Chapter 4. Funds-Flow Analysis and Forecasting. Overview of the Lecture. September The Statement of Cash Flows. Pro Forma Financial Statements

Transcription

1 Chapter 4 Funds-Flow Analysis and Forecasting September 2004 Overview of the Lecture The Statement of Cash Flows Pro Forma Financial Statements 2

2 The Statement of Cash Flows The statement of cash flows provides a summary of inflows and outflows of cash over the same period as the income statement. This statement provides insight into the firm s operating, investing and financing cash flows and reconciles them with changes in cash and marketable securities. 3 The Statement of Cash Flows The statement of cash flow takes a closer look at the cash events that occurred during the year. To this end, sources and uses of cash need to be defined. Activities that bring cash to the firm are called sources of cash. Activities that involve spending cash are called uses of cash. 4

3 The Statement of Cash Flows Sources and Uses of Cash An increase in a liability, (e.g. accounts payable) is a source of cash. A decrease in a liability is a use of cash. An increase in an asset (e.g. inventory) is a use of cash. A decrease in an asset is a source of cash. 5 The Statement of Cash Flows There are (at least) two ways to produce a statement of cash flows: The direct method The indirect (activity) method We will look at the direct method first. 6

4 Unibroue, Inc. Dec. 31, 2002, and Dec. 31, 2001, Balance Sheets ($000) Assets Cash 2,300 1,714 Short-term investments Accounts receivable 3,891 4,435 Income taxes receivable Inventories 4,128 3,417 Prepaid expenses Total current assets 10,903 10,600 Net fixed assets 23,085 22,426 Total assets 33,988 33,086 Liabilities and Stockholders Equity Accounts payables and accrued liabilities 3,199 2,257 Instalments on long-term debt Total current liabilities 4,136 3,209 Long-term debt 5,125 5,992 Future income taxes 2,573 2,248 Total liabilities 11,835 11,449 Capital stock 8,670 9,414 Contributed surplus Retained earnings 12,506 11,545 Total equity 22,154 21,637 Total liabilities and equity 33,988 33,086 7 The Statement of Cash Flows For Unibroue in 2002, sources of cash are: Sources of cash Decrease in short-term investments 400 Decrease in accounts receivable 544 Decrease in income taxes receivable 90 Increase in accounts payable 942 Increase in future income taxes 325 Increase in contributed surplus 300 Increase in retained earnings 961 Total sources of cash 3,562 8

5 The Statement of Cash Flows For Unibroue in 2002, uses of cash are: Uses of cash Increase in inventories 711 Increase in prepaid expenses 40 Increase in net fixed assets 599 Decrease in long-term debt (total) 882 Decrease in capital stock 744 Total uses of cash 2,976 9 The Statement of Cash Flows The net addition to cash is the difference between total sources of cash and total uses of cash: Total sources Total uses = Net addition to cash 3, 562 2, 976 = 586. We can verify that Cash in 2003 Cash in 2002 = Net addition to cash 2, 300 1, 714 =

6 The Statement of Cash Flows More formally, the statement of cash flows begins with net income, then adds all non-cash expenses, changes in non-cash working capital, capital spending and financing cash flows. There is no standard format for the statement of cash flows. 11 The Statement of Cash Flows A statement of cash flows is usually divided is three sections: Operating activities Investing activities Financing activities 12

7 The Statement of Cash Flows In what follows, we will construct a statement of cash flows for 2002 using this method. We will then compare our statement with the one provided by Unibroue in The Statement of Cash Flows To proceed, we start with net income. We then add all the non-cash expenses on the income statement. The most common non-cash expenses are Amortization Deferred taxes 14

8 Unibroue, Inc. Dec. 31, 2002 and Dec. 31, 2001, Income Statements ($000) Sales , ,580 Cost of goods sold 11,824 11,540 Gross profit 11,798 10,040 Selling, gen. and admin. expenses (SGA) 7,669 6,543 Amortization 2,073 1,833 Earnings before interest and taxes (EBIT) 2,056 1,664 Interest expense Foreign exchange gain (14) (14) Pretax income (EBT) 1, Taxes Net income Number of shares outstanding (weighted average) 6,111,875 6,235,451 Earnings per share $0.16 $0.10 Stock price (December) $2.43 $ The Statement of Cash Flows Amortization appears on the income statement. Deferred taxes, on the other hand, has to be calculated from the balance sheet, taking the difference between future income tax liabilities from one year to the other. Deferred taxes from Unibroue in 2002 is 2,573 2,248 =

