Chapter 17: Financial Planning and Forecasting

Vocabulary flashcards covering forecasting concepts, AFN components, spontaneous vs non-spontaneous financing, excess capacity, and forecasting methods.

Forecasting

The process of predicting a firm's future financial performance, starting with sales forecasts and projecting all lines of the income statement to earnings per share (EPS); should be realistic but aggressive.

Additional Funds Needed (AFN)

The amount of external financing required to support forecasted asset growth after accounting for spontaneous financing and retained earnings.

Spontaneous Liabilities

Current liabilities that automatically rise with increased operations, such as accounts payable and accruals.

Non-spontaneous Liabilities (N/P)

Financing that does not automatically increase with operations; requires a conscious decision by the firm and may contribute to AFN.

Accounts Payable (A/P)

A spontaneous liability arising from purchasing on credit as operations expand.

Accruals

Spontaneous liabilities representing accrued expenses that rise with higher levels of activity.

Addition to Retained Earnings

The portion of net income kept in the firm for reinvestment; equals (1 − payout ratio) × net income.

Payout Ratio (POR)

The fraction of net income paid out as dividends to shareholders.

Profit Margin (M)

Net income divided by sales; measures how much profit is made per dollar of sales, used in AFN calculations.

Change in Sales (ΔS)

Difference between next year's forecasted sales (S1) and current year sales (S0); drives asset and liability changes.

Current Year Sales (S0)

Sales in the current year used as the baseline in AFN calculations.

Next Year Sales (S1)

Forecasted sales for the next year used in AFN calculations.

Capital Intensity Ratio (A*/S0)

The amount of assets required per dollar of current year sales; used to determine how much assets must increase with sales growth.

Spontaneous Liabilities per Sales (L*/S0)

The amount of spontaneous liabilities per dollar of current year sales.

Full Capacity Sales (FCS)

The maximum sales level achievable with current fixed assets; used to assess the impact of excess capacity.

Excess Capacity Adjustments

Adjustments to AFN when capacity is not fully utilized, allowing growth without increasing fixed assets.

Self-Supporting Growth

Growth financed entirely by retained earnings; AFN equals zero if growth is funded internally.

Pro Forma Statements

Forecasted balance sheets and income statements used to project financial needs and ratios.

Regression Analysis

A method to predict asset needs by modeling historical relationships between assets and sales for forecasting.

Earnings Per Share (EPS)

Net income available to each share; often the final metric forecast after projecting income and dividends.