Sales forecast Assets required to support sales Required assets

-Existing assets= Required investment

Investment Module

Total assets >Total liabilities

and equity?

Total assets >Total liabilities

and equity?

Total assets – Total liabilities & equity

=Required financing

Generate pro formas with new investment and financing

Generate pro formas with new investment and financing No

Yes

New financing composition

New financing composition

Financing Module

Modeling Sales Forecasts

• Simple Method: Assume average or different growth rate for each period

• Develop detail forecast by product, business unit, customer or geographic market and aggregate forecasts

• Forecast the unit price and volume

• Forecast size of market and estimate market share

• Forecast costs and apply a margin assumption to derive sales

Financial Planning Model Assumptions

• Items that are functional relationships of sales– Percent of sales

• Operating expenses• Working capital and fixed assets

• Items that are functional relationships of other financial statement items– Interest, depreciation, dividends, marketable

securities, cashflows• Items that involve policy decisions (e.g. long-term

debt, equity, capital expenditures)

The “Plug”

• The balance-sheet item which will “close” or balance the balance sheet model so that Total Assets will always equal Total Liabilities & Equity

• Models the assumption of how the firm finances itself

• Examples are cash & marketable securities, debt, debt & equity

Circular References

• Created when Additions to Retained Earnings is added into the balance sheet, resulting in modified values for the plug which then impact the income statement

• Iterative process is required to produce a consistent and correct final set of financial statements

• To solve, use Tool Options Calculation Iteration (2003) or MS Office Button>Excel Options> Formulas> Iteration (2007)

• Not all circularities are convergent. Make sure to verify accuracy!