9 The Statement of Cash Flows This gives us Net income after taxes 961 Add: Non-cash expenses Amortization 2,073 Deferred taxes 325 Net cash from operations 3, The Statement of Cash Flows To obtain cash flow from operating activities, we need to add or subtract the change in non-cash working capital. An increase (decrease) in a non-cash working capital asset is a cash outflow (inflow) An increase (decrease) in a non-cash working capital liability is a cash inflow (outflow) 18

10 The Statement of Cash Flows For Unibroue cash flows from non-cash working capital were as follows: Decrease in accounts receivable 544 Decrease in income taxes receivable 90 Increase in inventories (711) Increase in prepaid expenses (40) Increase in accounts payable 942 Changes in non-cash working capital items The Statement of Cash Flows Net cash from operations plus the changes in non-cash working capital items gives cash flow from operating activities: Net cash from operations 3,359 Changes in non-cash working capital items 825 Cash flow from operating activities 4,184 20

11 The Statement of Cash Flows Cash flow from investing activities is usually given by ( NFA end NFA beg + Amortization ), which is ( ,073 ) = 2,672 for Unibroue in The Statement of Cash Flows In the present example, however, we also need to take into account the cash inflow from short-term investments, and thus Unibroue s cash flow from investing activities in 2002 is Short-term investments 400 Net capital spending (2,672) Cash flow from investing activities (2,272) 22

12 The Statement of Cash Flows Cash flow from financing activities comes from the changes in debt (short-term and long-term), common stock, contributed surplus, paid-in capital, and the like. All these items being liabilities, increasing them creates cash inflows and decreasing them creates cash outflows. 23 The Statement of Cash Flows In the case of Unibroue, cash flow from financing activities is Decrease in long-term debt (882) Decrease in capital stock and contributed surplus (444) Cash flow from financing activities (1,326) 24

13 Unibroue, Inc Statement of Cash Flows ($000) (our version) Operating Activities Net income after taxes 961 Add: Non-cash expenses Amortization 2,073 Deferred taxes 325 Net cash from operations 3,359 Changes in non-cash working capital items 825 Cash flow from operating activities 4,184 Investing Activities Short-term investments 400 Net capital spending (2,672) Cash flow from investing activities (2,272) Financing Activities Decrease in long-term debt (882) Decrease in share capital (444) Cash flow from financing activities (1,326) Net change in cash 586 Cash, beginning of the year 1,714 Cash, end of the year 2, The Statement of Cash Flows Note: There are sometimes non-cash expenses that appear on the statement of cash flows produced by a company that an outsider cannot extract from the company s balance sheets and income statements. That is, the statement of cash flows does provide additional information about the firm s operating, investing and financing activities. The following statement of cash flows is the one produced by Unibroue. 26

14 Unibroue, Inc Statement of Cash Flows ($000) Operating Activities Net income after taxes 961 Amortization of PP&E 1,760 Amortization of other assets 313 Deferred taxes 325 Net cash from operations 3,359 Changes in non-cash working capital items 825 Cash flow from operating activities 4,184 Investing Activities Short-term investments 400 PP&E (2,507) Other assets (166) Cash flow from investing activities (2,273) Financing Activities Repayment of long-term debt (882) Redemption of shares (443) Cash flow from financing activities (1,325) Net increase in cash and cash equivalents 586 Cash, beginning of the year 1,714 Cash, end of the year 2, Pro Forma Statements Projecting future financial statements is essential to analyzing the future prospects of a company. The three main outputs of financial forecasting are: 1. Pro forma income statement 2. Pro forma balance sheet 3. A statement of external financing required (EFR) 28

15 Pro Forma Statements Preparing pro forma statements requires a set of assumptions about the increase in sales, the increase in costs, the increase in assets, the increase in debt, etc Pro Forma Statements Preparing the pro forma statements requires the use of plug variables. A plug variable varies to ensure that the balance sheet balances and to ensure that the pro forma balance sheet figures are consistent with the pro forma income statement figures. That is, the growth assumptions cannot concern all items on the statements. How plug variables vary will determine the firm s external financing required. 30

