Microchip Computer Corporation’s Financial Planning and Budgeting Essay

Introduction

Financial planning is an integral part of management. As companies set goals, financial planning provides a means of achieving these goals and reducing risks associated with poor management (Alviniussen & Jankensg, 2009). Microchip Computer Corporation Company has a sales goal of +10% annual growths. From the available data, it is evident that Microchip Computer Corporation had a slight increase in sales in year 2005 as compared to the year 2004. The sales decreased gradually in 2006 and 2007, whereas a considerable increase in net sales records in 2008. In determining the trend of the general growth rates in Microchip Computer Corporation, the essay analyzes the net sales for five years (2004-2008) and determines their year-to-year percentage growth.

Microchip Computer Corporation

Selected financial data

The year-to-year percentage growth rate

1. From 2004-2005
   1. Net sales in 2004=11,062
   2. Net sales in 2005=11,933
   3. Increase in net sales from 2004 to 2005 is 871
   4. Percentage growth is (871/11062)*100=7.87%
2. From 2005-2006
   1. Net sales in 2005=11,933
   2. Net sales in 2006=9,181
   3. Increase in net sales from 2005 to 2006 is -2752
   4. Percentage growth is (-2752/11933)*100=-23.06%
3. From 2006-2007
   1. Net sales in 2006=9,181
   2. Net sales in 2007=6141
   3. Increase in net sales from 2006 to 2007 is -3040
   4. Percentage growth is (-3040/9181)*100=-33.11%
4. From 2007-2008
5. Net sales in 2007=6,141
6. Net sales in 2008=8,334
7. Increase in net sales from 2007to 2008 is 2193
8. Percentage growth is (2193/6141)*100=35.71%

Microchip Computer Corporation has an irregular trend in the net sales. Year 2006 and 2007 record very low sales with an upward short in the total net sales in 2008. If the company records a +10% revenue, the target revenue figure is as below:

Net sales in 2008=8,334

If the company anticipates obtaining a +10% revenue in 2009, the 2009 net sales will be 110% of 2008. Thus, 2009 net sales =110% *8,334= $9,196.4.

If all factors are held constant, there is a probability that the company recorded a +10% or even more annual revenue in 2009. It is noteworthy that a lower trend in net sales was experienced in two years, 2006, and 2007. Therefore, there is a probability to experience the upward trend for at least two years before experiencing changes (Meigs, Walter, & Robert, 2000). In any case, the management committee would have identified the problem that caused the downward trend in sales, solved the problem, and thus experienced a 35.71% net sales increase in 2008. In fact, the sales in 2009 would increase further than anticipated.

Percentage of sales method

The percentage of sales method is a tool for financial forecasting (Geoffrey, & Adam, 2002). The method is applied to forecast Micro Chip’s Consolidated Statement of Operations for the period of September 26, 2008 through September 25, 2009. An assumption of a 25% increase in sales, a 15% tax rate, and restructuring costs of 5% of the new sales is applicable in projection of growth. Thus, the financial data is calculated as follows:

Net sales

The net sales for 2008=8,334

Anticipated increase by 25% gives 125% of 8,334=10,417.5 as net sales for 2009.

Taxes

A 15% tax rate is charged of the new sales figure. Thus tax =15%*10,417.5=1,562.625

Net income

Ratio for net income to sales in 2008 is given by net income/Sales = 811/8334=0.097

Thus anticipated net income for 2009= 0.097 of 2009 (net sales-tax) =0.097*(10417.5-1562.625) =861.6875

Dividends

Ration for Dividends to Net Income in 2008 given by dividends/net income.

Thus, earnings (loss) per common share given as:

Basic =5.65/811= 0.00697. The anticipated equivalent of 2009 is 0.0067*861.6875=6.003

Dilute is =4.64/811= 0.0057. The anticipated equivalent of 2009 is 0.0057*861.6875=4.93

Cash, cash equivalent, and short-term investments

Ratio for cash to sales in 2008 is given by Cash/Sales = 5,426/8334=0.65

Thus anticipated cash for 2009= 0.65of 2009 net sales=0.65*10417.5=6,782.5

Costs

A restructuring cost of 5% of the new sales is anticipated

Thus, the cost is 5%*10,417.5=520.875

Microchips’ Consolidated Statement of Operations

For the period of September 26, 2008 through September 25, 2009

Conclusion

It is noteworthy that the financial statements for the period 2004-2008 do not give details of taxes. Therefore, the resulting irregular trend of sales could arise for such reasons and exclusions of other costs and revenues in the financial statement (Sullivan, & Steven, 2003). It is in 2009 predictions that we consider tax expenses. Various assumptions are applicable in predicting 2009 figures in the financial statement using the percentage of sale method. It is predictable that a number of shares used to compute earnings and losses per share do not change over the two years. It is also predictable change in sales do not affect long-term debts, and thus the figure remains the same (Jordan, 2003). While the figures may have allowance of errors, they reflect true and precise estimates of figures for 2009.

References

Alviniussen, A., & Jankensg,.H. (2009). Enterprise risk budgeting: Bringing risk management into the financial planning process. Journal of Applied Finance, 19(1), 178-192.

Geoffrey, S., & Adam S. (2002). Citizens’ Budget Reports: Improving Performance and Accountability in Government. Web.

Jordan, L. G. (2003). Strategic budgeting. The Journal of Government Financial Management, 52(1), 44-52.

Meigs, K., Walter B., & Robert F. (2000). Financial Accounting (4th ed.). New Jersey: McGraw-Hill.

Sullivan, A., & Steven M. (2003). Economics: principles in action. New Jersey: Pearson Prentice Hall.