METODO INDICEP DE CONCIENTIZACION-ALFABETIZACION

Introduction

A statement of financial position based forecast is an estimate of the company's statement of financial position at a future date. It is used to identify either the cash surplus or the funding shortfall in the company's statement of financial position at the forecast date.

Exam alert

Exam questions in this area could ask you to calculate cash forecasts from profit forecasts and from statement of financial position forecasts.

5.1 The statement of financial position

The statement of financial position is produced for financial accounting purposes. It is not an estimate of cash inflows and outflows. However a number of sequential forecasts can be produced, for example a forecast of the statement of financial position at the end of each year for the next five years.

5.2 Estimating a future statement of financial position

A statement of financial position estimate calls for some prediction of the amount/value of each item in the company's statement of financial position, excluding cash and short-term investments, as these are what we are trying to predict. A forecast is prepared by taking each item in the statement of financial position, and estimating what its value might be at the future date. The assumptions used are critical, and the following guidelines are suggested.

(a) Intangible non-current assets (gross book value) and long term investments, if there are any, should be taken at their current value unless there is good reason for another treatment.

(b) Some estimate of non-current asset purchases (and disposals) will be required. Revaluations can be ignored as they are not cash flows.

(c) Current assets. Statement of financial position estimates of inventories and receivables can be based on fairly simple assumptions. The estimated value for inventories and receivables can be made in any of the following ways.

(i) Same as current amounts. This is unlikely if business has boomed.

(ii) Increase by a certain percentage, to allow for growth in business volume. For example, the volume of receivables might be expected to increase by a similar amount.

(iii) Decrease by a certain percentage, to allow for tighter management control over working capital.

(iv) Assume to be a certain percentage of the company's estimated annual sales revenue for the year.

(v) The firm can assume that the operating cycle will more or less remain the same. In other words, if a firm's customers take two months to pay, this relationship can be expected to continue.

(d) Current liabilities. Some itemising of current liabilities will be necessary, because no single set of assumptions can accurately estimate them collectively.

(i) Trade payables and accruals can be estimated in a similar way to current assets, as indicated above.

(ii) Current liabilities include bank loans due for repayment within 12 months. These can be identified individually.

(iii) Bank overdraft facilities might be in place. It could be appropriate to assume that there will be no overdraft in the forecast statement of financial position. Any available overdraft facility can be considered later when the company's overall cash requirements are identified.

(iv) Taxation. Any company tax payable should be estimated from anticipated profits and based on an estimated percentage of those profits.

(v) Dividends payable. Any ordinary dividend payable should be estimated from anticipated profits, and any preferred dividend payable can be predicted from the coupon rate of dividend for the company's preferred shares.

(vi) Other payables can be included if required and are of significant value.

(e) Long-term payables. Long-term payables are likely to consist of long-term loans, and any other long-term finance debt. Unless the company has already arranged further long-term borrowing, this item should include just existing long-term debts, minus debts that will be repaid before the statement of financial position date.

(f) Share capital and reserves. With the exception of the retained earnings, the estimated statement of financial position figures for share capital and other reserves should be the same as their current amount unless it is expected or known that a new issue of shares will take place before the statement of financial position date.

(g) An estimate is required of the change in the company's accumulated profits in the period up to the end of the reporting period date. This reserve should be calculated as:

(i) The existing value of accumulated profits

(ii) Plus further retained profits anticipated in the period to the statement of financial position date (ie post tax profits minus estimated dividends)

The various estimates should now be brought together into a statement of financial position. The figures on each side of the statement of financial position will not be equal, and there will be one of the following.

(a) A surplus of share capital and reserves over net assets (total assets minus total liabilities). If this occurs, the company will be forecasting a cash surplus.

(b) A surplus of net assets over share capital and reserves. If this occurs, the company will be forecasting a funding deficit.

Alpha has an existing statement of financial position and an estimated statement of financial position in one year's time before the necessary extra funding is taken into account, as follows. (Note that for the purpose of this exercise liabilities have been deducted from assets.)

Forecast after Existing one year

$ $ $ $

Non-current assets 100,000 180,000

Current assets 90,000 100,000

Ordinary share capital 50,000 50,000

Other reserves 20,000 20,000

Retained earnings 30,000 50,000

100,000 120,000

The company is expecting to increase its net assets in the next year by $60,000 ($160,000 −

$100,000) but expects retained profits for the year to be only $20,000 ($50,000 − $30,000). There is an excess of net assets over share capital and reserves amounting to $40,000 ($160,000 − $120,000), which is a funding deficit. The company must consider ways of obtaining extra cash (eg by borrowing) to cover the deficit. If it cannot, it will need to keep its assets below the forecast amount, or to have higher short-term payables.

A revised projected statement of financial position can then be prepared by introducing these new sources of funds. This should be checked for realism (eg by ratio analysis) to ensure that the proportion of the statement of financial position made up by non-current assets and working capital, etc is sensible.

Main uses of statement of financial position-based forecasts

(a) As longer-term (strategic) estimates, to assess the scale of funding requirements or cash surpluses the company expects over time

(b) To act as a check on the realism of cash flow-based forecasts (The estimated statement of financial position should be roughly consistent with the net cash change in the cash budget, after allowing for approximations in the statement of financial position forecast assumptions)

5.3 Deriving cash flow from income statement and statement of financial position information

The previous paragraphs concentrated on preparing a forecast statement of financial position, with estimated figures for receivables, payables and inventory. Cash requirements might therefore be presented as the 'balancing figure'. However, it is possible to derive a forecast figure for cash flows using both the statement of financial position and income statement.

This is examined in the example below, which is based on the first question (Profits and cash flow) in this chapter. For the time being, assume that there is no depreciation to worry about. The task is to get from profit to operational cash flow, by taking into account movements in working capital.

Example: Extra funding

Operational Profit cash flow

$ $

Sales 200,000 200,000

Opening receivables (∴ received in year) 15,000

Closing receivables (outstanding at year end) (24,000)

Cash in 191,000

Cost of sales 170,000 170,000

Closing inventory (purchased, but not used, in year) 21,000

Opening inventory (used, but not purchased, in year) (12,000)

Purchases in year 179,000

Opening payables (∴ paid in year) 11,000

Closing payables (outstanding at year end) (14,000)

Cash out 176,000

Profit/operational cash flow 30,000 15,000

Profit 30,000

(Increase)/Decrease in inventories Opening 12,000

Closing (21,000)

(9,000) (Increase)/Decrease in receivables Opening 15,000

Closing (24,000)

(9,000)

Increase/(Decrease) in payables Closing 14,000

Opening (11,000)

3,000

Operational cash flow 15,000

In practice, a business will make many other adjustments. The profit figure includes items which do not involve the movement of cash, such as the annual depreciation charge, which will have to be added back to arrive at a figure for cash.

Both 'receipts and payments' forecasts and forecasts based on financial statements could be used

alongside each other. The cash management section and the financial controller's section should reconcile differences between forecasts on a continuing basis, so that the forecast can be made more accurate as time goes on.

All cash forecasts can now be prepared quickly and easily on spreadsheets. This enables revised figures to be calculated whenever assumptions are changed.

Section summary

A cash flow forecast can be prepared by projecting the movement in the statement of financial position or income statement.