What is DFN?
Discretionary Financing Needed; a.k.a. EFN (External Financing Needed)
What is the purpose of financial forecasting?
Determine how much $ the firm will need in the future.
What is the main goal of financial forecasting?
Understand the implications of today’s decisions on tomorrow’s performance.
Name the 6 steps of the % of sales method.
- Project Sales Revenue & Expenses (given)
- Forecast the change in spontaneous B.S. accounts (determine the change in assets, given the change in sales).
- Deal with Discretionary Accounts
Use % of Sales Method IF:
The item is spontaneous (varies directly with sales).
*If discretionary (non-spontaneous), find additional info. or make a reasonable assumption.
The pro forma I.S. is linked to the B.S. in which 3 ways?
- Retained Earnings from the forecasted income statement increase the forecasted equity account on the balance sheet.
- Depreciation from the forecasted I.S. decreases the forecasted Fixed Assets (PP&E) on the B.S.
- Forecated Interest expense on the I.S. depends on the interest-bearing liabilities on the forecasted B.S.
New Retained Earnings =
Forecasted Net Income - Forecasted Dividends Paid
New Net Fixed Assets (PP&E) =
Prior Net Fixed Assets - Forecasted Depreciation + Forecasted CAPEX
Examples of Discretionary Accounts
Long-term debt, notes payable, common stock
*All deal with the financing of the firm
Are Fixed Assets usually spontaneous or discretionary? What’s the exception?
If the firm is operating at full capacity, they may adjust spontaneously.