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Financial Planning & Forecasting

Projected Income Statement

Projected Balance Sheet

External Funding Requirement

Projected Income Statement


Percentage of Sales Method

This method assumes that the future relationship between various elements of costs to sales will be similar
to their historical relationship. When using this method, a decision has to be taken about which historical
cost ratios to be used. Should these ratios pertain to the previous year, or the average of two or more
previous years?

Budgeted Expense Method

Under percentage of sales method we assume that all elements of costs and expenses bore a strictly
proportional relationship to sales. The budgeted expenses method, on the other hand, calls for estimating
the value of each item on the basis of expected development in the future period for which the pro forma
profit and loss account is being prepared.

Projected Balance Sheet


The projections of various items on the assets side and liabilities side of the balance sheet may be derived
as follows:

Items Basis of Projection


Current Assets Percentage of sales method
Fixed Assets Percentage of sales method
Investments Assumption of no change
Miscellaneous Expenditure and Losses Assumption of no change
Current Liabilities and Provisions Percentage of sales method
Equity and Preference Capital Previous Values
Reserves and Surplus Projected Income Statement
Loan Funds Previous Values
External Funds Required Balancing Items
Problem No.1
The income statement & balance sheet of Deepam silks for yr.1 & yr.2 are as follows:
Profit & Loss Account Year 1 Year 2
Revenue from operations 600 720
Expenses
Material Expenses 300 344
Employees benefit expenses 150 172
Financial costs 10 12
Depreciation and Amortization expenses 30 40
Other expenses 86 100
Total Expenses 576 668
Profit before exceptional items and other income 24 52
Exceptional items 10 8
Profit before extraordinary items and tax 34 60
Extraordinary items
Profit after tax 34 60
Tax expenses 14 26
Profit (Loss) for the period 20 34
Dividends 12 15
Retained earnings 8 19

Balance Sheet Year 1 Year 2


EQUITY AND LIABILITIES
Shareholders’ Funds
 Share Capital (Par value 10) 120 120
 Reserves & Surplus 150 169
Non-current Liabilities
 Long-term borrowings 35 58
 Deferred tax liabilities
 Long term provisions 5 11
Current Liabilities
 Short term borrowings 20 22
 Trade payables 125 130
 Other current liabilities 5 5
 Short term provisions 40 45

500 560
Total
ASSETS
Non-current Assets
240 270
 Fixed assets
7 8
 Non-current investments
20 18
 Long term loans and advances
Current assets
 Current investments 3 2
 Inventories 125 144
 Trade receivables 80 90
 Cash & Cash equivalents 5 6
 Short term loans and advances 20 22
Total 500 560

Prepare the Proforma income statement for yr.3 & the Proforma balance sheet as at the end of yr.3,
based on the following assumptions:
a) The projected sales for the yr.3 are 850

b) The forecast values for the following profit & loss account items may be derived using the
percentage of sales method (for this purpose assumes that the average of the percentages for
yr.1 & yr.2 is applicable).
 Material expenses
 Employees benefit expenses
 Finance costs
 Other expenses and exceptional items

c) The forecast values for the other items of the profit & loss account are as follows:
 Depreciation: 45
 Tax: 50% of earnings before tax
 Dividends: 16

d) The forecast values of various balance sheet items may be derived as follows:
 Fixed assets (net) budgeted at 300.
 Non-investments no change over year 2
 Current assets are % of sales method wherein the % are based on the average for the
previous two years.
 Miscellaneous expenditures are expected to be reduced to 5 and losses.
 Share capital no change over year 2
 Reserves and surplus: Proforma profit and losses
 Non-current liabilities and current liabilities are % of sales method wherein the % are
liabilities & provisions based on average for the previous two years.
 External fund required: balancing item.

Problem No.2

The Balance Sheet of Deepak Cables Limited on 31/12/2010 is shown below:

Share capital 150 Fixed assets 400


Retained earnings 180 Inventories 200
Tern loan 80 Receivables 150
Short term bank borrowings 200 Cash 50
Accounts payable 140
Provisions 50
Total 800 Total 800
The sales of the firm for the year ending 31/12/2010 were 1000. Its profit margin on sales was 6%
and its DP ratio was 50%. The tax rate was 60%. Deepak cables expects its sales to increase by 30% in
the year 2001. The ratio of assets to sales and spontaneous current liabilities to sales would remain
unchanged. Likewise the profit margin ratio, the tax rate and the DP ratio would remain unchanged.

Required:

1. Estimate the EFR for 2001.


2. Prepare the Projected balance sheet and Profit and loss account assuming that EFR would be
raised equally from term loan and short term bank borrowings.

Problem No. 3

The Balance Sheet of Pradhan Company at the end of year 2000, which is just over, is given below:
Share capital 50 Fixed assets 130
Retained earnings 60 Inventories 90
Tern loan 80 Receivables 80
Short term bank borrowings 60 Cash 20
Accounts payable 50
Provisions 20
Total 320 Total 320
The sales for the year ended were 400. The expected sales for the year 2001 are 500. The profit
margin is 5% and the DP ratio is 50%.

Required:

1. Determine the EFR for the year 2001.


2. How should the company raise the EFR, if the following restrictions apply?
a. Current ratio should not be less than 1.25.
b. The ratio of fixed assets to long term loan should be greater than 1.25.

Assume that the company wants to tap EFR in the following order: Short term laon, Long term loan
and additional equity issue.

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