How to Calculate External Financing

Topics: Generally Accepted Accounting Principles, Balance sheet, Capital expenditure Pages: 2 (565 words) Published: July 17, 2013
How to Calculate External Financing
By an eHow Contributor

Calculating the amount of financing required is one of the greatest challenges that corporate managers face. Capital markets are extremely complex, and it can be difficult to determine how much, if any, external financing to raise. The amount of external financing your company needs will depend upon the operating budget for your business as well as the company's current capital resources. Determining how much external financing to raise will be much easier if you develop a solid operating budget for your company. Difficulty: Moderately Challenging

Project the amount of sales you expect your company to generate next year. The best way to project sales is to use the annual sales growth over the most recent five-year period. For example, if the company has grown sales at an annual rate of 5% over the past five years, and current year sales are $100, you can budget sales of $100 x (1 + 5%) = $105 for next year. Calculate the company's cost of goods sold and operating expenses using the average percentage of sales method. If cost of goods sold as a percentage of sales averaged 20% over the past five years, you can budget cost of goods sold equal to $105 x 20% = $21 for next year. If operating expenses as a percentage of sales averaged 15% over the past five years, you can budget operating expenses equal to $105 x 15% = $16 for next year. Subtract cost of goods sold and operating expenses from sales to determine pretax income. In this example, pre-tax income would equal $105 - $21 - $16 = $68. Calculate the company's taxes for next year, and subtract taxes from pre-tax income to compute net income. If the company's tax rate averaged 30% over the past five years, net income would equal $68 -- (35% x $68) = $44. Project next year's current assets using the same percentage of sales method. Current assets include cash, inventory and accounts receivable. If current assets


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