales. Ratio might decrease to 80% if operations increase significantly. 13 Other Considerations in Forecasting: Lumpy Assets Assets that cannot be acquired in small increments, but must be obtained in large, discrete amounts 14 Summary: How different factors affect the AFN forecast. Dividend payout ratio changes. If reduced, more RE, reduce AFN. Profit margin changes. If increases, total and retained earnings increase, reduce AFN. Plant capacity changes. Less capacity used, less need for AFN. Payment terms increased to 60 days. Accts. payable would double, increasing liabilities, reduce AFN. 15 Financial Control - Budgeting and Leverage The phase in which financial plans are implemented; control deals with the feedback and adjustment processes required to ensure the firm is following the right financial path to accomplish its goals, and, if not, to make necessary corrections.  16 Operating Breakeven Analysis An analytical technique for studying the relationship between sales revenues, operating costs, and profits Operating breakeven analysis deals only with the upper portion of the income statement - the portion from sales to NOI 17 Unilate’s 2010 Forecasted Operating Income ($ millions) 18 Operating Breakeven Chart
Slide 19 - Chapter 12 Financial Planning and Control © 2005 Thomson/South-Western 2 Financial Planning and Control Financial Planning: The projection of sales, income, and assets based on alternative production and marketing strategies, as well as the determination of the resources needed to achieve these projections Financial Control The phase in which financial plans are implemented, control deals with the feedback and adjustment process required to ensure adherence to plans and modification of plans because of unforeseen changes. 3 Financial Planning: The Sales Forecast A forecast of a firm’s unit and dollar sales for some future period, generally based on recent sales trends plus forecasts of the economic prospects for the nation, region, industry, etc. 4 Projected (Pro Forma) Financial Statements A method of forecasting financial requirements based on forecasted financial statements AFN = additional funds needed to support the level of forecasted operations 5 Projected Financial Statements Determine how much money the firm will need in a given period. Determine how much money the firm will generate internally during the same period. Subtract the funds generated internally from the funds required to determine the external financial requirements. 6 Step 1. Forecast the 2010 Income Statement Assumptions: Unilate operated at full capacity in 2009. Sales are expected to grow by 10%. Variable cost ratio is 82% (same as 2009). 2010 dividend per share is the same as 2009. AFN is raised by 60% short-term debt with 10% cost and 40% long-term debts with 12% cost. 7 Step 1. Forecast the 2010 Income Statement ($ millions) Unilate Textiles 8 Step 2. Forecast the 2010 Balance Sheet ($ millions) Unilate Textiles 9 Unilate has decided that any additional funds needed to support future operations will be raised mainly by issuing new common stock. Step 3. Raising the Additional Funds Needed Higher sales must be supported by higher assets. Asset increase can be financed by spontaneous increases in accounts payable and accruals and by retained earnings. Any short fall must be financed from external sources--by borrowing or by selling new stock. 10 The effects on the income statement and balance sheet of actions taken to finance forecasted increases in assets Step 4. Financing Feedbacks 11 Other Considerations in Forecasting: Excess Capacity Suppose in 2009 fixed assets had been operated at only 80% of capacity: 12 Changes in variable cost ratio affect the addition to retained earnings which affects the amount of AFN. Other Considerations in Forecasting: Economies of Scale Unilate’s variable cost ratio is 82% of sales. Ratio might decrease to 80% if operations increase significantly. 13 Other Considerations in Forecasting: Lumpy Assets Assets that cannot be acquired in small increments, but must be obtained in large, discrete amounts 14 Summary: How different factors affect the AFN forecast. Dividend payout ratio changes. If reduced, more RE, reduce AFN. Profit margin changes. If increases, total and retained earnings increase, reduce AFN. Plant capacity changes. Less capacity used, less need for AFN. Payment terms increased to 60 days. Accts. payable would double, increasing liabilities, reduce AFN. 15 Financial Control - Budgeting and Leverage The phase in which financial plans are implemented; control deals with the feedback and adjustment processes required to ensure the firm is following the right financial path to accomplish its goals, and, if not, to make necessary corrections.  16 Operating Breakeven Analysis An analytical technique for studying the relationship between sales revenues, operating costs, and profits Operating breakeven analysis deals only with the upper portion of the income statement - the portion from sales to NOI 17 Unilate’s 2010 Forecasted Operating Income ($ millions) 18 Operating Breakeven Chart 19 Breakeven Computation Sales Total operating Total Total revenues costs variable costs fixed costs = = + (P x Q) = TOC = (V x Q) + F QOpBE F P-V F Contribution margin = = QOpBE $154.0 million $15.00 - $12.30 = = $154.0 million $2.70 57.04 million units 57.0 million units =
