Keeping in mind that the RHS of the Balance sheet must always equal the LHS, we can make a simpliefied analysis of how much we will need to raise to support a certain sales level.
This is done by assuming the ratios will remain the same. For example, teh assets to sales ratio will stay the same. Thus when we have a forecasted change in slaes we can determine what sales, liabilities, and equity will change by.
AFN= Additional funds needed
AFN = Required Increase in Assets
- Spontaneous increase in liabilities
-Increased in Retained Earnings
Increase in assets=(Assets/Sales)*change in Sales
Spontaneous Increase in liabilities = (Liabilities/Sales)*Change
in sales
Increase in retained earnings = (Net Margin*Sales)(1- payout ratio)
**** note in the first class (10 AM) we made a slight change from
the book and called *A the ratio and NOT the assets that would change.
Although it was an attempt to make it easier, I think it backfired.
Hence by the second class I changed it back to the same nomenclature as
used in the text.
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