16 A Simple Financial Planning Model Income Statement Sales 1,000 Costs (800) Net income 200 Dividends 100 Earnings retained 100 Computerfield Corporation Current Financial Statements Balance Sheet Assets 500 Debt 250 Equity 250 Total 500 Total A Simple Financial Planning Model Example 1 Assumptions: Sales, costs, assets, debt and equity are all expected to increase by 20% in the coming year. Dividends is the plug variable: Computerfield Corporation Pro Forma Financial Statements Income Statement Balance Sheet Sales 1,200 Costs (960) Net income 240 Dividends? Earnings retained 50 Assets 600 Debt 300 Equity 300 Total 600 Total

17 A Simple Financial Planning Model Example 1 (continued) Equity is expected to increase by 50 while net income is expected to be 240. For the pro forma income statement to be consistent with the pro forma balance sheet, dividends must be = 190. Dividends is used at the plug variable in the present example. The next example uses a different plug variable. 33 A Simple Financial Planning Model Example 2 Assumptions: Sales, costs, assets, are all expected to increase by 20% in the coming year. The dividend payout ratio will remain 50% of net income, so debt is the plug variable. Computerfield Corporation Pro Forma Financial Statements Income Statement Balance Sheet Sales 1,200 Costs (960) Net income 240 Dividend 120 Earnings retained 120 Assets 600 Debt? Equity 370 Total 600 Total

18 A Simple Financial Planning Model Example 2 (continued) Total liabilities and equity are expected to increase to 600 while equity is expected to be 370. For the pro forma balance sheet to balance, future debt has to be = 230, i.e. debt has to be reduced by A Simple Financial Planning Model In the last example, EFR is -20, i.e. the firm will be able to repay $20 of long-term debt if the projections are correct. There are many ways to construct pro forma statements. Two of these are: The percent-of-sales approach. The judgemental approach. 36

19 Percent-of-Sales Approach The percent-of-sales approach assumes that some items on the income statement and balance sheet always vary in proportions with sales. For example, it may be reasonable to assume that current assets increase by 20% whenever sales increase by 20%. There are some items, however, that do not have to vary in the same proportions as sales. These are debt, common stock, retained earnings, short-term debt and interest payments, among others. Other balance sheet items, such as accounts receivable, can also be relatively independent of sales. 37 Percent-of-Sales Approach: An Illustration Consider the following statements: Rosengarten Corporation Current Financial Statements (in millions of $) Income Statement Sales 1,000 Costs (800) Taxable income 200 Taxes (34%) (68) Net income 132 Dividend (33.33%) 44 Earnings retained 88 Balance Sheet Cash 160 A/P 300 A/R 440 N/P 100 Inventory 600 C.L. 400 C.A. 1,200 LTD 800 NFA 1,800 C/S 800 R/E 1,000 Total 3,000 Total 3,000 38

20 Percent-of-Sales Approach: An Illustration Main assumption: Sales are expected to increase by 25%. Assumptions concerning the income statement: Costs are a constant fraction of sales (800/1,000 = 80%). The tax rate is not expected to change (34%). Dividend payout ratio will remain constant (33.33%). 39 Percent-of-Sales Approach: An Illustration Assumptions concerning the balance sheet (assets): Each current asset is a constant fraction of sales: 160 = 16% 1,000 for Cash, 440 = 44% 1,000 for A/R, 600 = 60% 1,000 for inventory. 40

21 The Percent-of-Sales Approach: An Illustration Assumptions concerning the balance sheet (assets): The firm will keep operating at the same capacity level, measured by NFA Sales = 1,800 1,000 = 1.8. That is, NFA in the pro forma balance sheet have to be equal to 1.8 times sales. 41 Percent-of-Sales Approach: An Illustration Assumptions concerning the balance sheet (liabilities): Accounts payable are a constant fraction of sales (30%). Notes payable and long-term debt are independent of sales (these are plug variables). Retained earnings increase depends on the plowback ratio, which is 66.66% in this example. Common stock is independent of sales (also a plug variable). 42

22 Percent-of-Sales Approach: An Illustration Before adjusting the plug variables: Rosengarten Corporation Partial Pro Forma Financial Statements (in millions of $) Income Statement Sales 1,250 Costs (1,000) Taxable income 250 Taxes (34%) (85) Net income 165 Dividend (33.33%) 55 Earnings retained 110 Balance Sheet Cash 200 A/P 375 A/R 550 N/P? Inventory 750 C.L.? C.A. 1,500 LTD? NFA 2,250 C/S? R/E 1,110 Total 3,750 Total 3, Percent-of-Sales Approach: An Illustration This 25% growth has to be financed with debt and/or equity. The external financing required (EFR) is EFR = 3,750 3,000 }{{} Change in T.A. ( ) }{{} Internal financing = $565 million. 44

