Chapter4: LONG-TERM FINANCIAL PLANNING AND GROWTH
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In the previous ction, we described a simple planning model in which every item incread at the same rate as sales. This may be a reasonable assumption for some elements. For others, such as long-term borrowing, it probably is not: The amount of long-term borrowing is something t by management, and it does not necessarily relate directly to the level of sales.
In this ction, we describe an extended version of our simple model. The basic idea is to parate the income statement and balance sheet accounts into two groups—tho that vary directly with sales and tho that do not. Given a sales forecast, we will then be able to calculate how much financing the firm will need to support the predicted sales level.
The financial planning model we describe next is bad on the percentage of sales approach A financial planning method in which accounts are varied depending on a firm's predicted sales level.. Ou
r goal here is to develop a quick and practical way of generating pro forma statements. We defer discussion of some ―bells and whistles‖ to a later ction.
THE INCOME STATEMENT
We start out with the most recent income statement for the Rongarten Corporation, as that shown in Table 4.1. Notice we have still simplified things by including costs, depreciation, and interest in a single cost figure.
Rongarten has projected a 25 percent increa in sales for the coming year, so we are anticipating sales of $1,000 × 1.25 = $1,250. To generate a pro forma income statement, we assume that total costs will continue to run at $800/1,000 = 80% of sales. With this assumption, Rongarten's pro forma income statement is shown in Table 4.2. The effect here of assuming that costs are a constant percentage of sales is to assume that the profit margin is constant. To check this, notice that the profit margin was $132/1,000 = 13.2%. In our pro forma, the profit margin is $165/1,250 = 13.2%; so it is unchanged.
Next, we need to project the dividend payment. This amount is up to Rongarten's management. We will assume Rongarten has a policy of paying out a constant fraction of net income in the form of a cash dividend. For the most recent year, the dividend payout ratio The amount of cash paid out to shareholders divided by net income. was this:
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[4.1]
历史唯物主义We can also calculate the ratio of the addition to retained earnings to net income:
面海This ratio is called the retention ratio The addition to retained earnings divided by net income. Also called the plowback ratio. or plowback ratio, and it is equal to 1 minus the dividend payout ratio becau everything not paid out is retained. Assuming that the payout ratio is constant, here are the projected dividends and addition to retained earnings:
百度试图THE BALANCE SHEET
To generate a pro forma balance sheet, we start with the most recent statement, as shown in Table 4.3.
核武器谁发明的
On our balance sheet, we assume that some items vary directly with sales and others do not. For items that vary with sales, we express each as a percentage of sales for the year just completed. When an item does not vary directly with sales, we write ―n/a‖ for ―not applicable.‖
For example, on the ast side, inventory is equal to 60 percent of sales (= $600/1,000) for the year just ended. We assume this percentage applies to the coming year, so for each $1 increa in sales, inventory will ri by $.60. More generally, the ratio of total asts to sales for the year just ended is $3,000/1,000 = 3, or 300%.
This ratio of total asts to sales is sometimes called the capital intensity ratio A firm's total asts divided by its sales, or the amount of asts needed to generate $1 in sales.. It tells us the amount of asts needed to generate $1 in sales; so the higher the ratio is, the more
capital-intensive is the firm. Notice also that this ratio is just the reciprocal of the total ast turnover ratio we defined in the last chapter.
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For Rongarten, assuming that this ratio is constant, it takes $3 in total asts to generate $1 in sal
es (apparently Rongarten is in a relatively capital-intensive business). Therefore, if sales are to increa by $100, Rongarten will have to increa total asts by three times this amount, or $300.忡
On the liability side of the balance sheet, we show accounts payable varying with sales. The reason is that we expect to place more orders with our suppliers as sales volume increas, so payables will change ―spontaneously‖ with sales. Notes payable, on the other hand, reprent short-term debt such as bank borrowing. This item will not vary unless we take specific actions to change the amount, so we mark it as ―n/a.‖
Similarly, we u ―n/a‖ for long-term debt becau it won't automatically change with sales. The same is true for common stock and paid-in surplus. The last item on the right side, retained earnings, will vary with sales, but it won't be a simple percentage of sales. Instead, we will explicitly calculate the change in retained earnings bad on our projected net income and dividends.
We can now construct a partial pro forma balance sheet for Rongarten. We do this by using the percentages we have just calculated wherever possible to calculate the projected amounts. For example, net fixed asts are 180 percent of sales; so, with a new sales level of $1,250, the net fixe
d ast amount will be 1.80 × $1,250 = $2,250, reprenting an increa of $2,250 − 1,800 = $450 in plant and equipment. It is important to note that for items that don't vary directly with sales, we initially assume no change and simply write in the original amounts. The result is shown in Table 4.4. Notice that the change in retained earnings is equal to the $110 addition to retained earnings we calculated earlier.
鲍鱼排骨汤Inspecting our pro forma balance sheet, we notice that asts are projected to increa by $750. However, without additional financing, liabilities and equity will increa by only $185, leaving a shortfall of $750 − 185 = $565. We label this amount external financing needed (EFN).夸医生的句子
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A PARTICULAR SCENARIO
Our financial planning model now reminds us of one of tho good news–bad news jokes. The good news is we're projecting a 25 percent increa in sales. The bad news is that this isn't going to happen unless Rongarten can somehow rai $565 in new financing.
This is a good example of how the planning process can point out problems and potential conflicts. If, for example, Rongarten has a goal of not borrowing any additional funds and not lling any new equity, then a 25 percent increa in sales is probably not feasible.三星标志
If we take the need for $565 in new financing as given, we know that Rongarten has three possible sources: short-term borrowing, long-term borrowing, and new equity. The choice of some combination among the three is up to management; we will illustrate only one of the many possibilities.
