Unit 15 Assessment — Financial Planning & Forecasting

📐 AFN Formula

📊 Percent-of-Sales Method

🌱 Sustainable Growth Rate

📋 Pro Forma Statements

Additional Funds Needed (AFN)

Full AFN FormulaAFN = (A*/S₀)×ΔS − (L*/S₀)×ΔS − M×S₁×(1−Payout)

Required Asset Increase(A*/S₀) × ΔS — assets that rise with sales

Spontaneous Liability Increase(L*/S₀) × ΔS — AP & accruals that rise with sales

Addition to Retained EarningsM × S₁ × (1 − Payout Ratio) = net income × retention rate

AFN InterpretationAFN > 0 → must raise external funds · AFN < 0 → surplus (can pay debt or dividends)

Percent-of-Sales Method

Core AssumptionMost balance sheet items scale proportionally with sales

Projected ItemProjected value = (Item/S₀) × S₁

Spontaneous AssetsCash, AR, inventory, fixed assets (if at capacity) — scale with sales

Spontaneous LiabilitiesAccounts payable, accrued wages/taxes — scale with sales

Non-SpontaneousLong-term debt, common stock, dividends — do NOT auto-scale

Sustainable Growth Rate

SGR FormulaSGR = (M × RR) ÷ (A/S − M × RR)

Where:M = profit margin · RR = retention ratio (1−payout) · A/S = assets-to-sales ratio

MeaningMaximum growth rate achievable without issuing new equity or changing financial ratios

Growth > SGRRequires new external equity or changes in margins/leverage

Levers to Raise SGRIncrease profit margin, increase retention ratio, increase asset turnover, increase leverage

Pro Forma Statements

Pro Forma Income StatementProjects revenues, COGS, expenses, net income based on sales forecast

Pro Forma Balance SheetProjects assets & liabilities using percent-of-sales; plug = AFN

Plug FigureAFN appears as the "plug" — debt or equity raised to balance the sheet

Excess CapacityIf firm has unused capacity, fixed assets may NOT need to increase with sales — reduces AFN

Key InputsSales growth rate, profit margin, payout ratio, A*/S₀, L*/S₀

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out of 100 points

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Section 1

—/40

Multiple Choice

Section 2

—/20

True / False

Section 3

—/20

Short Answer

Section 4

—/20

Extended Response

⚠ Sections 3 & 4 are teacher-graded. Use the rubric selectors below to finalize the score.

Multiple Choice

Select the best answer · AFN, percent-of-sales projections, SGR & pro forma calculations

2 pts each · 40 pts

Click the best answer. Use the formula reference panel and AFN component strip above. Each question is worth 2 points.

True or False

Click TRUE or FALSE for each statement

2 pts each · 20 pts

Select TRUE or FALSE for each statement. Each is worth 2 points.

Short Answer

Show all calculations + explain in 2–4 sentences · Teacher-graded

5 pts each · 20 pts

Answer in 2–4 complete sentences. Show every calculation step clearly. Rubric selectors appear after grading.

Extended Response — BBYM Community Café: Growth Financing Plan

Full AFN · Pro forma · SGR · Growth strategy memo · Teacher-graded

20 pts

Read the scenario carefully. Write a well-organized financial planning memo of at least 8 sentences. Show all calculations with labeled steps. Use and underline at least four unit vocabulary terms.

📋 Scenario — BBYM Community Café: Planning the Next Growth Phase

The BBYM Community Café is a youth-operated social enterprise that trains high school students in culinary arts and business management. It has been profitable for two years and the board wants to expand. The café's finance team has asked you to build a financial plan for a projected 25% sales increase next year.

Current Year (S₀)

Sales: $400,000
Total Assets (A*): $320,000
Spontaneous Liabilities (L*): $40,000

Profitability & Payout

Net profit margin (M): 5%
Dividend payout ratio: 40%
Retention ratio (RR): 60%

Growth Plan

Projected sales growth: 25%
New S₁ = $500,000
ΔS = $100,000

SGR Context

Board wants to know: can the café sustain 25% growth internally, or must it raise outside capital?

35 Write your full financial planning memo covering all four parts: (a) Use the AFN formula to calculate how much external financing the BBYM Community Café needs to support 25% sales growth — show every term of the formula with labeled values (required asset increase, spontaneous liability increase, addition to retained earnings) and the final AFN; (b) Calculate the Sustainable Growth Rate (SGR) for the café and compare it to the 25% planned growth — explain what this comparison tells the board about the café's internal financing capacity; (c) Name and briefly describe TWO ways the café could reduce its AFN — one operational improvement (e.g., improving profit margin or reducing asset intensity) and one financial policy change (e.g., changing payout ratio or leverage) — and calculate approximately how each change would affect the AFN; (d) Write a 2–3 sentence strategic memo to the BBYM board explaining the growth financing gap, whether the café should pursue external debt or equity, and the importance of financial planning discipline for youth-run community enterprises. Use at least four underlined vocabulary terms.

📋 Teacher Scoring Rubric

Criterion	Excellent (Full)	Proficient (Partial)	Developing (Minimal)	Score
Part (a) — AFN Calculation A/S₀ = 320/400 = 0.80 · L/S₀ = 40/400 = 0.10 · Required assets = 0.80×$100K = $80,000 · Spontaneous liabilities = 0.10×$100K = $10,000 · Add. to RE = 5%×$500K×60% = $15,000 · AFN = $80,000 − $10,000 − $15,000 = $55,000	All three components correct; AFN = $55,000 with labeled steps	Two of three components correct; minor arithmetic; AFN close	Only one component correct or formula not applied	/7
Part (b) — Sustainable Growth Rate & Comparison SGR = (0.05×0.60) ÷ (0.80 − 0.05×0.60) = 0.03 ÷ (0.80−0.03) = 0.03 ÷ 0.77 = 3.9% · 3.9% << 25% planned → café cannot self-finance 25% growth; significant external capital required	SGR ≈ 3.9% correctly calculated; clearly compared to 25%; explains that gap = need for external financing	Correct method; arithmetic error ±1%; comparison stated	SGR formula applied but wrong inputs or no comparison to 25%	/5
Part (c) — Two AFN Reduction Strategies	One operational (e.g., raise margin from 5% to 8% → add. to RE = 8%×500K×60% = $24K vs. $15K → saves $9K of AFN) and one financial policy (e.g., cut payout from 40% to 20% → RR rises to 80% → add. to RE = 5%×500K×80% = $20K → saves $5K); both quantified; realistic for a café	Two strategies identified; one quantified; the other qualitative	Only one strategy; no quantification	/4
Part (d) — Strategic Memo to Board	Acknowledges $55K AFN gap clearly; recommends debt over new equity to avoid diluting youth ownership / mission alignment; stresses that disciplined financial planning prevents over-expansion crises common in undercapitalized youth enterprises; ≥4 underlined vocabulary terms used professionally	Recommendation made with partial reasoning; some vocabulary terms	No financial rationale; no vocabulary terms; fewer than 3 sentences	/4

Extended Response Total: — / 20

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