9 - Budgets (2/2) Financial Forecasts PDF

WWW.DAUPHINE.PSL.EU 2020-2021 9 – Budgets (2/2) – Financial forecasts Céline Baud / Penelope Van den Bussche / Anne Bizière  WWW.DAUPHINE.PSL.EU 1. Reminders: Operating budgets 2 Articulation of budge...

WWW.DAUPHINE.PSL.EU 2020-2021 9 – Budgets (2/2) – Financial forecasts Céline Baud / Penelope Van den Bussche / Anne Bizière  WWW.DAUPHINE.PSL.EU 1. Reminders: Operating budgets 2 Articulation of budgets: towards the operating result Commercial budget Sales program Purchases/investments Production budget budget Supply budget Workforce Other manufacturing (raw material) budget costs budget General and Calculation of administrative production costs expenses budget Forecast P&L Account 3 Articulation of budgets : towards the Balance Sheet forecast (1) Commercial budget Sales program Purchases/investments Production budget budget Supply budget Workforce Other manufacturing (raw material) budget costs budget Inventories Calculation of Fixed assets General and administrative production costs expenses budget Forecast Balance Forecast P&L Account Sheet Net income 4 Budgets over different periods... EXPLOIT (Part 2, question 1) The President of Exploit is delighted with the results that emerge from your first estimate. She estimates that the expected operating result will make it possible to finance at least half of the new investments and thus limit the need to recourse to debt. However, she would like you to finetune and complete your forecasts. In particular, she is concerned about the impact of the seasonality of sales on the forecasts and wonders whether this will also have financial consequences. 1) To study these aspects, she provides you with an estimate of sales per quarter for 2019: Q1: 10,000 units Q2: 10,000 units Q3: 15,000 units Q4: 25,000 units Analyse the impact of this sales breakdown on your operating forecasts. 5 Budgets over different periods... Impact of choices and methods on the result: – Valuation of inventories (methods and periodicity) – Allocation of fixed costs: proportional allocation or not? Balancing sales-stocks-production-purchases: – Limiting stocks: warehouse costs up to 3 to 20% of the value of the inventory! BUT – Never suggest a budget programme that is/will be out of stock or in excess of your production/storage/management capacities. – Limit the cost of supplies (no. of orders), of supply management (standard quantities) and of production (constant production) à Importance of the budget back-and-forth and discussions around the operating budgets But also you need to take into accounts other financial stakes in the procedure! 8  WWW.DAUPHINE.PSL.EU 2. Financial budgets and their roles 9 Role of financial budgets Profit Analysis: margins on sales, cost P&L of goods sold. Insufficient result / Return on capital invested desired profitability (ROI; residual profit, etc.). Balance Medium- to long-term financial needs "Bad balance (fixed assets, management of WCR) Sheet sheet" (too much Financing structure (debt ratios, debt) leverage, solvency) Liquidity problems Cash flow Short term financial needs New budget back-and-forth / Budget challenged Amendments to the strategy  WWW.DAUPHINE.PSL.EU 3. Cash flow budget 11 Cash management (liquidity) If there is not enough cash to meet the Cash is not a productive asset: required payments: Þ Significant opportunity cost for the company Þ Default of payment It is expensive/costly and difficult to finance Þ Can lead to bankruptcy… even if the large cash requirements from banks: company is solvent in the long term Þ To be minimized and planned in advance Þ Must be able to honour short-term with the banks payment commitments Objectives: Maintain a minimum level of liquidity… while honouring commitments with third parties Planning needs in advance… to obtain the banks’ agreement Þ Tools: the cash flow budget (or cash budget) 12 Cash Flow Budget (or cash budget) Definition: all forecasts relating to receipts and payments (cash inflows and outflows) Cash flow: Very simple structure! Inflows (received) But be careful to clearly identify inflows and disbursements in practice. - Payments (Outflows) = Change in cash + Opening cash = Closing cash If cash at the end < 0 or at the desired minimum: Þ Short term bank loan (cash line) to be agreed in advance 13 Articulation of budgets : the Cash Flow budget Commercial budget Sales program Sales inflows Purchases/investments Production budget budget Supply budget Workforce Other manufacturing Cash (raw material) budget costs budget budget Calculation of Available General and Fixed assets cash administrative production costs expenses budget Forecast Balance Forecast P&L Account Sheet New loan Net income 15 Cash Flow budget and Cash requirements Parameters Payment policy and negotiating power with: – Customers – Suppliers Beware of: Inventory turnover rate: - Sales and purchases on Þ Management of WCR credit Payment terms for taxes, duties and - Depreciations social security charges. - Deferred tax payments, social security Investments policy - Acquisition of fixed assets Financing policy: financing - Loans and loans repayments investments and repayment of current loans Articulation of budgets : the Cash Flow budget EXPLOIT (Part 2, question 2) The President of Exploit is delighted with the results that emerge from your first estimate. She estimates that the expected operating result will make it possible to finance at least half of the new investments and thus limit the need to recourse to debt. However, she would like you to refine and complete your forecasts. In particular, she is concerned about the impact of the seasonality of sales on the forecasts and wonders whether this will also have financial consequences. 2) Draw up the cash budget and finalise the provisional closing balance sheet for the year using the provided balance sheet and the following information: Customers pay at 60 days (sales are assumed to be evenly distributed throughout the quarter) Raw material suppliers are paid at 90 days Investment is made on the first day of the year. 50% of the new tooling line is paid in cash through a loan from the bank. The remaining 50% is paid according to the following schedule: €84,000 in Q2; €84,000 in Q3; the remainder in Q4 17 Case study for next course: 9 – Previl 18