Ch24PPTs

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  • As a cash manager of Tyler Paints, you are required to prepare a cash budget for April, May and June of 1997. Sales in the first three months of 1997 were $400,000, $500,000 and $600,000 respectively. Projected sales for April through June are given below. Month April May June July Projected Sales $1,200,000 $1,000,000 $1,000,000 $500,000 Tyler collects 20% of its sales in the month of the sale. An additional 40% is collected in the month following the sale, and the remaining 35% is collected two months after the sale. Purchases amount to 60% of next month’s sales, and are paid for in the month prior to the sale. Wages equal 20% of the current month’s sales, while other fixed expenses (such as rent) are $120,000 per month. Tyler expects to pay taxes of $200,000 in June. Tyler’s policy is to have a monthly cash balance of $450,000 for liquidity reasons. Any shortages will be met by short-term borrowings. Surplus cash will be used to pay off such loans.
  • Ch24PPTs

    1. 1. 24 Corporate Financial Management 3e Emery Finnerty Stowe Financial Planning
    2. 2. The Financial Planning Process <ul><li>Liquidity </li></ul><ul><li>Working Capital </li></ul><ul><li>Inventories </li></ul><ul><li>Capital Budgeting </li></ul><ul><li>Capital Structure </li></ul><ul><li>Dividends </li></ul>A firm’s financial plan involves decisions about:
    3. 3. The Financial Plan <ul><li>Financial planning is the process of evaluating the impact of alternative investing and financing decisions of the firm. </li></ul><ul><li>Every financial plan has three components: </li></ul><ul><ul><li>A model </li></ul></ul><ul><ul><li>Inputs </li></ul></ul><ul><ul><li>Outputs </li></ul></ul>
    4. 4. The Financial Plan <ul><li>The model is a set of mathematical relationships between the inputs and the outputs. </li></ul><ul><li>Inputs to the model may include: </li></ul><ul><ul><li>Projected sales </li></ul></ul><ul><ul><li>Collections </li></ul></ul><ul><ul><li>Costs </li></ul></ul><ul><ul><li>Interest rates </li></ul></ul><ul><ul><li>Exchange rates </li></ul></ul>
    5. 5. The Financial Plan <ul><li>The outputs of the financial plan are: </li></ul><ul><ul><li>Pro forma financial statements </li></ul></ul><ul><ul><li>A set of budgets </li></ul></ul><ul><li>Pro forma financial statements are projected financial statements. </li></ul><ul><li>A budget is a detailed schedule of a financial activity: </li></ul><ul><ul><li>Sales budget </li></ul></ul><ul><ul><li>Advertising budget </li></ul></ul><ul><ul><li>Cash budget </li></ul></ul>
    6. 6. The Financial Plan <ul><li>The planning horizon is the length of time that the financial plan projects into the future. </li></ul><ul><li>Short-term financial plans </li></ul><ul><ul><li>Usually have a planning horizon of one year or less. </li></ul></ul><ul><ul><li>Are detailed and very specific. </li></ul></ul><ul><li>Long-term financial plans </li></ul><ul><ul><li>Usually have a five- or ten-year planning horizon. </li></ul></ul><ul><ul><li>Tend to be less detailed. </li></ul></ul>
    7. 7. Components of the Financial Plan <ul><li>Clearly stated strategic, operating and financial objectives . </li></ul><ul><li>Assumptions on which the plan is based. </li></ul><ul><li>Description of underlying strategies. </li></ul><ul><li>Contingency plans for emergencies. </li></ul><ul><li>Budgets , classified by </li></ul><ul><ul><li>time period </li></ul></ul><ul><ul><li>division </li></ul></ul><ul><ul><li>type </li></ul></ul>
    8. 8. Components of the Financial Plan <ul><li>The financing program , classified by </li></ul><ul><ul><li>time period </li></ul></ul><ul><ul><li>source of funds </li></ul></ul><ul><ul><li>types of funds </li></ul></ul><ul><li>A set of period-by-period pro forma financial statements for the entire planning horizon. </li></ul>
    9. 9. Planning Cycles <ul><li>A planning cycle specifies how frequently plans are reviewed and updated. </li></ul><ul><li>The planning horizon is also renewed with each update. </li></ul><ul><li>Short-term plans are updated more frequently than long-term plans. </li></ul>
