Week 3 Flashcards
What is strategic planning?
Long term, the overall direction of the company
What is operational planning?
Where the company wants to be at a certain point in time.
Very specific about the resources they need
What are the external sales forecasts based on?
Relationships observed between sales and key external indicators
What are the internal sales forecasts based on?
Based on a firm’s own relationships and historical trends
What is the cash budget?
An estimate of short term cash requirements with particular emphasis on surplus and deficit.
Why do we prepare a cash budget?
A firm must look at its pattern of daily cash receipts and cash disbursements to ensure that adequate cash is available for paying bills as they come due
What are the Pro-forma statements?
Forecasted IS and BS
- Forecasts overall financial position
- Estimate additional required financing to supported given levels of sales
How do we use the percentage of sales method?
We forecast financial variables based on historical relationships with sales.
What is the assumption with percentage of sales method?
We assume the previous relationship with sales will hold
How do we project SH equity?
SH equity = Lagged SH equity + Change RE
Change in RE = EAT - Dividends
What are the limitations with the assumption in the percentage of sales method?
Past financial condition is not necessarily an accurate indicator of the future.
Treats costs and assets as varying proportionally with sales
Why should we not treat costs and assets as proportional to sales?
Fixed costs don’t vary with sales
Existing assets could be used to generate greater sales, thus certain assets need not increase as sales increase
Additional Financing formula
=(ChangeA - Change CL) - (EAT -DIvedends )
Change A = Change S/S
