Determining long term financial needs can be important because they allow the finance section of an organization layout the future expenses for the next year. Pro forma balance sheets detail the projected funds required for the following year. There are also year-end ratios that must be calculated to determine the health of the organization. This financial report will also include how the numbers were obtained for each of the ratios and whether or not the organization will require external funds. There assumptions for the pro forma sheet will be retrieved from the New Strategic Directions Memo. EFN Calculation
EFN is known as external financing needed and this is required when the organization does not have enough funds to cover long-term obligations. External financing can be raised by the organization usually by issuing securities. Once the pro forma balance sheet is created it can be determined that external funds are not needed. To obtain the EFN the EFN would equal total assets –total liabilities and equity. After calculating this for Huffman Trucking, it is determined that there will not be a need to raise external funds because they have the required funding in their projections. Ratio calculations
There are several ratios that are used to help project the status of Huffman Trucking in the coming year. There are ratios like the current ratio; asset ratio and profit as a percentage of sales that can help determine where the company stands. Gross profit is typically given as profit as a percentage of sales and gross profit is the profit minus the cost to make and sell a product or service. To determine the gross profit, you take the revenue and subtract the cost of goods or services. The current ratio measures the firm’s ability to meet its short-term obligations (Gitman, 2009). To get the current ratio, the total current assets from the balance sheet are taken and divided by the total liabilities. Then the asset ratio, an efficiency tracker, shows how well an organization utilizes their assets. To determine the asset ratio, the revenue is divided by the total assets. Explanation of Calculations
Here is a brief explanation of each ratio and what each calculation presented. As previously stated to obtain the gross profit the cost of goods or services is subtracted from the revenue. Since there are no clear goods or services on the balance sheet, the total operating costs were taken in to use for this equation. The number comes out to a cash equivalent and that profit number must be divided by the total revenue. This calculation gives a decimal number to be converted to a percentage. For 2011 the gross profit percentage was 9% and for 2012 it was 8.68%. To obtain the current ratio the total assets are divided by the total assets/total liabilities. For 2011 and 2012 the current ratio would be 1.64 even though the total assets and liabilities are different. Finally, to obtain the asset ratio the revenue is divided by the total assets. In 2011 the asset ratio was 4.15 and 2012 the asset ratio was 4.36. With the asset ratio the higher the number the more efficient the company is. The higher number for 2012 indicates that Huffman Trucking is projected to use their assets more efficiently.
In the New Strategic Directions Memo there were directed items to be fixed and variable. These items on the balance sheet were assumed fixed and variable in the memo and did not require further assumption from the accounting department. The taxes and licenses were fixed along with depreciation, inflation, marketing expense. All other numbers were variable for the most part with the exception that some numbers were partially fixed and also had a variable portion. Conclusion
As the head of the accounting department this financial report shows that Huffman Trucking is on the right track for 2012. The external funds needed were calculated and shows that Huffman Trucking will not need external funds in 2012. The gross profit, current ratio and asset ratio were calculated as well with an explanation of each ratio. Lastly, the items on the income statements and balance sheets that were assumed fixed or variable were retrieved from the New Strategic Directions Memo.
Gitman, L.J. (2009). Principles of Managerial Finance (12th ed.). : Prentice Hall.