Slide 20 - Chapter 12 Financial Planning and Control © 2005 Thomson/South-Western 2 Financial Planning and Control Financial Planning: The projection of sales, income, and assets based on alternative production and marketing strategies, as well as the determination of the resources needed to achieve these projections Financial Control The phase in which financial plans are implemented, control deals with the feedback and adjustment process required to ensure adherence to plans and modification of plans because of unforeseen changes. 3 Financial Planning: The Sales Forecast A forecast of a firm’s unit and dollar sales for some future period, generally based on recent sales trends plus forecasts of the economic prospects for the nation, region, industry, etc. 4 Projected (Pro Forma) Financial Statements A method of forecasting financial requirements based on forecasted financial statements AFN = additional funds needed to support the level of forecasted operations 5 Projected Financial Statements Determine how much money the firm will need in a given period. Determine how much money the firm will generate internally during the same period. Subtract the funds generated internally from the funds required to determine the external financial requirements. 6 Step 1. Forecast the 2010 Income Statement Assumptions: Unilate operated at full capacity in 2009. Sales are expected to grow by 10%. Variable cost ratio is 82% (same as 2009). 2010 dividend per share is the same as 2009. AFN is raised by 60% short-term debt with 10% cost and 40% long-term debts with 12% cost. 7 Step 1. Forecast the 2010 Income Statement ($ millions) Unilate Textiles 8 Step 2. Forecast the 2010 Balance Sheet ($ millions) Unilate Textiles 9 Unilate has decided that any additional funds needed to support future operations will be raised mainly by issuing new common stock. Step 3. Raising the Additional Funds Needed Higher sales must be supported by higher assets. Asset increase can be financed by spontaneous increases in accounts payable and accruals and by retained earnings. Any short fall must be financed from external sources--by borrowing or by selling new stock. 10 The effects on the income statement and balance sheet of actions taken to finance forecasted increases in assets Step 4. Financing Feedbacks 11 Other Considerations in Forecasting: Excess Capacity Suppose in 2009 fixed assets had been operated at only 80% of capacity: 12 Changes in variable cost ratio affect the addition to retained earnings which affects the amount of AFN. Other Considerations in Forecasting: Economies of Scale Unilate’s variable cost ratio is 82% of sales. Ratio might decrease to 80% if operations increase significantly. 13 Other Considerations in Forecasting: Lumpy Assets Assets that cannot be acquired in small increments, but must be obtained in large, discrete amounts 14 Summary: How different factors affect the AFN forecast. Dividend payout ratio changes. If reduced, more RE, reduce AFN. Profit margin changes. If increases, total and retained earnings increase, reduce AFN. Plant capacity changes. Less capacity used, less need for AFN. Payment terms increased to 60 days. Accts. payable would double, increasing liabilities, reduce AFN. 15 Financial Control - Budgeting and Leverage The phase in which financial plans are implemented; control deals with the feedback and adjustment processes required to ensure the firm is following the right financial path to accomplish its goals, and, if not, to make necessary corrections.  16 Operating Breakeven Analysis An analytical technique for studying the relationship between sales revenues, operating costs, and profits Operating breakeven analysis deals only with the upper portion of the income statement - the portion from sales to NOI 17 Unilate’s 2010 Forecasted Operating Income ($ millions) 18 Operating Breakeven Chart 19 Breakeven Computation Sales Total operating Total Total revenues costs variable costs fixed costs = = + (P x Q) = TOC = (V x Q) + F QOpBE F P-V F Contribution margin = = QOpBE $154.0 million $15.00 - $12.30 = = $154.0 million $2.70 57.04 million units 57.0 million units = 20 Operating Breakeven Point For the proposal to break even, Unilate must sell 57 million units or $855,600,000 of product. SOpBE F F Gross profit margin = = 1- V P ( )
Slide 21 - Chapter 12 Financial Planning and Control © 2005 Thomson/South-Western 2 Financial Planning and Control Financial Planning: The projection of sales, income, and assets based on alternative production and marketing strategies, as well as the determination of the resources needed to achieve these projections Financial Control The phase in which financial plans are implemented, control deals with the feedback and adjustment process required to ensure adherence to plans and modification of plans because of unforeseen changes. 3 Financial Planning: The Sales Forecast A forecast of a firm’s unit and dollar sales for some future period, generally based on recent sales trends plus forecasts of the economic prospects for the nation, region, industry, etc. 4 Projected (Pro Forma) Financial Statements A method of forecasting financial requirements based on forecasted financial statements AFN = additional funds needed to support the level of forecasted operations 5 Projected Financial Statements Determine how much money the firm will need in a given period. Determine how much money the firm will generate internally during the same period. Subtract the funds generated internally from the funds required to determine the external financial requirements. 6 Step 1. Forecast the 2010 Income Statement Assumptions: Unilate operated at full capacity in 2009. Sales are expected to grow by 10%. Variable cost ratio is 82% (same as 2009). 2010 dividend per share is the same as 2009. AFN is raised by 60% short-term debt with 10% cost and 40% long-term debts with 12% cost. 7 Step 1. Forecast the 2010 Income Statement ($ millions) Unilate Textiles 8 Step 2. Forecast the 2010 Balance Sheet ($ millions) Unilate Textiles 9 Unilate has decided that any additional funds needed to support future operations will be raised mainly by issuing new common stock. Step 3. Raising the Additional Funds Needed Higher sales must be supported by higher assets. Asset increase can be financed by spontaneous increases in accounts payable and accruals and by retained earnings. Any short fall must be financed from external sources--by borrowing or by selling new stock. 10 The effects on the income statement and balance sheet of actions taken to finance forecasted increases in assets Step 4. Financing Feedbacks 11 Other Considerations in Forecasting: Excess Capacity Suppose in 2009 fixed assets had been operated at only 80% of capacity: 12 Changes in variable cost ratio affect the addition to retained earnings which affects the amount of AFN. Other Considerations in Forecasting: Economies of Scale Unilate’s variable cost ratio is 82% of sales. Ratio might decrease to 80% if operations increase significantly. 