Exemplified
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CHAPTER 8 T TMPLEMENTTNG STRATEGIES: MAR
reseaxch and developmellt ernendir,- ^ L -^ J
' ^AI EerE): MARKETING' FINANcE/AccouNTlNG' R&D, AND Mls lssuEs
sr riui* "rl"rnifl'"nt
expenditures by 70 percent ro support product developmenr, or to sell leeuirg
ut b;r;-ril;; stock to raise capital rot auersincaiJn'j. fr"*tt at financial institurionsgy,ed1i,J;:"JJilL:l,'ff i:iff;,#:[T"J,#n*T:.1:;i;;#unancial ratios under vr
and to indusgy uu"r.n"*3ut shategy-implementation
scenarios. wh"nln to compute projected
,n"*sy-t,"il;;;T;'"Hff:il"::tosprovide "a",ur"l^igi,#;';:Tj,ffii,,1;r##:T: Primarily as a resu11_J'i,r1"'i*g**-oxrel
Acr, companies today are being much more i+filid{,::il::gt*n:mt'+;:r,T*[f -:r:::lyj"rdp,o.op,imis,ica,y,,c,onstituenJie;:___ *_ vqru,Bs. rnere rs much more care not'o,iGi,t#.ffi;r:H; viaed in ratrt';:;:fr"T:fiil?:ffill#l;li,Tff*Tl';
ffi:1"^l :",qany are *"_V | ,companv needs to raise f+s .niuion ," ffi;: llp*rion,..r;;##;::U*rrullffi t ,,1,
,
__-_ ^vrvr6u ruarre6; (Z) $30 million of \l / I "fuW,cf P)''v '0
nd Balance Sheet for the Litten Cr (in millions),'rffi Sales
Cost ofGoods Sold Gross Margin
Selling Expense Administratir. Expense
Earnings Before Interest and Taxes Interest
, Earnings Before Tbxes Thxes
Net Incone Dividends
Retained Earnings
PROJECTED BALANCE SHEET Assets
Cash
Accounts Receivable Inventory
Total CunentAssets
Land
Plant and Equipnent.
Less Depreciation
Net Plant and Equipment Total FixedAssets
TotalAcsets
Liabilities
Accounts payable
Notes payable
Total Current Liabilities Long-term Debt
Additional paid_in{apital
Retained Earnings
$r00
70
30
10
5
l5 3
t2 6
6
2
4
$150.00
105.00
45.00
15.00
7.50
22.50
3.00
19.50
9.75
9.75
5.00
4.75
7.75
4.00
45.00
s6.75
15.00
80.00
20.00
60.00
75.00
131,75
10.00
10.00
20.00
"" 70.00 35.00
6.75
,,"N,175
507o increase
70Vo of sales
l07o ofsales
57o of sales
50Vo rate
Plug figure
1007o increase
5
2
20 ,.,
l5 50
Add three new plants at $10 million eachl0
40
55
u
l0 10
20
40
20
2
E2
Bonowed $30 m11lion Issued 100,000 shares at gl50 each $2 + $q.ts
Total Llabtlltles and Net Worth
-**!i|#*NlM'P*"i*'
this total will be raised tbrough ihcreased debt and,$l5,milliontlnough common slock; (3) sales are expected to increase 50 percent; (4) three new"facilities; costing a total of $30,millirili, rqri11 be constructed in foreign markets; and (5) lnnd for the new facilities,is already ownedrby the company' Note in Table 8-7 that Litten's strate€jes and their implementation are elpected to result in a sales increase from $100 million to $150 million and in a net increase in ir,.Jrqr,fro. $6 million to $9.75 million in the forecasted year,
There are six steps in performing projected financial analysis:
I ' Prepare the projected income statement before the balance sheet. Start by forecastine sales as accurately as possible. Be careful not to blindly push historical iercentages
- into the future with regard to r€venue (sales) increases. Be mindful of what ttre fiimlOia to achieve those past sales increases, which may not be appropriate for the future unless the firm takes similar or analogous actiens (such as opening a similar number of stdies, for example). If dealing with a manufacturing firrn, also be mindful that if the firm is oPerating at 100 percent capacity running three eight-hour shifts per day, then probably' new manufacturing facilities (land, plant, and equipment) will be needed to increase sales further.
2. Use the percentage-of-sales method to project cost of goods sold (CGS) and the expeqse items in the income statement. For example, if CGS is 70 percent of sales in the prior year (as it is in Table 8-7), then use that same percentage to calculate CGS in the future y198ri- unless there is a reason to use a different percentage. Items such as interest, dividend'q, and taxes must be teated independently and cannot be forecasted using the pqrcentage;oftsales method.
3. Calculate the projected net income. 4. Subtract from the net income any dividends to be paid for that year. this re.rnaining
net income is retained earnings (RE). Bring this retained earnings amount for thel year (NI - DIV = RE) over to the balance sheet by adding it to the prior year's RE shown on the balance sheet. In other words, every yeax a firm adds its RE for that particular year (from the income statement) to its historical RE total on the balance sheet. Ttreref,ore, the RE amount on the balance sheet is a cumulative number rather than money avail,ible for strptegy implementation! Note that RE is the first projected balance sheetitem*obe entered. Due to this accounting procedure in developing projected financial statements, the RE amount on the balance sheet is usually a large number. However, it also can be a low or even negative number if the firm has been incurring losses. The only way for RE to decrease from one year to the next on the balance sheet is (l) if the firm incurred an earnings loss that year or (2) the firm had positive net income for the year but paid out dividends more than the net income. Be mindful that RE is the key link between a projected income statement and balance sheet, so be careful to make this calculation correcfly.
5. hoject the balance sheet items, beginning with retained earnings and then,forecasting stockf,tolders' equity, long-tenn liabilities, current liabilities, total liabilities, total assits, fixed assets, and current assets (in that order). Use the cash account as the plug figure-- that is, use the cash account to make the assets total the liabilities and net worth. Then make appropriate adjusfrnents. For example, if the cash needed to balance the statements is too small (or too large), make appropriate changes to bonow more (or less) money than planned.
6. List comments (remarks) on the projocted statements. Any time a significant . change is made in an item from a prior year to the projected year, an explanation (remark) should be provided. Remarks are essential because otherwise pro formas are meaningless.
;iected Financial Statement Analysis for Whote Foods Market Because so many stategic management students have limited experimce deleloping jected financial statements, let's apply the steps outlined on'the previous pug", io v Foods Market, the company showcased at the beginning of this chapter for exoeilent management
