WGU C214 - Session 8 - Forecasting Working Capital (2025)

Financial Forecasting

Business planning

Sales forecast

Production planning Financial planning

Resource acquisition DFN and SGR

Cash flow forecasting

Firms must plan for bond issuance to meet cash needs

Pro forma balance sheet

projection based on sales forecast

Spontaneous accounts

these vary with sales

example: current assets and current liabilities

(usually expressed as percentage of assets)

Discretionary accounts

accounts changed by deliberate management decisions

example: equipment purchases and bond issuance

(usually expressed as a dollar amount)

(DFN) Discretionary Funding Needed

DFN = Assets - Liabilities - Equity

(Assets = sales x asset %)

(Liabilities&equity = bonds + equity)

The balance sheet must balance assets must equal liabilities and equity

If there is not enough liabilities and equity the firm must sell bonds to raise cash

(SGR) Sustainable Growth Rate

Growth rate of equity

SGR = ROE * ( 1- Payout Ratio)

ROE = Net Income/Equity

(Net Income = Dividends Paid + Addition to Retained Earnings)

Payout Ratio = Dividends/Net Income

(Payout Ratio = % of Net Income paid out in Dividends)

Plowback Ratio = % of Net Income added to Retained Earnings

To maintain Optimal Debt-Equity mix,

Firm cannot grow faster than the growth of Equity

Optimal Capital Structure

Debt-Equity mix that Maximizes the Stock Price

Stock Issuance

Rare after Initial Public Offering (IPO)

Equity Growth: through Retained Earnings

Increasing SGR: Dupont formula

ROE = (Net Income/Sales) x (Sales/Assets) x (Assets/Equity)

= Net Margin x Asset Turnover x Financial Leverage

To increase SGR

Increase Net Margin - Reduce Costs

Increase Asset Turnover - Reduce Assets

Reduce Payout Ratio - Reduce Dividends

Increase Leverage - If below Optimal

Working capital management

the managing of current assets and current liabilities

cash

accounts receivable

inventory

accounts payable

Cash cycle

Cash cycle must be financed!

Strategy: Pay accounts payable slowly and collect accounts receivable quickly to shorten the cash cycle and minimize financing expense

Working capital management decisions

Cash: minimize

-operating balance: to pay bills

-reserve balance: extra cash for unforeseen needs

Accounts receivable: collect quickly

-credit qualifying standards

-credit terms: discounts for early pay (receiving less money)

Inventory: minimize

-lean to minimize financing costs

-avoid shortages (risk of product shortage)

Accounts payable: pay slowly

-supplier discounts for early pay

-trade credit financing