    10. 10. Bottom-Up and Top-Down Planning <ul><li>A bottom up planning process starts at the production level and proceeds upwards through the corporate hierarchy. </li></ul><ul><li>A top-down planning process starts with top management making strategic decisions. </li></ul><ul><ul><li>These decisions are then implemented by managers further down the corporate hierarchy. </li></ul></ul>
    11. 11. Phases of the Financial Planning Process <ul><li>Formulating the plan </li></ul><ul><li>Implementing the plan </li></ul><ul><li>Evaluating performance </li></ul>
    12. 12. Benefits of Financial Planning <ul><li>Standardizing assumptions </li></ul><ul><li>Future orientation </li></ul><ul><li>Objectivity </li></ul><ul><li>Employee development </li></ul><ul><li>Lender requirements </li></ul><ul><li>Better performance evaluation </li></ul><ul><li>Preparing for contingencies </li></ul>
    13. 13. Cash Budgets <ul><li>Cash budgets </li></ul><ul><ul><li>Project and summarize cash inflows and outflows. </li></ul></ul><ul><ul><li>Show monthly cash balances. </li></ul></ul><ul><ul><li>Show any short-term borrowing needed to cover cash shortfalls. </li></ul></ul><ul><li>They are usually based on sales forecasts. </li></ul><ul><li>They are usually constructed on a monthly basis. </li></ul><ul><ul><li>More frequent planning may be warranted. </li></ul></ul>
    14. 14. Preparing a Cash Budget <ul><li>Prepare a cash budget for Tyler Paints for the months of April, May and June. </li></ul>
    15. 15. Tyler Paints Cash Budget (I) <ul><li>As a cash manager of Tyler Paints, you are required to prepare a cash budget for April, May and June of 1997. Sales in the first three months of 1997 were $400,000, $500,000 and $600,000 respectively. Projected sales for April through June are given below. </li></ul>Month April May June Projected Sales $1,200,000 $1,000,000 $1,000,000
    16. 16. Tyler Paints Cash Budget (II) <ul><li>Tyler collects 20% of its sales in the month of the sale. An additional 45% is collected in the month following the sale, and the remaining 35% is collected two months after the sale. Purchases amount to 60% of next month’s sales, and are paid for in the month prior to the sale. Wages equal 20% of the current month’s sales, while other fixed expenses (such as rent) are $120,000 per month. Tyler expects to pay taxes of $200,000 in June. </li></ul><ul><li>Tyler’s policy is to have a monthly cash balance of $450,000 for liquidity reasons. Any shortages will be met by short-term borrowings. Surplus cash will be used to pay off such loans. </li></ul>
    17. 17. Collections on Sales <ul><li>Collections in the Month of April are: </li></ul><ul><ul><li>20% of April Sales </li></ul></ul><ul><ul><li>45% of March Sales </li></ul></ul><ul><ul><li>35% of February Sales </li></ul></ul><ul><li>Collections in April = $685,000 </li></ul><ul><ul><ul><li>20% × $1,200,000 = $240,000 </li></ul></ul></ul><ul><ul><ul><li>45% × $600,000 = $270,000 </li></ul></ul></ul><ul><ul><ul><li>35% × $500,000 = $175,000 </li></ul></ul></ul><ul><ul><li>$685,000 </li></ul></ul>
    18. 18. Collections on Sales April May June Sales $1,200,000 $1,000,000 $1,000,000 t : 20% t – 1: 45% t – 2: 35% $240,000 $270,000 $175,000 $200,000 $540,000 $210,000 $200,000 $450,000 $420,000 Total $685,000 $950,000 $1,070,000
    19. 19. Collections on Sales <ul><li>Uncollected sales at the end of June (Accounts Receivable) = </li></ul><ul><ul><li>= 35% of May Sales + 80% of June Sales) </li></ul></ul><ul><ul><li>= 35% × $1,000,000 + 80% × $1,000,000 </li></ul></ul><ul><ul><li>= $1,150,000 </li></ul></ul>
    20. 20. Cash Disbursements <ul><li>Cash Disbursements in April = </li></ul><ul><ul><li>Purchases of 60%(May Sales) </li></ul></ul><ul><ul><li>+ Wages of 20%(April Sales) </li></ul></ul><ul><ul><li>+ Other Fixed Expenses of $120,000 </li></ul></ul><ul><li>Cash Disbursements in April = </li></ul><ul><ul><ul><li>60% × $1,000,000 </li></ul></ul></ul><ul><ul><ul><li>+ 20% × $1,200,000 </li></ul></ul></ul><ul><ul><ul><li>+ $120,000 </li></ul></ul></ul><ul><ul><ul><li>$960,000 </li></ul></ul></ul>
