What Is Breakeven Analysis And Cash Budgeting

Submitted By desmithey
Words: 1043
Pages: 5
Open Document
FINANCIAL FORECASTING

Breakeven analysis and cash budgeting are both short-term planning tools. It is equally important that long-term planning be periodically reviewed to ensure that the short-term goals are consistent with the long-term objectives, as well as to provide advance notice of the needs of the corporation so that appropriate decisions can be made and actions taken.

Suppose our Balance Sheet for the past year looked as follows:

2012 Balance Sheet:

Cash

50,000

Accounts Payable
100,000
Accounts Receivable

180,000

Bank Note

90,000
Inventory

200,000

------------

------------

Total Current Liabs.
190,000
Total Current Assets

430,000

L-T Debt

220,000
Gross Fixed Assets

400,000

(Accum. Depr.)

(130,000)

Common Stock
10,000

------------

Retained Earnings
280,000
Net Fixed Assets

270,000

------------

Total Equity
290,000

Total Assets

700,000

Total Liab. & Equity
700,000

The assets should reflect the consequences of the past year’s activities (particularly the receivables and payables) as well as expectations of the coming year’s sales. The primary factor that influences our asset and financing requirements is the level of sales that is anticipated. We must, therefore, get a realistic estimate of what our sales will be in the coming years in order to determine the amount of assets that will be required in order to support the anticipated sales. Once we have an estimate of the amount of assets that will be required, we need to determine what financing will be necessary for the projected asset levels.

Consider the income statement for 2012 as well as the projected income statement for 2013. The assumptions used to construct the projected income statement are listed next to each category:

Income Statements:

2012

2013

Actual

Projected

======

=========

Revenues

1,000,000

1,200,000 20% increase
Cost of Goods Sold

500,000

600,000 50% of Sales

------------

------------

Gross Profit

500,000

600,000

Gen. & Adm. Expense

Salaries

220,000

226,600 3% inflation Rent

60,000

60,000 Contractual Repairs & Maintenance
14,000

14,420 3% inflation Travel

23,000

23,690 3% inflation Utilities

12,000

12,360 3% inflation Depreciation

40,000

44,000 MACRS determined

------------

------------

EBIT

131,000

218,930

Interest Expense

30,000

30,000

------------

------------

Taxable Income

101,000

188,930

Taxes (35%)

35,350

66,126

------------

------------

Net Income

65,650

122,805

Less: Dividends

25,000

25,000

------------

------------

Addition to Retained Earnings
40,650

97,805

If we intend to be able to meet the growing demand, we need to be sure that we have the necessary assets on hand to support our projected level of sales, as well as the ability to finance these projected asset levels. The easiest means of projecting the balance sheet is to utilize the percent-of-sales method of projection. This technique takes each account on the balance sheet that varies with sales and expresses it as a percentage of sales. This percentage is then applied to the projected sales level to determine what levels can reasonably be expected for these accounts.

If we assume that the balance sheet for 2012 above was about right for the level of sales of $1 million that we experienced in 2012, then we can project the balance sheet for 2013 given our projected sales of $1.2 million for the year:

Note that your bank doesn’t just automatically give you more money, nor are long-term bonds automatically issued. In fact, aside from accounts payable and other accruals (which are referred to as spontaneous sources of financing) which have a zero cost, how assets are financed is a decision
Show More

Related Documents: What Is Breakeven Analysis And Cash Budgeting

How Does Forecasting Differ From Planning

Chapter 9 Prework 9-1.1: How does forecasting differ from planning? Forecasting is a management tool for planning. Planning is usually done with management control unlike forecasting. Rather than predicting/ forecasting – planning is where management sets objectives, goals, and plans of action. Forecasting is attempting to quantify demand in a future time period. Typically forecasting uses historical data during the same previous time period (year, month, day, etc.). For example, noticing that…

