Business Forecasting Essentials: Financial Planning, Assumptions & Decisions

Module 2: Session 3 Forecasting Module 2: Session 3 1 4/13/2025

Session Objectives Forecasting output Making realistic financial planning assumptions and decisions Converting quantitative estimates into financials Awareness to review forecasted results and revisiting decisions to improve results. Module 2: Session 3 2 4/13/2025

Forecasting output A business plan is built on forecasted core output over a planning period. An evaluation of past performance, potential market and competitive activity helps to make a realistic output forecast. Output target should be achievable but challenging. As a first step, determine the mileage to be done over the planning period and break it down into periodic targets. Module 2: Session 3 3 4/13/2025

Deriving other input elements Output units are matched with input units using previous established relationships. Technical staff will estimate direct input of elements to attain forecasted output including: Direct and indirect materials Direct and indirect labour Machine time Machine direct and indirect consumables Other overhead inputs Module 2: Session 3 4 4/13/2025

Conversion of quantities to monetary figures Forecasted inputs are priced based on accepted unit costs or predicted costs. Forecasted outputs are also priced based on per time adjusted values. Particular attention must be paid to economic trends on prices and costs Actions of competitors should also be considered when setting prices and costs. Module 2: Session 3 5 4/13/2025

Realistic assumptions for key input and outputs Realistic assumptions be made on: Capacity and potential work Inputs of works assumptions Pricing of works assumptions Administrative cost assumptions Credit periods Use of bills of materials, BoQs. Machinery and equipment assumptions Module 2: Session 4 6 4/13/2025

Financial assumptions Timing Pricing Inflation Credit period Inventory levels Source and cost of capital Capital structure Drawings Assets replacement To forecast an income statement or cash flow statement, financial assumptions have to be made about: Module 2: Session 3 7 4/13/2025

Caution on financial forecasting Forecasting risk - probability that forecast is not correct. Be conservative in estimates because: Marketers are overly optimistic Failure de-motivates Achievement motivates Some decisions based on forecasts are irreversible Weighted average could help to reduce forecasting risk. Module 2: Session 3 8 4/13/2025

Why forecasting accuracy is important for a business. Investing in assets . Inaccurate forecasts will lead to investing in too much fixed assets and inventory leading to waste. Inappropriate resource mobilization. Resources such as cash and work force may be either understated or excessive, either way Morale. Morale of staff and management fall when forecasts cannot be achieved Internal Reporting. Internal budgeting is determined by the forecasts created. External Investors. Both loan and equity investors like to see net income and revenue forecasts before investing. Inaccurate forecasts will cause conflict with them in future Module 2: Session 3 9 4/13/2025

Past data for projected income statement Data from previous financial statements will not generally matter except for: Computation of depreciation and amortization of fixed and intangible assets. Adjustments for inventory and work in progress at the beginning and end of an accounting period. Recognition of accounting policies on revenue/cost Module 2: Session 2 10 4/13/2025

Closing the income projection gap The forecasted income statement generated will be analysed to assess if it meets the targets for revenue and profits specified as: Absolute revenues and profit. ROI. Profit margin. The revenue and cost assumptions may be reviewed to meet the set targets. Reduce costs or increase revenues to improve profitability. Module 2: Session 3 11 4/13/2025

Cash flow projection Shows how and when cash is expected to flow in and out of a business. Offers evidence that there will be enough cash on hand for obligations as they fall due. Only shows future receipts and payments over a chosen period of time whether current or capital Shows for each month the balance at the beginning and the balance at the end of that period. Module 2: Session 3 12 4/13/2025

Timing difference in cash flow Balance sheet is relevant as it extends to the current cash flow period: Balance of cash from the preceding and next period. Accounts receivable from previous and next period. Accounts payable at the beginning and end of a period. Level of inventory and work in progress to start with and at the end of the period. Taxation and dividends that are paid in the period. Leave out non cash items provided for in income statements such as depreciation, provisions and deferred items. Module 2: Session 3 13 4/13/2025

Closing the cash gap Analyse the cash flow to see a pattern of closing balances. Short falls need to be funded and excesses invested. To eliminate short falls: Review the budget to remove non essential items such as office decorations, meetings, travels. Suspend recruitment of non essential workers. Suspend or delay the timing of non urgent purchases of machinery, materials and other consumables. Reduce drawings. Buy on credit. Module 2: Session 3 14 4/13/2025

Group activity 1. Identify planning assumptions in the case study and identify others needed for the business to forecast output. 2. Identify planning assumptions to forecast inputs 3. Identify assumptions necessary to develop an income and cash flow statement. 4. Identify the capital needs of Munaku Contractors and propose how it could be funded in the light of its financial position. 5. Suggest how financing of the business could be improved. Module 2: Session 3 15 4/13/2025

Group activity Q4: Capital needs of Munaku Rate shs'000 Items Basis/Period Quantity shs'000 Fixed Assets Land Piece 500,000 1 500,000 Machinery Set 350,000 1 350,000 Buildings Total fixed assets investment Working capital: Once 170,000 1 170,000 1,020,000 Start up costs: Management salaries 6 months 15,000 6 90,000 Equipment hire per kms (2kmsX3months) 12,000 6 72,000 Fuel 9000lts per km (9,000x2kmsx3months) 3.5 54,000 189,000 Overheads per kms (2kmsX3months) 100,000 6 600,000 Management salaries per month (3months) 15,000 3 45,000 Direct labour per kms (2kmsX3months) 72,000 6 432,000 Materials 8000 tonnes/ kms (8000x2kmsx3) 24 48,000 1,152,000 Total working capital (short term) Total start up capital 2,580,000 16 4/13/2025 3,600,000

Group activity Q4: Possible capital structure Possible gearing: equity to debt zero low high Bf capital 1:0 2:1 1:2 Equity 7,071,000 11,421,000 7,614,000 3,807,000 Debt 750,000 - 3,807,000 7,614,000 Total bf capital 7,821,000 New 3,600,000 Total capital 11,421,000 11,421,000 11,421,000 11,421,000 Structure of new capital Allocated amount (shs) %ge of new issue New Equity 543,000 15 New Debt 3,057,000 85 3,600,000 100 For Munaku to achieve a 2:1 equity debt ratio, the new capital would be issues 15% equity and 85% debt. With the current capital structure it would not be possible to have a 1:2 equity debt ratio as the current equity interest (shs 7,071,000) is already in excess of the capital needed to make that ratio (shs 3,807,000). Module 2: Session 3 17 4/13/2025

THE END Q & A Module 2: Session 3 18 4/13/2025