13 Other Considerations in Forecasting: Lumpy Assets Assets that cannot be acquired in small increments, but must be obtained in large, discrete amounts 14 Summary: How different factors affect the AFN forecast. Dividend payout ratio changes. If reduced, more RE, reduce AFN. Profit margin changes. If increases, total and retained earnings increase, reduce AFN. Plant capacity changes. Less capacity used, less need for AFN. Payment terms increased to 60 days. Accts. payable would double, increasing liabilities, reduce AFN. 15 Financial Control - Budgeting and Leverage The phase in which financial plans are implemented; control deals with the feedback and adjustment processes required to ensure the firm is following the right financial path to accomplish its goals, and, if not, to make necessary corrections.  16 Operating Breakeven Analysis An analytical technique for studying the relationship between sales revenues, operating costs, and profits Operating breakeven analysis deals only with the upper portion of the income statement - the portion from sales to NOI 17 Unilate’s 2010 Forecasted Operating Income ($ millions) 18 Operating Breakeven Chart 19 Breakeven Computation Sales Total operating Total Total revenues costs variable costs fixed costs = = + (P x Q) = TOC = (V x Q) + F QOpBE F P-V F Contribution margin = = QOpBE $154.0 million $15.00 - $12.30 = = $154.0 million $2.70 57.04 million units 57.0 million units = 20 Operating Breakeven Point For the proposal to break even, Unilate must sell 57 million units or $855,600,000 of product. SOpBE F F Gross profit margin = = 1- V P ( ) 21 Operating Leverage The existence of fixed operating costs, such that a change in sales will produce a larger change in operating income (EBIT)
Slide 22 - Chapter 12 Financial Planning and Control © 2005 Thomson/South-Western 2 Financial Planning and Control Financial Planning: The projection of sales, income, and assets based on alternative production and marketing strategies, as well as the determination of the resources needed to achieve these projections Financial Control The phase in which financial plans are implemented, control deals with the feedback and adjustment process required to ensure adherence to plans and modification of plans because of unforeseen changes. 3 Financial Planning: The Sales Forecast A forecast of a firm’s unit and dollar sales for some future period, generally based on recent sales trends plus forecasts of the economic prospects for the nation, region, industry, etc. 4 Projected (Pro Forma) Financial Statements A method of forecasting financial requirements based on forecasted financial statements AFN = additional funds needed to support the level of forecasted operations 5 Projected Financial Statements Determine how much money the firm will need in a given period. Determine how much money the firm will generate internally during the same period. Subtract the funds generated internally from the funds required to determine the external financial requirements. 6 Step 1. Forecast the 2010 Income Statement Assumptions: Unilate operated at full capacity in 2009. Sales are expected to grow by 10%. Variable cost ratio is 82% (same as 2009). 2010 dividend per share is the same as 2009. AFN is raised by 60% short-term debt with 10% cost and 40% long-term debts with 12% cost. 7 Step 1. Forecast the 2010 Income Statement ($ millions) Unilate Textiles 8 Step 2. Forecast the 2010 Balance Sheet ($ millions) Unilate Textiles 9 Unilate has decided that any additional funds needed to support future operations will be raised mainly by issuing new common stock. Step 3. Raising the Additional Funds Needed Higher sales must be supported by higher assets. Asset increase can be financed by spontaneous increases in accounts payable and accruals and by retained earnings. Any short fall must be financed from external sources--by borrowing or by selling new stock. 10 The effects on the income statement and balance sheet of actions taken to finance forecasted increases in assets Step 4. Financing Feedbacks 11 Other Considerations in Forecasting: Excess Capacity Suppose in 2009 fixed assets had been operated at only 80% of capacity: 12 Changes in variable cost ratio affect the addition to retained earnings which affects the amount of AFN. Other Considerations in Forecasting: Economies of Scale Unilate’s variable cost ratio is 82% of sales. Ratio might decrease to 80% if operations increase significantly. 13 Other Considerations in Forecasting: Lumpy Assets Assets that cannot be acquired in small increments, but must be obtained in large, discrete amounts 14 Summary: How different factors affect the AFN forecast. Dividend payout ratio changes. If reduced, more RE, reduce AFN. Profit margin changes. If increases, total and retained earnings increase, reduce AFN. Plant capacity changes. Less capacity used, less need for AFN. Payment terms increased to 60 days. Accts. payable would double, increasing liabilities, reduce AFN. 15 Financial Control - Budgeting and Leverage The phase in which financial plans are implemented; control deals with the feedback and adjustment processes required to ensure the firm is following the right financial path to accomplish its goals, and, if not, to make necessary corrections.  16 Operating Breakeven Analysis An analytical technique for studying the relationship between sales revenues, operating costs, and profits Operating breakeven analysis deals only with the upper portion of the income statement - the portion from sales to NOI 17 Unilate’s 2010 Forecasted Operating Income ($ millions) 18 Operating Breakeven Chart 19 Breakeven Computation Sales Total operating Total Total revenues costs variable costs fixed costs = = + (P x Q) = TOC = (V x Q) + F QOpBE F P-V F Contribution margin = = QOpBE $154.0 million $15.00 - $12.30 = = $154.0 million $2.70 57.04 million units 57.0 million units = 20 Operating Breakeven Point For the proposal to break even, Unilate must sell 57 million units or $855,600,000 of product. SOpBE F F Gross profit margin = = 1- V P ( ) 21 Operating Leverage The existence of fixed operating costs, such that a change in sales will produce a larger change in operating income (EBIT) 22 Degree of Operating Leverage The percentage change in NOI (or EBIT) associated with a given percentage change in sales