23 Percent-of-Sales Approach: An Illustration The firm might follow some guidelines as to how funds can be raised. These guidelines could be, for instance, 1. Use debt first (short-term then long-term); 2. Sell stocks only if necessary. 45 Percent-of-Sales Approach: An Illustration How much new debt to issue? This depends on the firm s constraints. Example of constraints: The current ratio must not be smaller than 3, say (the actual current ratio). This constraint limits short-term borrowing. The total debt ratio must not exceed 0.4, say (the actual total debt ratio). This constraint limits long-term borrowing once short-term borrowing has been exhausted. Raise the remaining funds through equity offering. 46

24 Percent-of-Sales Approach: An Illustration Possible Financing Scenario Current ratio: 3 Total debt ratio: 0.4 Short-Term Borrowing (Notes Payable) Current Ratio = C.A. C.L. = 1,500 C.L. = 3 C.L. = $500 million. 47 Percent-of-Sales Approach: An Illustration Actual current liabilities are $475 million, so they can be increased by $25 million. Hence, Rosengarten can raise up to $25 million using N/P. The firm has to find $565 million. If $25 million are obtained through N/P, $540 million have to be raised using long-term debt and common stock. 48

25 Percent-of-Sales Approach: An Illustration Long-Term Debt Total Debt Ratio = Total debt Total assets = Total debt 3,750 = 0.4, which gives Total debt = $1, 500 million. Thus the firm can raise up to 1, = $200million in long-term debt. We still need = $340 million. 49 Percent-of-Sales Approach: An Illustration The remaining $340 million will be raised through a common stock issue, which gives the following pro forma statements: Rosengarten Corporation Pro Forma Financial Statements (in millions of $) Income Statement Sales 1,250 Costs (1,000) Taxable income 250 Taxes (34%) (85) Net income 165 Dividend (33.33%) 55 Earnings retained 110 Balance Sheet Cash 200 A/P 375 A/R 550 N/P 125 Inventory 750 C.L. 500 C.A. 1,500 LTD 1,000 NFA 2,250 C/S 1,140 R/E 1,110 Total 3,750 Total 3,750 50

26 Weaknesses of the Percent-of-Sales Approach The percent-of-sales approach has three weaknesses: 1. It is unrealistic to assume that all expenses will remain exactly the same percent of sales from one fiscal year to the next. 2. With the percent-of-sales method, a company is essentially locked into a given profit margin. 3. The percent-of-sales approach assumes that all of the firm s costs are variable. Fixed costs create leverage. 51 Example Vectra Manufacturing Actual and Pro Forma Income Statements (POS Approach) 2002 Percent 2003 Percent (Actual) of sales (Pro Forma) of sales Sales 100, ,000 Less: COGS 80,000 80% 112,000 80% Gross Margin 20,000 20% 28,000 20% Less: Operating expenses 10,000 10% 14,000 10% Operating earnings 10,000 14,000 Less: Interest expenses 1,000 1% 1,400 1% Earnings before taxes 9,000 12,600 Less: Taxes (15%) 1,350 1,890 Net income after tax 7, % 10, % Common share dividends 4,000 5,600 Earnings retained 3,650 5,110 52

27 Example (Continued) Suppose Vectra is not happy with its current profit margin of 7.7%. The average ratios for gross and profit margins are 28% and 12.5%, respectively, in Vectra s industry. Hence Vectra should be able to better control costs and increase margins. 53 Example (Continued) Suppose that Vectra has the following figures in mind: COGS: 76% of sales instead of 80%. Operating expenses: 11% of sales instead of 10%. Note that a new, more efficient, machine implies greater amortization expense, which could be the cause of this increase. Interest expenses: Should not be greater than $1,100. Dividends: Will remain constant at $4,000. What s your opinion on this one? 54

