Percentage par and paid in capital (capital surplus) but

  Percentage of Sales Method (covered in 170 and
173A). This methodology assumes that all assets and liabilities will continue
to be managed as before. That means no improvement or change for any reason.
The steps in the process are:

1. First and most important
(because many changes are a function of the sales change): Determine the sales
growth for the forecast year. There are various avenues for making this
a) As a company outsider:
            – history will repeat itself
(use last year’s or average over few years)
            – company statements in Annual
Report or Quarterly Press releases or
              business press interviews, etc.
            – analyst expectations, etc
available on the Internet financial sites
b) Additionally, if you work for the company
            – sales force/customer survey
            – internal information on new
products etc.

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2. Determine which
items on Income Statement and Balance Sheet are Discretionary (action has to be
taken my management to change) and which ones are “spontaneous” (they change as
sales grow). Typically:
Fixed Assets, Notes Payable, Long Term Debt and New Equity issues (stock at par
and paid in capital (capital surplus) but not Retained Earnings, which must be
calculated) are Discretionary. Cash, AR, Inventory, Accounts Payable, and
Accruals are spontaneous.

3. Move all
Discretionary balances to the forecast year

4. Calculate all new
balances that are a function of the sales. There are two ways to do this that
yield the same result:
a) Apply 1+ sales growth % factor (if sales growth is 20%, apply 1.2) to the
old year balance to get new year balance. I do this because it is a one step
b) Calculate the % of sales that the old year’s asset level represents, apply
that % to the new year’s sales to calculate the new year balance. This is what
the textbooks usually show you how to do

5. Calculate New
Retained Earnings using the formula Old Equity (you add to Retained Earnings,
if shown separately) PLUS Net Income from the new year MINUS Dividends from the
new year.

6. Add up all Assets,
add up all Liabilities and Equity, compare

7. If Total Assets >
Total Liabilities and Equity, need additional funds to finance those asset
levels. If Total Assets < Total Liabilities and Equity, you have extra cash. 8. Decide how you finance the needs or how to apply the cash to balance the balance sheet, which always has to balance. 9. If doing more than one year forecast, always balance the year before starting on the next year. B. Other Methods (to be covered in another note for 173B) 1. Forecasting using performance ratio targets (say reduce DSO by 30%). 2. Statistical forecasts of line items 3. Other assumptions about variables