Question

Define each of the following terms and give and example:

a. Operating plan; financial plan

b. Spontaneous liabilities; profit margin; payout ratio

c. Additional funds needed (AFN); AFN equation; capital intensity ratio; self-supporting growth rate

d. Forecasted financial statement approach using percentage of sales

e. Excess capacity; lumpy assets; economies of scale

f. Full capacity sales; target fixed assets to sales ratio; required level of fixed assets

Answer 1

a.

Operating plan: This refers to detailed plan for managing with human resource and equipment. How company is going to work on daily basis that is planned in Operation plan. It refers to the physical necessity of the company. for eg, how company is going to start the business, location, production, processing, sale ability and related strategies.

Financial Plan:This in terms of money, how business needs to grow, from where we need to raise cost effective fund, where to invest, how to invest so this helps in long term growth of company. for eg for any start up along with operational plan see its cost effectiveness in financial plan. This is very much important for long term business.

b.

Spontaneous liabilities: This are the liabilities of a company arises form it's routine activity. This is self raising cost. This will directly affects to the cost of goods sold. If this increases then CGS will also increases. For eg, accounts payable, working capital, taxes payable, salary n wages payable etc.  

profit margin: This is relative measure of net sales reduced by cost of goods sold divided by net sales. In simple terms this is a ratio of [(Net sales-COGS)/net sales] . This is a percentage on how much we earn on sales. for eg, net sale is $5000 and cogs is $3500 then profit margin is 30%

payout ratio: This refers to how much company is paying to it's owners/shareholders. This is a ration of Dividend per share/ Earning per share or pay out/profit. for eg if company earned $100 per share and DPS is $40 then payout ratio is 40%

C

Additional funds needed (AFN): This means extra finance need to reach assets increase for achieving projected sales.

AFN equation = Projected increase in assets - Spontaneous increase in liability - Increase in retained earning.

Capital intensity ratio: This refers to your earning compared to your assets. How much your company is earning on assets. This refers to = Total assets/ total revenue.

self-supporting growth rate: This means the maximum profit a company can earn on its own investments. that means without external financial help.This can be found by setting AFN to zero,

Self supporting g= [M(1-POR)S₀/ A₀ - S₀ - M(1-POR)S₀]

d.

Forecasted financial statement approach using percentage of sales:

This means to using current ratio for forecasted future sales to know the company's future profitability and sustainability, this us very useful and common method for forecasting future cash flows and profitability of a company.