28 Example (Continued) Vectra Manufacturing Actual and Pro Forma Income Statements (Judgmental Approach) 2002 Percent 2003 Percent (Actual) of sales (Pro Forma) of sales Sales 100, ,000 Less: COGS 80,000 80% 106,400 76% Gross Margin 20,000 20% 33,600 24% Less: Operating expenses 10,000 10% 15,400 11% Operating earnings 10,000 18,200 Less: Interest expenses 1,000 1% 1, % Earnings before taxes 9,000 17,100 Less: Taxes (15%) 1,350 2,565 Net income after tax 7, % 14, % Common share dividends 4,000 4,000 Earnings retained 3,650 10, Percent-of-Sales Approach and Fixed Costs The POS approach assumes that the firm has no fixed costs, i.e. all costs increase with sales. A growing firm benefits from having fixed costs since these remain constant as sales increase, thus increasing the profit margin. Rent, amortization, management salaries, property taxes, marketing, and research and development are examples of fixed costs. 56

29 Variable and Semi-Variable Costs Variable costs, on the other hand, always vary with sales. Examples of these are raw material, labour, factory overhead and sales commissions. Note that there also are semi-variable costs, which vary with sales only once they have reached a certain level. That is, semi-variable costs will not vary for low sales levels. Take equipment maintenance, for example. A minimum amount of maintenance must always be performed regardless of the sales level but more maintenance must be performed as sales increase beyond a certain point. 57 Profit Margin and Fixed Costs Let S Sales (in $), v Variable costs per $ sold, F Fixed Costs, t Corporate Tax Rate. EBT = S vs F NIAT = (1 t)((1 v)s F), where NIAT is net income after taxes. 58

30 Profit Margin and Fixed Costs This gives Profit Margin = NIAT S = (1 t)((1 v)s F) S = (1 t)(1 v) (1 t)f S. 59 Profit Margin and Fixed Costs Profit Margin = (1 t)(1 v) (1 t)f S Remarks: In the absence of fixed costs (F = 0), profit margin is constant. In the presence of fixed costs (F > 0), profit margin increases when sales increase. 60

31 Profit Margin and Fixed Costs In the Vectra example, suppose that, in 2002, fixed costs were $21,000: $12,000 in COGS, $8,000 in operating expenses (OE) and $1,000 in interest expenses. As a fraction of sales, variable costs were then Variable Costs Sales = = = Variable COGS + Variable OE S (80,000 12,000) + (10,000 8,000) 100, , ,000 = 70%. 100, Profit Margin and Fixed Costs If variable costs remain 70% of sales and if fixed costs remain $21,000, net income after taxes (NIAT) in 2003 is expected to be NIAT = (1 t)((1 v)s F) = 0.85 ( ,000 21,000) = 17, 850 and the profit margin is expected to be NIAT S = 17, ,000 = 12.75%. 62

32 Vectra Manufacturing Actual and Pro Forma Income Statements (Judgmental Approach) 2002 Percent 2003 Percent (Actual) of sales (Pro Forma) of sales Sales 100, ,000 Less: COGS Fixed 12,000 12,000 Variable 68,000 68% 95,200 68% Gross Margin 20,000 32,800 Less: Operating expenses Fixed 8,000 8,000 Variable 2,000 2% 2,800 2% Operating earnings 10,000 22,000 Less: Interest expenses 1,000 1,000 Earnings before taxes 9,000 21,000 Less: Taxes (15%) 1,350 3,150 Net income after tax 7, % 17, % 63 Preparing the Pro Forma Balance Sheet In what follows, the pro forma balance sheet for Vectra Manufacturing will be prepared using the judgmental approach. Income Statement Sales 100,000 COGS (80,000) Op. expenses (10,000) Interest (1,000) EBT 9,000 Taxes (15%) (1,350) Net income 7,650 Dividends 4,000 Earnings ret. 3,650 Vectra Manufacturing 2002 Financial Statements (Actual) Balance Sheet Cash 6,000 A/P 7,000 M/S 4,000 Taxes payable 300 A/R 13,000 Line of credit 8,300 Inv. 16,000 Other 3,400 C.A. 39,000 C.L. 19,000 LTD 18,000 NFA 51,000 C/S 30,000 R/E 23,000 Total 90,000 Total 90,000 64