Slide 23 - Chapter 12 Financial Planning and Control © 2005 Thomson/South-Western 2 Financial Planning and Control Financial Planning: The projection of sales, income, and assets based on alternative production and marketing strategies, as well as the determination of the resources needed to achieve these projections Financial Control The phase in which financial plans are implemented, control deals with the feedback and adjustment process required to ensure adherence to plans and modification of plans because of unforeseen changes. 3 Financial Planning: The Sales Forecast A forecast of a firm’s unit and dollar sales for some future period, generally based on recent sales trends plus forecasts of the economic prospects for the nation, region, industry, etc. 4 Projected (Pro Forma) Financial Statements A method of forecasting financial requirements based on forecasted financial statements AFN = additional funds needed to support the level of forecasted operations 5 Projected Financial Statements Determine how much money the firm will need in a given period. Determine how much money the firm will generate internally during the same period. Subtract the funds generated internally from the funds required to determine the external financial requirements. 6 Step 1. Forecast the 2010 Income Statement Assumptions: Unilate operated at full capacity in 2009. Sales are expected to grow by 10%. Variable cost ratio is 82% (same as 2009). 2010 dividend per share is the same as 2009. AFN is raised by 60% short-term debt with 10% cost and 40% long-term debts with 12% cost. 7 Step 1. Forecast the 2010 Income Statement ($ millions) Unilate Textiles 8 Step 2. Forecast the 2010 Balance Sheet ($ millions) Unilate Textiles 9 Unilate has decided that any additional funds needed to support future operations will be raised mainly by issuing new common stock. Step 3. Raising the Additional Funds Needed Higher sales must be supported by higher assets. Asset increase can be financed by spontaneous increases in accounts payable and accruals and by retained earnings. Any short fall must be financed from external sources--by borrowing or by selling new stock. 10 The effects on the income statement and balance sheet of actions taken to finance forecasted increases in assets Step 4. Financing Feedbacks 11 Other Considerations in Forecasting: Excess Capacity Suppose in 2009 fixed assets had been operated at only 80% of capacity: 12 Changes in variable cost ratio affect the addition to retained earnings which affects the amount of AFN. Other Considerations in Forecasting: Economies of Scale Unilate’s variable cost ratio is 82% of sales. Ratio might decrease to 80% if operations increase significantly. 13 Other Considerations in Forecasting: Lumpy Assets Assets that cannot be acquired in small increments, but must be obtained in large, discrete amounts 14 Summary: How different factors affect the AFN forecast. Dividend payout ratio changes. If reduced, more RE, reduce AFN. Profit margin changes. If increases, total and retained earnings increase, reduce AFN. Plant capacity changes. Less capacity used, less need for AFN. Payment terms increased to 60 days. Accts. payable would double, increasing liabilities, reduce AFN. 15 Financial Control - Budgeting and Leverage The phase in which financial plans are implemented; control deals with the feedback and adjustment processes required to ensure the firm is following the right financial path to accomplish its goals, and, if not, to make necessary corrections.  16 Operating Breakeven Analysis An analytical technique for studying the relationship between sales revenues, operating costs, and profits Operating breakeven analysis deals only with the upper portion of the income statement - the portion from sales to NOI 17 Unilate’s 2010 Forecasted Operating Income ($ millions) 18 Operating Breakeven Chart 19 Breakeven Computation Sales Total operating Total Total revenues costs variable costs fixed costs = = + (P x Q) = TOC = (V x Q) + F QOpBE F P-V F Contribution margin = = QOpBE $154.0 million $15.00 - $12.30 = = $154.0 million $2.70 57.04 million units 57.0 million units = 20 Operating Breakeven Point For the proposal to break even, Unilate must sell 57 million units or $855,600,000 of product. SOpBE F F Gross profit margin = = 1- V P ( ) 21 Operating Leverage The existence of fixed operating costs, such that a change in sales will produce a larger change in operating income (EBIT) 22 Degree of Operating Leverage The percentage change in NOI (or EBIT) associated with a given percentage change in sales 23 DOL S = Gross Prof it EBIT Each 1 percent change in sales, will result in a 2.08 percent change in operating income. Calculating the Degree of Operating Leverage $297 $143 2.08x = =
Slide 24 - Chapter 12 Financial Planning and Control © 2005 Thomson/South-Western 2 Financial Planning and Control Financial Planning: The projection of sales, income, and assets based on alternative production and marketing strategies, as well as the determination of the resources needed to achieve these projections Financial Control The phase in which financial plans are implemented, control deals with the feedback and adjustment process required to ensure adherence to plans and modification of plans because of unforeseen changes. 3 Financial Planning: The Sales Forecast A forecast of a firm’s unit and dollar sales for some future period, generally based on recent sales trends plus forecasts of the economic prospects for the nation, region, industry, etc. 4 Projected (Pro Forma) Financial Statements A method of forecasting financial requirements based on forecasted financial statements AFN = additional funds needed to support the level of forecasted operations 5 Projected Financial Statements Determine how much money the firm will need in a given period. Determine how much money the firm will generate internally during the same period. Subtract the funds generated internally from the funds required to determine the external financial requirements. 