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Financial Forecasting and Working Capital Management: FIN 304 at La Salle University - Pro, Study notes of Finance

La Salle UniversityFinance
Prof. Elizabeth Cooper

This document from la salle university's finance department outlines the purpose and methods of financial forecasting, focusing on working capital management. Topics include common size statements, financial ratios, and forecasting specific items from the income statement and balance sheet. Useful for students in finance or business, this document covers ratios for asset management, solvency, and profitability, as well as forecasting methods for revenue, purchases, inventory, depreciation, interest expense, taxes, dividends, cash, accounts receivable, inventory, accumulated depreciation, and long-term debt.

Typology: Study notes

2009/2010

Uploaded on 12/09/2010

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La Salle University
Department of Finance
FIN 304 Prof. Cooper
FINANCIAL FORECASTING AND WORKING CAPITAL
MANAGEMENT
Purpose of Forecasting
Will we need to raise funds to support operations?
Is expected financial performance satisfactory?
Are we creating value?
Common size statements
Financial statement (Income Statement and Balance Sheet) items each as a
percentage of sales.
These percentages can be helpful for us in forecasting future items.
Average, median, or a weighted average
Financial ratios
Help check internal consistency
Useful for forecasts
Answers questions on asset management and value creation, among others.
Some useful ratios:
Asset Management Ratios
Working capital=Current Assets−Current Liabilities (non−interest bearing)
Working Capital ¿Sales=Working capital
Sales
Inventory turnover =Purchases(¿CGS )
Inventory
Days of inventory=365 days
Inventory turnover
Receivable turnover=Sales
Accounts receivable
Days Receivable(C ollection Period )= 365 days
Receivables turnover
Payables turnover=Purchases(¿CGS )
Accounts Payable
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La Salle University Department of Finance FIN 304 Prof. Cooper

FINANCIAL FORECASTING AND WORKING CAPITAL

MANAGEMENT

Purpose of Forecasting  Will we need to raise funds to support operations?  Is expected financial performance satisfactory?  Are we creating value? Common size statements  Financial statement (Income Statement and Balance Sheet) items each as a percentage of sales.  These percentages can be helpful for us in forecasting future items.  Average, median, or a weighted average Financial ratios  Help check internal consistency  Useful for forecasts  Answers questions on asset management and value creation, among others. Some useful ratios: Asset Management Ratios Working capital = Current Assets − Current Liabilities ( non − interest bearing ) Working Capital ¿ Sales = Working capital Sales Inventory turnover = Purchases ( ¿ CGS ) Inventory Days of inventory = 365 days Inventory turnover Receivable turnover = Sales Accounts receivable Days Receivable ( Collection Period )= 365 days Receivables turnover Payablesturnover = Purchases (¿ CGS ) Accounts Payable

Days Payable = 365 days Payables turnover Solvency Ratios Debt −¿− Equity = Total liabilities Total equity ¿ interest earned =

EBIT

Interest expense Profitability Profit margin = Net income Sales Return on assets = Net income Total assets Return on equity = Net income Equity Value Creation ROIC = Operating income ( 1 − t ) Invested capital Invested capital = Notes Payable + Curr Portion LTD + LTD + Equity EVA = Invested Capital ∗( ROIC − cost of capital ) Forecasting specific items from the Income Statement and Balance Sheet

 Generally an amount estimated by management Accounts Payable  Percentage of Purchases, CGS, or Revenue  Similar to Accounts Receivable and Inventory  %DaysPurchases Long-Term Debt  A decreasing balance based on debt repayment schedule  Could also be expected to increase based on management plans Equity (preferred and common)  Paid in capital usually a known amount (same as history)  Retained Earnings is equal to last year’s balance plus this year’s net income minus any dividends. Outcomes from Forecasting Cumulative and Annual Need for Funds  Provides a feel for total fund requirements over the next few years  Assumes that operations continue as expected without the injection of new financing. Free Cash Flow  Provides a sense of funds being generated by operations  No universally-accepted definition of FCF, but we use the one similar to that in the text: CF t = EBIT t (1 – Tax t ) + Dep t – DWCR t – Capex t  Working capital changes can have a significant impact on cash flows Economic Value Added Invested capital(ROIC(1-t) – cost of capital)