Financial Management Essentials You Always Wanted To Know

4th Edition

Vibrant Publishers, Kalpesh Ashar

• Publisher: Vibrant Publishers
• Year: 2019
• ISBN:
  9781949395389
• Edition: 4
• Topic: Business
• Subtopic: Gestione di rischi finanziari
• Index: Business

Financial Management Essentials You Always Wanted To Know: 4th Edition provides new managers and leaders with the foundational concepts of financial management. Having deep knowledge of law, engineering, and other professional disciplines doesn't prepare someone for the key role finance plays in business. This book provides an overview of core financial concepts such as: • Analysis of financial statements• Cost of Capital• Creating a capital budget• Managing working capital• Stocks and dividends• Forecasting

Each chapter provides clear examples of financial management practice and includes practice exercises to help train the reader in the usage of these critical tools. This edition also includes Chapter Summaries and Solutions to Practice Exercises. This book is part of the Self-Learning Management Series that helps working professionals moving into management roles.

About the Series

The Self-Learning Management series is designed to help students, new managers, career switchers and entrepreneurs learn essential management lessons. This series is designed to address every aspect of business from HR to Finance to Marketing to Operations, be it any industry. Each book includes basic fundamentals, important concepts, standard and well-known principles as well as practical ways of application of the subject matter. The distinctiveness of the series lies in that all the relevant information is bundled in a compact form that is very easy to interpret.

Forecasting Financial Statements

Companies forecast their financial statements over the next 5-10 years. This is needed for various reasons, like providing to lenders and banks when taking new debt, setting financial targets for managers and knowing how much money will need to be borrowed in the following years. In this chapter we shall concentrate on the last aspect of knowing how much to borrow during each year.

Forecasted financial statements are called Pro forma financial statements. Percent of Sales method is used in forecasting financial statements and in knowing the amount of funds to be borrowed. There are five steps involved in this method, which are given in the sections below.

Step 1 – Forecast Sales

The first step for any company using Percent of Sales method to forecast financial statements is to do a sales forecast. Companies generally look at the sales growth trend over the last few years to come up with a forecast for the next few years. There can be corrections related to the company’s expectations of increase or decrease in demand due to change in market conditions.

The table below shows the sales of a company over the last 5 years. Using this data, the company projects its sales for the next year.

In the above graph, the trend line provides an estimate of the projected sales in 2012. This is assuming that 2012 will have similar market conditions as in the previous 5 years.

Step 2 – Forecast Income Statement

Once the company has projected its sales for the next year, it can forecast the other parts of the income statement, most of which depend on the sales forecast. We will use the below income statement of the company for the current year to forecast its income statement for the next year.

We have already forecasted the sales for 2012. Expenses (except depreciation) are generally a percentage of the sales. Depreciation will be based on the basis of the net plant and equipment in 2012. Since we don’t have knowledge of the balance sheet for 2012, we shall assume that plant and equipment grow at the same rate in 2012 as does sales. Sales are growing from $2,500 thousand to $2,800 thousand, which is 12% growth. Similarly, we assume that net plant and equipment also grow by 12% and so does the depreciation. We will take the interest expense to be the same as we don’t yet know how much more debt we would take on. Taxes are calculated on actual PBT, preferred dividends are also kept constant as we don’t know how much more preferred stock will be issued. We will further assume a constant growth of common dividends and will need to assume the same number of common stocks as we don’t know how much more would be borrowed by way of common equity. Looking at the past, we take a 10% growth rate in the common dividends. W...