Example of Sales Method

The balance sheet of XYZ Ltd as on date 31st December 2002 is as following:       

Additional Information

1. The sales for year 2002 amounted to Sh.500,000. The sales will increase with 15% in year 2003 and 10% in year 2004.

2. The after tax return on sales is 12% that shall be maintained in future.

3. The company's dividend payout ratio is 80%. This will be sustained in forecasting period.

4. Any additional financing from external sources such will be affected with the issue of commercial paper via company.

Required

a) Determine the amount of external finance for 2 years upto 31st December 2004.

b) Prepare a performa balance as on date 31 December 2004

Solution

Identify various items in balance sheet directly along with sales as:

1. Accrued expenses
2. Trade creditors
3. Current Asset
4. Fixed Asset

Net fixed assets   =     (300M/500M) x 100   =  60%

Current Assets     =     (100M/500M )x 100   =  20%    

Trade creditors      =    (50/50) x 100             = 10%

Accrued expenses =    ( 30/500) x 100          =   6%

a) Compute the increase in sales over the 2 years.

Year 2002 sales           =500 * (115/100) =575M       

Year 2003 sales           = 575* (115/100) = 632M      

Increase in sales in 2003-03-26=        632.5 - 500     =          132.5M

b) Compute the amount of external requirement of the firm over the 2 years of forecasting period.

i) Increase in F. Assets                    =          % of sales x increase in sales

                                                        =          60% x 132.5  =  79.5M

ii) Increase in C. Assets = % of sales x increase in sales

                                                       =          20% of 132.5  =  26.5M

  Total additional investment/asset required                          106M

Interpretation

For the company to earn increase in sales of 132.5M it will have to acquire additional assets costing 106M.

                                                                                                                                    Sh.'000'

Additional investment/asset required                                                                        106,000

Less: Spontaneous source of finance

Increase in creditors   = % of sales x increase in sales

                                    = 132,500 x 10%                                                                     (13,250)

Increase in accrued expenses = % of sales x increase in sales         

                                                            = 132,500 x 6%                                               (7,950)

Less: Retained earnings during 2 years of operation (initial sources)

            Net profit for 2003      = Net profit margin x sales of 2003

                                                = 12% of 575,000                    =          69,000

            Less: Dividend payable 80% of 69,000                                   =55,200           (13,800)

            Net profit for 2004      = Net profit margin x sales of 2004

                                                = 12% of 632,500                    =          75,900

            Less: dividend payable 80% of 75,900                                    =60,720          (15,180)

External financial needs (commercial paper)                                                               55,820