Requests for permission to make copies of any part of the work should be mailed to: Thomson/South-Western5191 Natorp Blvd.Mason, OH 45040,Chapter 8,Financial Planning and Control,Financial Planning,The projection of sales, income, and assets based on alternative production and marketing strategies, as well as the determination of the resources needed to achieve these projections,Financial Control,The phase in which financial plans are implemented Control deals with the feedback and adjustment process required to ensure adherence to plans and modification of plans because of unforeseen changes,Sales Forecasts,A forecast of a firms unit and dollar sales for some future period,Sales Forecasts,A forecast of a firms unit and dollar sales for some future period Generally based on recent sales trends plus forecasts of the economic prospects for the nation, region, industry, and so forth,Projected (Pro Forma) Financial Statements,Project the asset requirements for the coming period, then project the liabilities and equity that will be generated under normal operations, and subtract the projected liabilities and equity from the required assets to estimate the additional funds needed (AFN) to support the level of forecasted operations,Projected Balance Sheet Method,A method of forecasting financial requirements based on forecasted financial statements,Projected Balance Sheet Method,Forecast the Income Statement Adjust for spontaneously generated funds obtained from routine business transactions Forecast the Balance Sheet Raise the additional funds needed Adjust forecast for Financial Feedbacks,Projected Balance Sheet Method,Financing feedbacks are the effects on the income statement and balance sheet of actions taken to finance forecasted increases in assets,Projected (Pro Forma) Financial Statements,Analysis of the forecast determine if the forecast meets the firms financial targets planned management changes must be incorporated into the forecasts iterative process,Other Considerationsin Forecasting,Excess capacity,Other Considerationsin Forecasting,Economies of Scale variable cost of goods sold ratio changes with size of the firm this affects the addition to retained earnings, and thus the AFN,Other Considerationsin Forecasting,Lumpy Assets assets that cannot be acquired in small increments, but must be obtained in large, discrete amounts,Other Considerationsin Forecasting,Lumpy Assets assets that cannot be acquired in small increments, but must be obtained in large, discrete amounts small increase in sales can require significant increase in plant and equipment,Financial Control - Budgeting and Leverage,Relationship between sales volume and profitability under different operating conditions Control phase and process,Operating Breakeven Analysis,An analytical technique for studying the relationship among sales revenues, operating costs, and profits Only deals with the operating section of the income statement,Operating Breakeven Analysis,Operating Breakeven Point represents the level of production and sales where operating income is zero the point where revenues from sales just equal total operating costs,Breakeven Graph - Argile Textiles,(P x Q) = TOC = (V x Q) + F,Breakeven Computation,Breakeven Point for Argile Textiles,Breakeven Computation,Breakeven based on dollar sales for Argile Textiles,Using Operating Breakeven Analysis,New product decisions required sales to achieve profitability Expansion of operations increase fixed and variable costs increase sales Modernization and automation increased fixed and reduced variable costs Determine riskiness of operations,Operating Leverage,The existence of fixed operating costs, such that a change in sales will produce a larger change in operating income (EBIT),Operating Leverage,Degree of operating leverage (DOL) the percentage change in NOI (or EBIT) associated with a given percentage change in sales,Operating Leverage,Operating Leverage,Operating leverage and operating breakeven higher operating leverage increases operating breakeven point,Financial Leverage,The existence of fixed financial costs such as interest When a change in EBIT results in a larger change in EPS,Financial Leverage,Degree of financial leverage (DFL) the percentage change in EPS that results from a given percentage change in EBIT,Financial Leverage,Combining Operating and Financial Leverage,The greater degree of operating leverage, or fixed operating costs for a particular level of operations, the more sensitive EBIT will be to changes in sales volume,Combining Operating and Financial Leverage,The greater the degree of financial leverage (or fixed financial costs for a particular level of operations), the more sensitive EPS will be to changes in EBIT If a firm has a considerable amount of both operating and financial leverage, then a small change in sales will lead to wide fluctuations in EPS,Combining Operating and Financial Leverage,Degree of Total Leverage (DTL) the percentage change in