6 Step 1. Forecast the 2010 Income Statement Assumptions: Unilate operated at full capacity in 2009. Sales are expected to grow by 10%. Variable cost ratio is 82% (same as 2009). 2010 dividend per share is the same as 2009. AFN is raised by 60% short-term debt with 10% cost and 40% long-term debts with 12% cost. 7 Step 1. Forecast the 2010 Income Statement ($ millions) Unilate Textiles 8 Step 2. Forecast the 2010 Balance Sheet ($ millions) Unilate Textiles 9 Unilate has decided that any additional funds needed to support future operations will be raised mainly by issuing new common stock. Step 3. Raising the Additional Funds Needed Higher sales must be supported by higher assets. Asset increase can be financed by spontaneous increases in accounts payable and accruals and by retained earnings. Any short fall must be financed from external sources--by borrowing or by selling new stock. 10 The effects on the income statement and balance sheet of actions taken to finance forecasted increases in assets Step 4. Financing Feedbacks 11 Other Considerations in Forecasting: Excess Capacity Suppose in 2009 fixed assets had been operated at only 80% of capacity: 12 Changes in variable cost ratio affect the addition to retained earnings which affects the amount of AFN. Other Considerations in Forecasting: Economies of Scale Unilate’s variable cost ratio is 82% of sales. Ratio might decrease to 80% if operations increase significantly. 13 Other Considerations in Forecasting: Lumpy Assets Assets that cannot be acquired in small increments, but must be obtained in large, discrete amounts 14 Summary: How different factors affect the AFN forecast. Dividend payout ratio changes. If reduced, more RE, reduce AFN. Profit margin changes. If increases, total and retained earnings increase, reduce AFN. Plant capacity changes. Less capacity used, less need for AFN. Payment terms increased to 60 days. Accts. payable would double, increasing liabilities, reduce AFN. 15 Financial Control - Budgeting and Leverage The phase in which financial plans are implemented; control deals with the feedback and adjustment processes required to ensure the firm is following the right financial path to accomplish its goals, and, if not, to make necessary corrections.  16 Operating Breakeven Analysis An analytical technique for studying the relationship between sales revenues, operating costs, and profits Operating breakeven analysis deals only with the upper portion of the income statement - the portion from sales to NOI 17 Unilate’s 2010 Forecasted Operating Income ($ millions) 18 Operating Breakeven Chart 19 Breakeven Computation Sales Total operating Total Total revenues costs variable costs fixed costs = = + (P x Q) = TOC = (V x Q) + F QOpBE F P-V F Contribution margin = = QOpBE $154.0 million $15.00 - $12.30 = = $154.0 million $2.70 57.04 million units 57.0 million units = 20 Operating Breakeven Point For the proposal to break even, Unilate must sell 57 million units or $855,600,000 of product. SOpBE F F Gross profit margin = = 1- V P ( ) 21 Operating Leverage The existence of fixed operating costs, such that a change in sales will produce a larger change in operating income (EBIT) 22 Degree of Operating Leverage The percentage change in NOI (or EBIT) associated with a given percentage change in sales 23 DOL S = Gross Prof it EBIT Each 1 percent change in sales, will result in a 2.08 percent change in operating income. Calculating the Degree of Operating Leverage $297 $143 2.08x = = 24 Operating Income at Sales Levels of 110 and 99 Million Units
Slide 25 - Chapter 12 Financial Planning and Control © 2005 Thomson/South-Western 2 Financial Planning and Control Financial Planning: The projection of sales, income, and assets based on alternative production and marketing strategies, as well as the determination of the resources needed to achieve these projections Financial Control The phase in which financial plans are implemented, control deals with the feedback and adjustment process required to ensure adherence to plans and modification of plans because of unforeseen changes. 3 Financial Planning: The Sales Forecast A forecast of a firm’s unit and dollar sales for some future period, generally based on recent sales trends plus forecasts of the economic prospects for the nation, region, industry, etc. 4 Projected (Pro Forma) Financial Statements A method of forecasting financial requirements based on forecasted financial statements AFN = additional funds needed to support the level of forecasted operations 5 Projected Financial Statements Determine how much money the firm will need in a given period. Determine how much money the firm will generate internally during the same period. Subtract the funds generated internally from the funds required to determine the external financial requirements. 6 Step 1. Forecast the 2010 Income Statement Assumptions: Unilate operated at full capacity in 2009. Sales are expected to grow by 10%. Variable cost ratio is 82% (same as 2009). 2010 dividend per share is the same as 2009. AFN is raised by 60% short-term debt with 10% cost and 40% long-term debts with 12% cost. 7 Step 1. Forecast the 2010 Income Statement ($ millions) Unilate Textiles 8 Step 2. Forecast the 2010 Balance Sheet ($ millions) Unilate Textiles 9 Unilate has decided that any additional funds needed to support future operations will be raised mainly by issuing new common stock. Step 3. Raising the Additional Funds Needed Higher sales must be supported by higher assets. Asset increase can be financed by spontaneous increases in accounts payable and accruals and by retained earnings. Any short fall must be financed from external sources--by borrowing or by selling new stock. 10 The effects on the income statement and balance sheet of actions taken to finance forecasted increases in assets Step 4. Financing Feedbacks 11 Other Considerations in Forecasting: Excess Capacity Suppose in 2009 fixed assets had been operated at only 80% of capacity: 12 Changes in variable cost ratio affect the addition to retained earnings which affects the amount of AFN. Other Considerations in Forecasting: Economies of Scale Unilate’s variable cost ratio is 82% of sales. Ratio might decrease to 80% if operations increase significantly. 