Treasury Mngt ( Future Forcasting)

Financial Forecasting Lesson 1. Financial Planning, Forecasting and Budgeting Lesson 2. Financial Statement Analysis Lesson 3. Fund Flow Analysis

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Lesson 1….

Financial Planning, Forecasting and Budgeting

Financial forecasting qIt is a process qCompany’s management positions the firm’s future activities qbased upon the expected external environment qExternal environment – economic, technical and social

Three main techniques for future forecasting

qProforma financial statement

üProjected future statement of a company üBased upon a set of assumption about future performance relative to the market conditions

qCash budget üPrepare periodically usually a month üDetails of expected cash receipts & cash payments

qOperation budget ü

Sales forecasting methods qSubjective method üJury of executive opinion üSales force estimates

qObjective method üTrend analysis via Extrapolation üRegression analysis

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Lesson 2…..

Financial Statement Analysis

Financial statement analysis :It consist of the application of analytical tools and techniques to the data in the financial statement in order to derive from them measurements and relationships that are significant use for decision making

Sources of financial information

qPrimary sources from annual report and required disclosures qMarket price §

The principle tools of analysis q Ratio analysis ü Liquidity ratios ü Profitability ratios ü Ownership ratios ü Capital structure ratios ü Coverage ratios ü Dividend ratios

q Comparative analysis ü Cross-sectional analysis ü Time-series analysis ü Common-size analysis

q Du Pont analysis q Fund flow analysis

Ratio analysis q Liquidity ratio ü Current ratio = current asset / current liabilities ü Quick ratio = current asset – inventories / current liabilities ü Account s receivable turnover ratio = Net credit sales/Avg. 

accounts receivable ü Average collection period = 360/Account receivables ü Inventory turnover = Cost of good sold / Average Inventory ü

q Profitability ratio ü Gross profit margin ratio = Gross profit / Sales ü Net profit margin ratio = Net profit / Net Sales

q q Ownership ratio ü Earning per share = Net income/Number of outstanding shares ü Price-earning ratio = Market price/ Earning per share 

q Capital structure ratio ü Debt-equity ratio = Debt/Equity ü Debt-asset ratio = Debt/Asset 

q Leverage ratio

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ü Interest coverage ratio = EBIT/Interest expenses ü Debt service coverage ratio = PAT + Dep + other non cash charges+ interest on loan / interest on loan + repayment of loan ü Dividend yield = Dividend per share / Market price

Comparative analysis q Cross-sectional analysis 

To assess whether the financial ratios are with in the limits, they are compared with industry averages or with a good player in normal business conditions

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q Time-series analysis 

Year-to-Year change : A comparison of financial statement over two or three years can be undertaken by computing the Yearto-Year change in absolute amount or in term of percentage change

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q Common size analysis 

In this analysis of financial statement, it is

DU PONT analysis qThe Du Pont company of the US developed a system of financial analysis qAnalysis return ratio in term of profit margin and turnover ratio 

Problems encounter in financial statement analysis qDevelopment of Benchmarks qWindow –dressing qPrice level changes qDifference in accounting policies qInterpretation of results qCorrelation among ratios q

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Lesson 3….. Fund Flow Analysis

Fund Flow Statement qIt is a statement which explains üThe source from which funds were raised üThe uses these funds were put on qIncrease in liabilities & decrease in assets – Application of Funds qDecrease in liabilities & increase in assets – Source of Funds

Preparation of Fund Flow Statement qTotal Resource Basis ü Compare the Balance Sheet over the period of time ü Increase & decrease in assets and liabilities ü Inflow through the issue of equity or preference capital

qCash Basis ü Increase & decrease of cash in Balance Sheet ü Increase & decrease of cash in Income Statement ü Information from the source & use of funds format

qWorking Capital Basis ü Similar to the preparation of the Fund Flow Statement on cash basis ü Components of current assets & current liabilities are omitted

Significance of Fund Flow statement qDetection of imbalance and appropriate action qDivisional performance appraisal qEvaluation of firm’s financing qPlanning of future financing

Thank you

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Efforts by:

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Bisht 

Tushank Neeraj Garg

Meenakshi