The document outlines the financial planning model ingredients, including sales forecasts and proforma statements, emphasizing the relationship between sales growth and financial policy. It discusses how an increase in sales affects the balance sheet, particularly in terms of liabilities and equity, and introduces the concept of 'plug' variables, which are adjustments made to balance financial projections. Ultimately, it highlights the managerial decisions necessary to finance asset growth as sales increase.

1. Financial Planning Model Ingredients
1) Sales Forecast
2)Proforma statements
3)Assets Requirements
4)Financial Requirements
5)The Plug
6)Economic Assumption
Recent Financial Statement
Sales $1,000
Costs ($800)
Net Income $200
Assets $500
Total $500
Liabilites & Owner Equity
Debt $250
Equity $250
Total $500
2) Suppose sales increase by 20%
ABC Corporation
Note : IF it is not stated, As a financial planner at ABC assume that all variables are tied directly to
sales and current relationship are optimal. This means that all items will grow at exactly the same
rate as sales.This is obviously oversimplified, we use this assumption only to make a point.
Financial Planning Models: A First Look
ABC Corporation
Income statement
Balance Sheet
Assets

2. Current Year Projection
Sales $1,000 $1,200
Costs ($800) ($960)
Net Income $200 $240
Assets Current Year Projection Change
Assets $500 $600 $100
Total $500 $600 $100
Liabilites & Owner Equity
Debt $250 $300 $50
Equity $250 $300 $50
Total $500 $600 $100
For example, Can net income be equal to $240 and equity increase by only $50?
Income $240
Equity ($50)
Difference $190
Possibly as a Cash dividend. In this case , Dividends are the plug variable.
Proforma balance sheet
Lets have to reconcile these two proformas. How ?
Answer is ABC must have paid out the difference.
ABC Corporation
Proforma Income Statement
ABC Corporation
Suppose ABC does not pay out $190. In this case, the addition to retained earning is the full $240.
ABC equity will grow to $250 the starting amount plus$240 net income $490 and debt must be
retired to keep total assets equal to 600..
With $600 in total assets and $490 in equity, debt will be have to be $600-$490= $110 , because we
started with $250 in debt.ABC will have to retire $250-$110=$140 in debt. The resulting proforma
balance sheet would look like this.

3. Assets Current Year Projection Change
Assets $500 $600 $100
Total $500 $600 $100
Liabilites & Owner Equity
Debt $250 $110 ($140)
Equity $250 $490 $240
Total $500 $600 $100
ABC Corporation
Proforma balance sheet
In this case, Debt is the plug variable used to balance projected total assets and liabilites
This example shows the interaction between sales growth and Financial policy. As a sales increase,
so do total assets.. This Occurs because the firm must invest in networking capital and fixed assets
to support higher sales levels.Because assets are growing, total liabilites and equity will grow as
well.
The Thing to notice from simple example is that the way the liabilities and owners equity change
depends on the firm's financing policy and its dividend policy. The growth in assets requires that the
firm decide on how to finance that growth.This is strictly a Managerial decision.Note that in my
example, the firm needed no outside funds, This won't usually be the case.