13 Other Considerations in Forecasting: Lumpy Assets Assets that cannot be acquired in small increments, but must be obtained in large, discrete amounts 14 Summary: How different factors affect the AFN forecast. Dividend payout ratio changes. If reduced, more RE, reduce AFN. Profit margin changes. If increases, total and retained earnings increase, reduce AFN. Plant capacity changes. Less capacity used, less need for AFN. Payment terms increased to 60 days. Accts. payable would double, increasing liabilities, reduce AFN. 15 Financial Control - Budgeting and Leverage The phase in which financial plans are implemented; control deals with the feedback and adjustment processes required to ensure the firm is following the right financial path to accomplish its goals, and, if not, to make necessary corrections.  16 Operating Breakeven Analysis An analytical technique for studying the relationship between sales revenues, operating costs, and profits Operating breakeven analysis deals only with the upper portion of the income statement - the portion from sales to NOI 17 Unilate’s 2010 Forecasted Operating Income ($ millions) 18 Operating Breakeven Chart 19 Breakeven Computation Sales Total operating Total Total revenues costs variable costs fixed costs = = + (P x Q) = TOC = (V x Q) + F QOpBE F P-V F Contribution margin = = QOpBE $154.0 million $15.00 - $12.30 = = $154.0 million $2.70 57.04 million units 57.0 million units = 20 Operating Breakeven Point For the proposal to break even, Unilate must sell 57 million units or $855,600,000 of product. SOpBE F F Gross profit margin = = 1- V P ( ) 21 Operating Leverage The existence of fixed operating costs, such that a change in sales will produce a larger change in operating income (EBIT) 22 Degree of Operating Leverage The percentage change in NOI (or EBIT) associated with a given percentage change in sales 23 DOL S = Gross Prof it EBIT Each 1 percent change in sales, will result in a 2.08 percent change in operating income. Calculating the Degree of Operating Leverage $297 $143 2.08x = = 24 Operating Income at Sales Levels of 110 and 99 Million Units 25 Financial Leverage The existence of fixed financial costs such as interest and preferred dividends when a change in EBIT results in a larger change in EPS
Slide 26 - Chapter 12 Financial Planning and Control © 2005 Thomson/South-Western 2 Financial Planning and Control Financial Planning: The projection of sales, income, and assets based on alternative production and marketing strategies, as well as the determination of the resources needed to achieve these projections Financial Control The phase in which financial plans are implemented, control deals with the feedback and adjustment process required to ensure adherence to plans and modification of plans because of unforeseen changes. 3 Financial Planning: The Sales Forecast A forecast of a firm’s unit and dollar sales for some future period, generally based on recent sales trends plus forecasts of the economic prospects for the nation, region, industry, etc. 4 Projected (Pro Forma) Financial Statements A method of forecasting financial requirements based on forecasted financial statements AFN = additional funds needed to support the level of forecasted operations 5 Projected Financial Statements Determine how much money the firm will need in a given period. Determine how much money the firm will generate internally during the same period. Subtract the funds generated internally from the funds required to determine the external financial requirements. 6 Step 1. Forecast the 2010 Income Statement Assumptions: Unilate operated at full capacity in 2009. Sales are expected to grow by 10%. Variable cost ratio is 82% (same as 2009). 2010 dividend per share is the same as 2009. AFN is raised by 60% short-term debt with 10% cost and 40% long-term debts with 12% cost. 7 Step 1. Forecast the 2010 Income Statement ($ millions) Unilate Textiles 8 Step 2. Forecast the 2010 Balance Sheet ($ millions) Unilate Textiles 9 Unilate has decided that any additional funds needed to support future operations will be raised mainly by issuing new common stock. Step 3. Raising the Additional Funds Needed Higher sales must be supported by higher assets. Asset increase can be financed by spontaneous increases in accounts payable and accruals and by retained earnings. Any short fall must be financed from external sources--by borrowing or by selling new stock. 10 The effects on the income statement and balance sheet of actions taken to finance forecasted increases in assets Step 4. Financing Feedbacks 11 Other Considerations in Forecasting: Excess Capacity Suppose in 2009 fixed assets had been operated at only 80% of capacity: 12 Changes in variable cost ratio affect the addition to retained earnings which affects the amount of AFN. Other Considerations in Forecasting: Economies of Scale Unilate’s variable cost ratio is 82% of sales. Ratio might decrease to 80% if operations increase significantly. 13 Other Considerations in Forecasting: Lumpy Assets Assets that cannot be acquired in small increments, but must be obtained in large, discrete amounts 14 Summary: How different factors affect the AFN forecast. Dividend payout ratio changes. If reduced, more RE, reduce AFN. Profit margin changes. If increases, total and retained earnings increase, reduce AFN. Plant capacity changes. Less capacity used, less need for AFN. Payment terms increased to 60 days. Accts. payable would double, increasing liabilities, reduce AFN. 15 Financial Control - Budgeting and Leverage The phase in which financial plans are implemented; control deals with the feedback and adjustment processes required to ensure the firm is following the right financial path to accomplish its goals, and, if not, to make necessary corrections.  