• Global Frameworks: US CMA Part 1 (Planning, Budgeting, and Forecasting).

1. Pro-Forma Financial Statement Modeling
Pro-forma modeling involves projecting financial statements into the future to verify that corporate strategies are financially viable.
The process centers on the Percent-of-Sales Method. Financial analysts identify which balance sheet and income statement line items scale directly with sales revenue (e.g., Cost of Goods Sold, Accounts Receivable, Inventory, Accounts Payable). These items are projected forward as a fixed percentage of the forecast revenue target.
 
2. External Funds Needed (EFN) Matrix Formula
 
When sales expand, a company must increase its assets (inventory, receivables, plant capacity) to support that growth. Some of this asset growth is funded naturally by spontaneous liabilities (like accounts payable increasing). The remainder must come from retained earnings or external financing.
The External Funds Needed (EFN) formula estimates this financing gap:

EFN = (A* / S₀) × ΔS − (L* / S₀) × ΔS − (S₁ × M × RR)
Where:

  • A* / S₀ = Assets that grow spontaneously with sales as a percentage of initial sales (S₀)

  • L* / S₀= Spontaneous liabilities as a percentage of initial sales (S₀)
  • Δ S = Increase in sales (S₁ – S₀)
  • S₁ = Projected total sales for the next period
  • M = Net profit margin
  • RR = Retention Rate (1 – Dividend Payout Ratio)

3. Balancing the Model and Sustainable Growth Rate (SGR)
If the EFN calculation is positive, the financial planner must balance the model by scheduling new debt or equity issuance. If EFN is negative, the firm is generating excess cash, which can be allocated to debt paydown, share buybacks, or cash reserves.
The Sustainable Growth Rate (SGR) represents the maximum rate a company can expand its sales without issuing new equity or increasing its financial leverage:

SGR = (DuPont × RR) / [1 − (DuPont × RR)]
Alternatively, using the standard return on equity (ROE):

SGR = ROE × RR
Where ROE is broken down into its core drivers via the DuPont Analysis Framework:

ROE = Net Profit Margin × Asset Turnover × Equity Multiplier
 
PreviousNext