Words 761 - Pages 4

Essay on Apple: Forecasting and Personnel Creates Unity

unity, energy, initiative and loyalty and eliminates incompetence; For other uses, see Forecast (disambiguation). Forecasting is the process of making statements about events whose actual outcomes (typically) have not yet been observed. A commonplace example might be estimation of some variable of interest at some specified future date. Prediction is a similar, but more general term. Both might refer to formal statistical methods employing time series, cross-sectional or longitudinal data, or alternatively…

Words 1649 - Pages 7

Sks Manufacutring - Deloitte & Touche Case Essay

Manufacturing that need to be systematically tackled in order for stabilization of the business to occur and the long-term redesigning process to be effective. The key issues facing SKS Manufacturing are: (1) cash flow shortage (2) weak alignment and integration within the value chain and (3)…

Words 1165 - Pages 5

Foreign Exchange Rate Determination

Concordia University Summer 2015 8-7 Technical Analysis The forecasting inadequacies of fundamental theories has led to the growth and popularity of technical analysis, the belief that the study of past price behavior provides insights into future price movements. The primary assumption is that any market driven price (i.e. exchange rates) follows trends. FINA470 Concordia University Summer 2015 8-8 The Asset Market Approach to Forecasting The asset market approach assumes that whether foreigners…

Words 1532 - Pages 7

Demand & Inventory Management Essay

Forecasting demand and inventory management using Bayesian time series T.A. Spedding University of Greenwich, Chatham Maritime, Kent, UK K.K. Chan Nanyang Technological University, Singapore Batch production, Demand, Forecasting, Inventory management, Bayesian statistics, Time series Keywords Introduction A typical scenario in a manufacturing company in Singapore is one in which all the strategic decisions, including forecasting of future demand, are provided by an overseas office. The…

Words 5020 - Pages 21

Forecasting Methods Past And Present

Running head:“FORECASTING METHODS AND LIMITATIONS”. 1 Capabilities And Limitations Of Forecasting Methods Past And Present ANDREW KELLER
 THOMAS EDISON ONLINE
 Running head:“FORECASTING METHODS AND LIMITATIONS”. 2…

Words 1926 - Pages 8

Essay on Ethical Issues in Forecasting and Decision Analysis

ETHICAL ISSUES IN FORECASTING AND DECISION ANALYSIS Dunal M. McCurdy MBA 615- Business Foundations November 24, 2011 ETHICAL ISSUES IN FORECASTING AND DECISION ANALYSIS It is especially important to think about the most critical causes of the problem in making your forecasts and decisions. The process of forecasting involves using observations about the problem situation to predict the outcomes of your own actions, the actions of others, and the outcomes of other situational…

Words 1183 - Pages 5

Forecasting and Opinion Qualitative Forecasting Essay

Jury Executive Opinion: When a business choose to use the Jury of the executive opinion qualitative forecasting model, they rely on the opinions of high-level managers. Companies may incorporate statistical models to help with the analysis. The resulting group estimate becomes the forecast such as weekly sales increase of 25% by the end of the quarter. After six months of increase, weekly sales profit have also increased. Small businesses may find this model easier to use because of its simplicity…

Words 646 - Pages 3

Forecasting and Customer Demand Design Essay

| Customers – what products/services do customers want Forecasting – predicting timing and volume of customer demand Design – incorporating customer wants, manufacturability, and time to market Capacity planning – matching supply and demand Processing – controlling quality, scheduling work Inventory – meeting demand requirements while managing costs Purchasing – evaluating potential suppliers, supporting the needs of operations on purchased goods and services * Suppliers – monitoring…

Words 457 - Pages 2

Approach To Forecasting Uses A Series Of Questionnaires

chain. 3: Which one of the following will always lead to an increase in productivity? a. Increase inputs and increase outputs. b. Increase outputs and hold inputs constant. c. Decrease both inputs and outputs. 4: Which approach to forecasting uses a series of questionnaires? a. Associative b. Naive c. Moving average d. Exponential smoothing e Delphi 5: Which of these factors affects productivity? a. methods and technology b. workers c. management…

Words 1102 - Pages 5