16 Operating Breakeven Analysis An analytical technique for studying the relationship between sales revenues, operating costs, and profits Operating breakeven analysis deals only with the upper portion of the income statement - the portion from sales to NOI 17 Unilate’s 2010 Forecasted Operating Income ($ millions) 18 Operating Breakeven Chart 19 Breakeven Computation Sales Total operating Total Total revenues costs variable costs fixed costs = = + (P x Q) = TOC = (V x Q) + F QOpBE F P-V F Contribution margin = = QOpBE $154.0 million $15.00 - $12.30 = = $154.0 million $2.70 57.04 million units 57.0 million units = 20 Operating Breakeven Point For the proposal to break even, Unilate must sell 57 million units or $855,600,000 of product. SOpBE F F Gross profit margin = = 1- V P ( ) 21 Operating Leverage The existence of fixed operating costs, such that a change in sales will produce a larger change in operating income (EBIT) 22 Degree of Operating Leverage The percentage change in NOI (or EBIT) associated with a given percentage change in sales 23 DOL S = Gross Prof it EBIT Each 1 percent change in sales, will result in a 2.08 percent change in operating income. Calculating the Degree of Operating Leverage $297 $143 2.08x = = 24 Operating Income at Sales Levels of 110 and 99 Million Units 25 Financial Leverage The existence of fixed financial costs such as interest and preferred dividends when a change in EBIT results in a larger change in EPS 26 Unilate Textiles: Degree of Financial Leverage DFL EBIT EBIT I = - = EBIT EBIT [financial BEP] - DFL110 $143.0 $143.0 - $41.4 = = $143.0 $101.6 = 1.41x
Slide 27 - Chapter 12 Financial Planning and Control © 2005 Thomson/South-Western 2 Financial Planning and Control Financial Planning: The projection of sales, income, and assets based on alternative production and marketing strategies, as well as the determination of the resources needed to achieve these projections Financial Control The phase in which financial plans are implemented, control deals with the feedback and adjustment process required to ensure adherence to plans and modification of plans because of unforeseen changes. 3 Financial Planning: The Sales Forecast A forecast of a firm’s unit and dollar sales for some future period, generally based on recent sales trends plus forecasts of the economic prospects for the nation, region, industry, etc. 4 Projected (Pro Forma) Financial Statements A method of forecasting financial requirements based on forecasted financial statements AFN = additional funds needed to support the level of forecasted operations 5 Projected Financial Statements Determine how much money the firm will need in a given period. Determine how much money the firm will generate internally during the same period. Subtract the funds generated internally from the funds required to determine the external financial requirements. 6 Step 1. Forecast the 2010 Income Statement Assumptions: Unilate operated at full capacity in 2009. Sales are expected to grow by 10%. Variable cost ratio is 82% (same as 2009). 2010 dividend per share is the same as 2009. AFN is raised by 60% short-term debt with 10% cost and 40% long-term debts with 12% cost. 7 Step 1. Forecast the 2010 Income Statement ($ millions) Unilate Textiles 8 Step 2. Forecast the 2010 Balance Sheet ($ millions) Unilate Textiles 9 Unilate has decided that any additional funds needed to support future operations will be raised mainly by issuing new common stock. Step 3. Raising the Additional Funds Needed Higher sales must be supported by higher assets. Asset increase can be financed by spontaneous increases in accounts payable and accruals and by retained earnings. Any short fall must be financed from external sources--by borrowing or by selling new stock. 10 The effects on the income statement and balance sheet of actions taken to finance forecasted increases in assets Step 4. Financing Feedbacks 11 Other Considerations in Forecasting: Excess Capacity Suppose in 2009 fixed assets had been operated at only 80% of capacity: 12 Changes in variable cost ratio affect the addition to retained earnings which affects the amount of AFN. Other Considerations in Forecasting: Economies of Scale Unilate’s variable cost ratio is 82% of sales. Ratio might decrease to 80% if operations increase significantly. 13 Other Considerations in Forecasting: Lumpy Assets Assets that cannot be acquired in small increments, but must be obtained in large, discrete amounts 14 Summary: How different factors affect the AFN forecast. Dividend payout ratio changes. If reduced, more RE, reduce AFN. Profit margin changes. If increases, total and retained earnings increase, reduce AFN. Plant capacity changes. Less capacity used, less need for AFN. Payment terms increased to 60 days. Accts. payable would double, increasing liabilities, reduce AFN. 15 Financial Control - Budgeting and Leverage The phase in which financial plans are implemented; control deals with the feedback and adjustment processes required to ensure the firm is following the right financial path to accomplish its goals, and, if not, to make necessary corrections.  16 Operating Breakeven Analysis An analytical technique for studying the relationship between sales revenues, operating costs, and profits Operating breakeven analysis deals only with the upper portion of the income statement - the portion from sales to NOI 17 Unilate’s 2010 Forecasted Operating Income ($ millions) 18 Operating Breakeven Chart 19 Breakeven Computation Sales Total operating Total Total revenues costs variable costs fixed costs = = + (P x Q) = TOC = (V x Q) + F QOpBE F P-V F Contribution margin = = QOpBE $154.0 million $15.00 - $12.30 = = $154.0 million $2.70 57.04 million units 57.0 million units = 20 Operating Breakeven Point For the proposal to break even, Unilate must sell 57 million units or $855,600,000 of product. SOpBE F F Gross profit margin = = 1- V P ( ) 21 Operating Leverage The existence of fixed operating costs, such that a change in sales will produce a larger change in operating income (EBIT) 22 Degree of Operating Leverage The percentage change in NOI (or EBIT) associated with a given percentage change in sales 23 DOL S = Gross Prof it EBIT Each 1 percent change in sales, will result in a 2.08 percent change in operating income. Calculating the Degree of Operating Leverage $297 $143 2.08x = = 24 Operating Income at Sales Levels of 110 and 99 Million Units 25 Financial Leverage The existence of fixed financial costs such as interest and preferred dividends when a change in EBIT results in a larger change in EPS 26 Unilate Textiles: Degree of Financial Leverage DFL EBIT EBIT I = - = EBIT EBIT [financial BEP] - DFL110 $143.0 $143.0 - $41.4 = = $143.0 $101.6 = 1.41x 27 DTL Gross profit - [Financial BEP] = EBIT Degree of Total Leverage $297.0 $101.6 2.92x = = = DOL x DFL = 2.08 x 1.41 = 2.92x
