9.- Forecast of the P&L

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Operational Finance: Finance for Managers

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IESE Business School

Operational Finance: Finance for Managers

314 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]

To be able to know whether the company

will pay back in the future we need a forecast.

Specifically a forecast of the balance sheet.

To see that line of the credit.

But to be able to make a forecast of the balance sheet, we need a forecast of

the P&L, because most of the items in the balance sheet actually depend on the P&L.

This is why in the outline that we're going to follow we start first

with the P&L and then we'll do a forecast of the balance sheet.

So let's just start with a forecast of the P&L.

Now as you will see, what is the first thing that we have to forecast on the P&L?

You would agree with me that it is sales.

So that is the most important thing to forecast.

The whole forecast on the balance sheet and

the P&L is how much are you going to sell next year?

And now in the case it says that the guy expects to grow at 25% the following year

but you have to be a little bit skeptical about what other people tell you.

So for the knowledge with the knowledge that you have what do you think?

How much do you think that polypanel can grow in the next two,

three years in the future?

All we know from the case information we have is the following first,

we have information about the past.

So how much was the company able to grow in the last few years?

Well we know that it was an incredible growth at the beginning because

the company was being born, 170% and then afterwards it was 54, 47, 33.

An average of 45.

So it seems like this 25% is not that crazy.

You've been able to grow at two digits for over five years, right?

Now the second thing that we know about the future is that the comparison that we

have is a similar company in Lombardi,

in the area in Italy, that sells about 5 million Euros.

Remember that we sell now about 3 million Euros.

So we can almost double.

And in Bavaria where we are, there is more industrial activity.

There is more economic growth and there are fewer distributors.

So it is not that crazy to assume this 25% of growth.

Agree, I know that you are thinking that you could say

what happens if instead of growing at 25% I grow at 10%?

Or I grow at 35%?

Don't worry, you have the excel with you, and

we can actually change the numbers afterwards.

And all the forecast actually would update the whole thing completely,

according to the growth in sales.

But let's just start with this 25%.

Which makes, seems reasonable.

Now, how are we going to start?

If you look at the P&L that we had before with the four years from 04 to 08 to 07,

what we want to do is fill in the numbers, all the numbers, for 08, 09, and 10.

And if you agree the first number is sales.

And is going to be 25%.

It's very simple right?

We start with 25% increase.

I am putting there the percentage but what we have to do for

2008 specifically is take 2936 times 1.25 and

this is what we put here which is 3650 in 2008.

Now, all the other stuff that we're having the P&L is going to depend on sales.

So for a forecast, you have to be a little bit

prudent in the sense that it is you who has to make the decision.

I agree with polypanel both of us are going to make decisions and

you are learning this.

But when you're doing a forecast of your own company.

Or you are a consultant and you have to do a forecast for another company.

You have to make the assumptions and the hypothesis, and they have to be realistic.

So the next thing would be, what do we put in COGS as a percentage of sales?

What do you think?

Well look it makes sense that if we had 70% of cost over

the last four years, we'd probably have 70% over the next few years.

Because it hasn't changed right.

The same applies to transportation over sales.

It's been 7% forever so

it makes sense to assume that's it's going to keep being 7% right.

So our gross margin will be 23%.

Now, the subdivision of topics,

we are not that very interested but if we look into the opex, this is important.

Do you remember that we saw that it went from 29 then 24, 20, and 19?

Did you remember that we said that it was reaching a stability point

which means that it's going to be difficult to be lower than 19%.

Would you agree with me to say that probably the best scenario is to have 19%?

It makes sense right?

So let's assume 19% which means that Opex in

absolute terms, is going to grow at 25%.

The same as sales.

Does that make sense to you?

I mean as a consequence EBITDA and

ROS is going to be a consequence of all the others stuff because EBITDA is

the difference between gross margin and Opex, right?

And ROS is the last line so once we have all these numbers

we can start applying them here in the P&L and filling in everything, right.

So as you see, we have filled in the COGS, we have filled in gross margin,

and we have filled in operation expenses and EBITDA.

What do we do about depreciation?

Well, here again we have to use the common sense and say well,

if we've been doing about 30, 33, 31, 31.

Let's assume 30 over the next three years which it's reasonable, right?

With these, we compute the EBIT yeah.

And with the EBIT, we have that.

Now the next thing is financial expenses.

Now, what do we put there?

This is a tricky thing, right?

Because as you would say financial expenses is the interest expense

that you pay on your debt.

But do you see debt in the P&L?

The debt is not in the P&L.

The debt is in the balance sheet but

it turns out that we haven't done a forecast of the balance sheet.

So we don't know what to put there, right.

So let's hold on for a second, right.

Let's hold on for a second and then here we have a problem, as you say.

The interest depend on my debt but my debt is in the balance sheet and

we haven't done the forecast of the balance sheet.

So when we do the forecast advance sheet and

then we look into the debt we will come back to this polypanel financial results.

But so far, we've almost done the forecast of the whole P&L.

And with this we're almost done with the forecast of the P&L and

we move on to the forecast of the balance sheet.

[MUSIC]

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