Financial Forecasting and Cash Budgeting

1
Chapter 7

• Financial Forecasting and Cash Budgeting

2
Objectives of Financial Forecasting

• Both short-term and long-term forecasts have same
  major objective a financial planning and
  control system to guide the financial future of
  the firm
• Short-term forecasts focus on cash budgeting and
  cash-flow planning
• Long-term forecasts focus on planning for future
  growth and financing growth

3
Short-term Forecasts and Cash Budgeting

• A plan for the near future expressed in dollars
• Objective of plan is planning and control its is
  important to emphasize the use of the budget as a
  control tool

4
Short-term Forecasts and Cash Budgeting

• Seven logical steps in building short-term
  forecast
• Develop sales forecast
• Estimate expected profitability
• Develop pro forma income statement
• Estimate cash payment and collection lags
• Develop detailed cash collections and payments
  forecast
• Construct cash budget
• Develop pro forma balance sheet

5
Long-Term Financial Planning

• Percentage of sales technique based on premise
  that as future sales grow, assets also will grow
  to support increased sales
• Increased assets will be financed partially by
  reinvested earnings and partially by increased
  current liabilities
• Financing shortages will be provided by permanent
  external financing, usually long-term debt or new
  equity
• Asset and liability accounts expected to expand
  with sales expansion are estimated as a
  percentage of sales

6
Long-Term Financial Planning

• Accounts not expected to respond directly to
  sales increases are estimated independently
• Plug account is established on right-hand side
  of balance sheet to allow the force figure needed
  to make balance sheet balance equals required
  external financing

7
Potential Sources of Long-term Financing

• Long-term loans
• Increase earnings reinvestment rate
• Sell common stock