12.- Forecast of the Balance Sheet (Polypanel)

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Operational Finance: Finance for Managers

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IESE Business School

Operational Finance: Finance for Managers

313 notes

Cours 2 sur 5 dans Specialization Foundations of Management

When it comes to numbers, there is always more than meets the eye. In operational finance, you will learn how to read the “story” that the balance sheet and income statement tells about the company’s operations. The insights you gain from this “financial story” will then become a tool for short-term decision-making at the top management level relating to current assets, current liabilities and the management of working capital. Finally, by the end of the course you will understand the financial consequences of managerial decisions on operations, marketing, etc.

À partir de la leçon

Week 2: Operational Ratios and Forecasting

In week 1, we looked at Polypanel’s Balance Sheet and P&L Statement. In the Balance Sheet, we noted that receivables increased from €188,000 in 2004 to €649,000 in 2007. We left off with the question: Is this difference due to an increase in sales or delays in payments from customers? In week 2, we will introduce operational ratios, the tools we need to disentangle both effects and understand what’s going on below the surface. We will also conduct a forecasting exercise of Polypanel to understand how well it will be positioned to pay back a potential credit line in the future. Objectives: By the end of the session you will understand the different types of operational ratios (Days of Collection, Days of Inventory and Days of Payables) in order to analyze how well a business is performing. You will also learn how to use forecasting to support financing decisions.

1.- Recap from Week 15:47

2.- Recap from Week 1, (continued)6:06

3.- Operational Ratios: Days of Collection5:20

4.- Operational Ratios: Days of Collection, (continued)3:59

5.- Operational Ratios: Days of Inventory3:45

6.- Operational Ratios: Days of Inventory, (continued)4:39

7.- Operational Ratios: Days of Payment6:28

8.- Operational Ratios: Days of Payment, (continued)4:10

9.- Forecast of the P&L7:08

10.- Forecast of the Balance Sheet (Theory)5:40

11.- Forecast of the Balance Sheet (Theory), (continued)5:53

12.- Forecast of the Balance Sheet (Polypanel)6:12

13.- Forecast of the Balance Sheet (Polypanel), (continued)3:21

14.- Brief Recap3:49

Rencontrer les enseignants

Miguel Antón
Associate Professor
Financial Management

[MUSIC]

Now we could say that you are an expert into in a forecast of the P&L and

the Balance Sheet, right.

With the P and L, we didn't do a theory part.

We went through the polypanel case directly.

Now for the balance sheet, because it's a little bit more complicated,

I showed you a way of doing it pretty simple.

Which is you take those 8 items that are the ones that you have to forecast.

First, the ones that depend on sales.

Then fixed asset, long-term debt, equity.

And at the very end, only at the very end, you fill in cash and credit.

So let's do that for the case of polypanel.

With all this in mind, what we're interested

isn't in filling in all these numbers here of the balance sheet,

and very specifically in knowing what happens with that line of credit.

Now my suggestion is that we start

with the simplicity with which we started in the theory part.

Which is, let's take away the stuff that is not important.

For example, the other current liabilities, promissory notes to supplier,

or the liabilities and all the desegregation of the equity.

All those parts we could say, well what do we think?

We should put another lab in.

Because we don't know what's going to be done in the future,

be we can see that's it's gone from 42 to 18.

So we could say that that's going to be, we could say that that's zero.

If you don't like zero, you can put ten, but let's put zero, okay?

Promissory note to supplier,

as we said before the promissory note is part of payables.

So let's accumulate everything in payables and let's make that line disappear.

Other liabilities, last year it was 22.

It's pretty low compared to the rest of the balance sheet so let's take that zero.

And then for the desegregation of the equity, let's forget about that,

because we said that equity's basically equity from last year,

plus net Income minus dividends.

So with that in mind, we can just get rid of that thing yeah.

Zero zero and then not applicable to the other stuff.

Now what is the next thing we do?

Well we said let's focus first the stuff that is depending on sales,

but before we do that I still realized I clicked the pointer

to make sure that in the cash we leave it empty and in the credit we leave it empty,

because there are the two things that we fill in the last.

So let's just start with receivables, inventory, and

payable's which are the things that depend on sales.

Now, receivables, let's look at this specific case of receivables.

It was in 2007, 649.

Now, inventory and payables also depend on sales.

But if we look at the receivables specifically,

you remember that we said- you've seen that methodology.

If the growth of of sales is going to be 25%, then and sales were 2,936,

and now we're going to have sales in 2008 of 3,650.

Now if we keep the days of collection constant from last year it was 81 days.

For simplicity let's put 80 days, then receivables is going to be the days of

collection, 80 days, times daily sales, which is 3,650.

Do you agree?

So if we do that, 80 x 3,650 over 365 is going to be 800,

which is exactly what we're going to put in receivables in 2008.

Do you see?

So as not to get bored, we are not going to do every single number, but

you can see that following data structure we get the 800 there and

we actually the 1,000 and 1,250 right.

Now if we follow exactly the same formula and

the same pace for inventory we would get the numbers for the inventory.

And once we have inventory under receivables,

we can have all current assets except cash.

Agree.

And then the same applies for suppliers.

So, for suppliers, we would take the suppliers of the previous year.

What is the days of payment?

Do you remember?

It was 94, we were paying really late.

For simplicity we can put 90 and then you compare that daily cogs for

the following year.

If we do that, we get the number for suppliers.

Now current liabilities, except credit, would be 630 and all the other numbers.

Now we have almost everything so with fixed assets.

It was 100 last year, we can assume that

you invest in fixed assets the same amount of depreciation.

So if it depreciates 30,

we invest 30 which means that we're going to keep fixed assets constant.

It's going to be 100, 100, 100.

Now yes, let's turn to long term debt.

Long term debt, do we have all the asset part and

we can move on to the long term debt.

The case says that we're actually giving back the long term debt 30 a year.

So if we had 150, the following year would be 120, and

then the following year would be 90, and then 60.

So pretty simple.

And then with the equities, a little tricky here now.

Because equity is going to take on the equity for

last year plus the net income of that year.

The net income is in the forecast of the PNL.

There's no pace in this light to show it to you but it's going to depend on that

and we have that loop and that loop we enable the traditional calculation.

With the loop, we're able to compute the equity.

If you are still with me, don't leave me.

So we feel the equity, we have that.

You sum everything and as you can see we now have total assets and

total liabilities.

Except cash and credit.

[MUSIC]

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