    21. 21. Cash Disbursements April May June Sales $1,200,000 $1,000,000 $1,000,000 Purchases Wages Other Taxes $600,000 $240,000 $120,000 $0 $600,000 $200,000 $120,000 $0 $300,000 $200,000 $120,000 $200,000 Total $960,000 $920,000 $820,000
    22. 22. Cash Budget April May June Collections Disbursements $685,000 $960,000 $950,000 $920,000 $1,070,000 $820,000 Net Cash Flow ($275,000) $30,000 $250,000 Begin Balance Available Balance Borrowings Ending Balance $450,000 $175,000 $275,000 $450,000 $450,000 $480,000 ($30,000) $450,000 $450,000 $700,000 ($245,000) $455,000 Cumulative Loans $275,000 $245,000 $0
    23. 23. Cash Budget <ul><li>Tyler will have to borrow $275,000 in April. </li></ul><ul><li>Tyler can repay $30,000 in May, leaving an outstanding loan balance of $245,000. </li></ul><ul><li>The short-term loan can be fully repaid in June. </li></ul>
    24. 24. Pro Forma Financial Statements <ul><li>They show the effect of the firm’s decisions on its future financial statements. </li></ul><ul><li>Effect of alternative decisions can be examined: </li></ul><ul><ul><li>Effect of sales variations. </li></ul></ul><ul><ul><li>Effect of interest rate changes. </li></ul></ul><ul><ul><li>Effect of financing decisions. </li></ul></ul><ul><ul><li>Effect of dividend decisions. </li></ul></ul>
    25. 25. Percent of Sales Forecasting Method <ul><li>Allows firm to estimate funds required to finance growth. </li></ul><ul><li>Sales growth results in: </li></ul><ul><ul><li>increase in current and fixed assets. </li></ul></ul><ul><ul><li>increase in spontaneous short-term financing. </li></ul></ul><ul><ul><li>increase in profitability. </li></ul></ul><ul><li>The increase in current assets must be financed from internally generated funds or external funds. </li></ul>
    26. 26. Percent of Sales Forecasting Method <ul><li>If internally generated funds are insufficient to finance the growth, the firm may: </li></ul><ul><ul><li>Reduce the growth rate. </li></ul></ul><ul><ul><li>Sell assets not required to run the firm. </li></ul></ul><ul><ul><li>Obtain new external financing. </li></ul></ul><ul><ul><li>Reduce or stop paying cash dividends. </li></ul></ul>
    27. 27. Additional Financing Needed (AFN) <ul><li>Let </li></ul><ul><ul><li>A / S = the increase in assets per dollar increase in sales. </li></ul></ul><ul><ul><li>L / S = the increase in spontaneous liabilities per dollar increase in sales. </li></ul></ul><ul><ul><li>S 0 = current level of sales. </li></ul></ul><ul><ul><li>g = projected growth rate in sales. </li></ul></ul><ul><ul><li>M = net profit margin on sales. </li></ul></ul><ul><ul><li>D = cash dividends planned for common stock. </li></ul></ul>
    28. 28. Additional Financing Needed (AFN) <ul><li>Additional Financing Needed </li></ul><ul><ul><li>AFN = ( A / S )g S 0 – ( L/S)gS 0 – [ M (1+ g ) S 0 – D ] </li></ul></ul>
    29. 29. Additional Financing Needed <ul><li>Peak Plastics expects rapid sales growth next year. Sales for the current year were $4 million, and are expected to grow by 20% next year. Peak wants to estimate the external capital that will be required to finance this growth. </li></ul><ul><li>The firm estimates that additional assets equal to 50% of the increase in sales will be required. Liabilities will increase by 18% of sales. The net profit margin is 6% and Peak expects to pay $84,000 in dividends to its common stockholders. </li></ul>
    30. 30. Additional Financing Needed = $52,000 AFN = (.50)(.20)$4m – (.18)(.20)$4m – [.06(1.20)$4m – $84,000]
    31. 31. Using Spreadsheet Software to Prepare Financial Plans <ul><li>Allows evaluation of changes in assumptions. </li></ul><ul><li>Allows evaluation of alternative scenarios. </li></ul><ul><li>Automates preparation of standardized budgets and financial statements. </li></ul>

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