1. 1 FINANCIAL FORECASTING PROFORMA FINANCIAL STATEMENTS CASH BUDGETS OPERATING BUDGETS SALES FORECASTING EXTERNAL FINANCING REQUIREMENT SUSTAINABLE GROWTH RATE

2. 2 FINANCIAL FORECASTING A planning process used for estimating and quantifying the future activities of the firm keeping in view the expected changes in the operating environment. Techniques used in financial projections: (a) Proforma Financial Statements (b) Cash budget (c) Operating budget

3. 3 PROFORMA FINANCIAL STATEMENTS Projected financial statements based on a set of assumptions about the company’s future performance and funding requirements. Types of Proforma Financial Statements: (a) Proforma Profit and loss account (b) Proforma Balance Sheet

4. 4 CASH AND OPERATING BUDGETS Cash Budgets: -A forecast of cash receipts and disbursements for the next planning period. -It helps in exploring the need for short-term borrowing Operating Budgets: - They are related to the planning of the operations of the firm. Example: Sales budget, Production budget, Materials budget, Labour cost budget etc.

5. 5 METHODS OF SALES FORECASTING The techniques used for forecasting sales can be classified as: (a) Subjective Methods - Jury of executive opinion - Sales force estimates (b) Objective Methods - Trend analysis via extrapolation - Regression analysis

6. 6 EXTERNAL FINANCING REQUIREMENT Part of the requirement for new investments that has to be raised through external resources. It is computed as: where, A/S is Current and fixed assets as a proportion of sales L/S is spontaneous liabilities as a proportion of sales m is net profit margin S is projected sales for next year d is the dividend payout ratio S is expected increase in sales

7. 7 Example: The balance sheet of Pragati Ltd. is given below: The sales for the company are expected to increase by 25% in the next year. The sales to net worth ratio is 5. Profit margin is 40% of the growth rate in sales. Dividend pay out ratio = 2(Sales). Compute the External Fund Requirement for the company. LiabilitiesAmount (in Rs.) AssetsAmount (in Rs.) Share Capital Retained Earnings Long-Term Loans Short-term borrowings Creditors 6,00,000 3,00,000 4,50,000 2,25,000 Fixed Assets Current Assets 6,00,000 12,00,000 18,00,000

8. 8 Solution: Sales to net worth ratio is given as 5. Sales = Net worth x 5 = 9 lakhs x 5 = Rs. 45 lakhs. where, total assets (A) = Rs 18 lakhs. Spontaneous liabilities = Rs. 2.25 lakhs. Sales in the current year (S) = Rs 45 lakhs Projected Sales (S 1 ) = Rs. 45 lakhs (1+.25) = Rs. 56.25 Profit margin (m)= 0.4 x 0.25 =0.10 i.e. 10% Dividend payout ratio (d) = 2 x 0.25 =0.5. ΔS = 56.25 – 45 = Rs. 11.25 lakhs EFR = Rs. 1.125 lakh.

9. 9 SUSTAINABLE GROWTH RATE Growth rate that can be maintained without raising external equity. It is computed as: where, m is the net profit margin A/S is the total assets to sales ratio A/E is the total assets to equity ratio d is the dividend payout ratio.

10. 10 Example: Given below is the balance sheet of Skyline Ltd. for the year 2001: The turnover of the company for the last year was Rs. 10 crore. The company earns a net profit of 5% and pays out 50% of profits as dividends. Compute the maximum growth rate in sales that can be achieved by the company without raising external equity. Liabilities(in Rs. Lakhs) Assets(in Rs. Lakhs) Share Capital Reserves And Surplus Secured Loans Current Liabilities and Provisions: Sundry Creditors Bank Finance For Working Capital Provisions 150 50 200 130 100 20 Net Fixed Assets Current Assets: Inventories Sundry Debtors Cash And Bank Balance 300 150 50 650

11. 11 Solution: The sustainable growth rate can be computed as: g = = = 14.29%.