33 Preparing the Pro Forma Balance Sheet The pro forma income statement is as below. For all items other than retained earnings, the firm will proceed step by step. Income Statement Sales 140,000 COGS (106,400) Op. expenses (15,400) Interest (1,100) EBT 17,100 Taxes (15%) (2,565) Net income 14,535 Dividends 4,000 Earnings ret. 10,535 Vectra Manufacturing 2003 Financial Statements (Pro Forma) Balance Sheet Cash? A/P? M/S? Taxes payable? A/R? Line of credit? Inv.? Other? C.A.? C.L.? LTD? NFA? C/S? R/E 33,535 Total? Total? 65 Preparing the Pro Forma Balance Sheet Let s first look at assets: Cash: Vectra wants a minimum cash balance of $8,000. Marketable Securities (M/S): These are assumed to remain constant at $4,

34 Preparing the Pro Forma Balance Sheet Accounts Receivable: In 2002, average collection period was ,000/13,000 = days. This happens to be 10 days higher than the industry average. Vectra wants its average collection period to be 41 days in 2003, which means that accounts receivable at the end of 2003 should be ,000/A/R = 41 A/R = , = 15, Preparing the Pro Forma Balance Sheet Inventory: In 2002, average days in inventory was ,000/16,000 = 73 days. Vectra is happy with this number and wants to have the same in That is, , 400/Inv. = 73 Inv. = , = 21,

35 Preparing the Pro Forma Balance Sheet Net Fixed Assets: Vectra plans to acquire a new machine for $35,000 in 2003, from which $7,000 will be amortized in that year (reflected in the increase in operating expenses). Net fixed assets then increase by 35,000 7,000 = $28,000, which means that NFA in 2003 are expected to be 51, ,000 = $79, Preparing the Pro Forma Balance Sheet Note that we have enough information so far to determine what total assets will be in 2003: Income Statement Sales 140,000 COGS (106,400) Op. expenses (15,400) Interest (1,100) EBT 17,100 Taxes (15%) (2,565) Net income 14,535 Dividends 4,000 Earnings ret. 10,535 Vectra Manufacturing 2003 Financial Statements (Pro Forma) Balance Sheet Cash 8,000 A/P? M/S 4,000 Taxes payable? A/R 15,726 Line of credit? Inv. 21,280 Other? C.A. 49,006 C.L.? LTD? NFA 79,000 C/S? R/E 33,535 Total 128,006 Total? 70

36 Preparing the Pro Forma Balance Sheet Let s now consider liabilities and equity: Accounts Payable: Purchases are 45% of COGS and Vectra s average payment period in 2002 was 365 ( ,000)/7,000 = 71 days. Suppliers want this average to be reduced to 62 days in 2003, which translates into 365 ( ,400)/A/P = 62 days A/P = , = 8, Preparing the Pro Forma Balance Sheet Taxes Payable: These are assumed to be 25% of the tax amount that appears on the income statement, which is, for 2003, 25% 2,565 = 641. Other Current Liabilities: Remain unchanged. Line of Credit: Depends on the financing plan. Long-Term Debt: Depends on the financing plan. Common Stock: Depends on the financing plan. 72

37 Preparing the Pro Forma Balance Sheet We thus have, before adjusting the plug variables, Income Statement Sales 140,000 COGS (106,400) Op. expenses (15,400) Interest (1,100) EBT 17,100 Taxes (15%) (2,565) Net income 14,535 Dividends 4,000 Earnings ret. 10,535 Vectra Manufacturing 2003 Financial Statements (Pro Forma) Balance Sheet Cash 8,000 A/P 8,133 M/S 4,000 Taxes payable 641 A/R 15,726 Line of credit 8,300 Inv. 21,280 Other 3,400 C.A. 49,006 C.L. 20,474 LTD 18,000 NFA 79,000 C/S 30,000 R/E 33,535 Total 128,006 Total 102, Preparing the Pro Forma Balance Sheet From these statements, we can find the total financing required (TFR) TFR = Change in Total Assets = 128,006 90,000 = 38,006. Vectra does not need to raise the whole amount from outside investors since some of this change in assets will be financed internally, i.e. using the increases in accounts payable, taxes payable and retained earnings. 74

38 Preparing the Pro Forma Balance Sheet The funds raised from outside investors, the external financing required, is found as follows: Total financing required 38,006 Less: Internal sources Increase in accounts payable 1,133 Increase in taxes payable 341 Reinvested profits 10,535 Total internal sources 15,009 External financing required 25, Financial Planning and Growth By how much can a firm grow without borrowing? This growth rate is called the internal growth rate. By how much can a firm grow without selling stocks but by borrowing to leave the debt-equity ratio constant? This growth rate is called the sustainable growth rate. 76