Slide 28 - Chapter 12 Financial Planning and Control © 2005 Thomson/South-Western 2 Financial Planning and Control Financial Planning: The projection of sales, income, and assets based on alternative production and marketing strategies, as well as the determination of the resources needed to achieve these projections Financial Control The phase in which financial plans are implemented, control deals with the feedback and adjustment process required to ensure adherence to plans and modification of plans because of unforeseen changes. 3 Financial Planning: The Sales Forecast A forecast of a firm’s unit and dollar sales for some future period, generally based on recent sales trends plus forecasts of the economic prospects for the nation, region, industry, etc. 4 Projected (Pro Forma) Financial Statements A method of forecasting financial requirements based on forecasted financial statements AFN = additional funds needed to support the level of forecasted operations 5 Projected Financial Statements Determine how much money the firm will need in a given period. Determine how much money the firm will generate internally during the same period. Subtract the funds generated internally from the funds required to determine the external financial requirements. 6 Step 1. Forecast the 2010 Income Statement Assumptions: Unilate operated at full capacity in 2009. Sales are expected to grow by 10%. Variable cost ratio is 82% (same as 2009). 2010 dividend per share is the same as 2009. AFN is raised by 60% short-term debt with 10% cost and 40% long-term debts with 12% cost. 7 Step 1. Forecast the 2010 Income Statement ($ millions) Unilate Textiles 8 Step 2. Forecast the 2010 Balance Sheet ($ millions) Unilate Textiles 9 Unilate has decided that any additional funds needed to support future operations will be raised mainly by issuing new common stock. Step 3. Raising the Additional Funds Needed Higher sales must be supported by higher assets. Asset increase can be financed by spontaneous increases in accounts payable and accruals and by retained earnings. Any short fall must be financed from external sources--by borrowing or by selling new stock. 10 The effects on the income statement and balance sheet of actions taken to finance forecasted increases in assets Step 4. Financing Feedbacks 11 Other Considerations in Forecasting: Excess Capacity Suppose in 2009 fixed assets had been operated at only 80% of capacity: 12 Changes in variable cost ratio affect the addition to retained earnings which affects the amount of AFN. Other Considerations in Forecasting: Economies of Scale Unilate’s variable cost ratio is 82% of sales. Ratio might decrease to 80% if operations increase significantly. 13 Other Considerations in Forecasting: Lumpy Assets Assets that cannot be acquired in small increments, but must be obtained in large, discrete amounts 14 Summary: How different factors affect the AFN forecast. Dividend payout ratio changes. If reduced, more RE, reduce AFN. Profit margin changes. If increases, total and retained earnings increase, reduce AFN. Plant capacity changes. Less capacity used, less need for AFN. Payment terms increased to 60 days. Accts. payable would double, increasing liabilities, reduce AFN. 15 Financial Control - Budgeting and Leverage The phase in which financial plans are implemented; control deals with the feedback and adjustment processes required to ensure the firm is following the right financial path to accomplish its goals, and, if not, to make necessary corrections.  16 Operating Breakeven Analysis An analytical technique for studying the relationship between sales revenues, operating costs, and profits Operating breakeven analysis deals only with the upper portion of the income statement - the portion from sales to NOI 17 Unilate’s 2010 Forecasted Operating Income ($ millions) 18 Operating Breakeven Chart 19 Breakeven Computation Sales Total operating Total Total revenues costs variable costs fixed costs = = + (P x Q) = TOC = (V x Q) + F QOpBE F P-V F Contribution margin = = QOpBE $154.0 million $15.00 - $12.30 = = $154.0 million $2.70 57.04 million units 57.0 million units = 20 Operating Breakeven Point For the proposal to break even, Unilate must sell 57 million units or $855,600,000 of product. SOpBE F F Gross profit margin = = 1- V P ( ) 21 Operating Leverage The existence of fixed operating costs, such that a change in sales will produce a larger change in operating income (EBIT) 22 Degree of Operating Leverage The percentage change in NOI (or EBIT) associated with a given percentage change in sales 23 DOL S = Gross Prof it EBIT Each 1 percent change in sales, will result in a 2.08 percent change in operating income. Calculating the Degree of Operating Leverage $297 $143 2.08x = = 24 Operating Income at Sales Levels of 110 and 99 Million Units 25 Financial Leverage The existence of fixed financial costs such as interest and preferred dividends when a change in EBIT results in a larger change in EPS 26 Unilate Textiles: Degree of Financial Leverage DFL EBIT EBIT I = - = EBIT EBIT [financial BEP] - DFL110 $143.0 $143.0 - $41.4 = = $143.0 $101.6 = 1.41x 27 DTL Gross profit - [Financial BEP] = EBIT Degree of Total Leverage $297.0 $101.6 2.92x = = = DOL x DFL = 2.08 x 1.41 = 2.92x 28 Importance of Forecasting and Control Functions If projected operating results are not satisfactory, management can reformulate its plans. If funds required to meet sales forecast cannot be obtained, management can sale back projected levels of operations. If required funds can be raised, it is best to plan for their acquisition in advance. Any deviation from projections needs to be handled to improve future forecasts.
 

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