Financial%20Forecasting

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Chapter 4

• Financial Forecasting

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Chapter 4 - Outline

• What is Financial Forecasting?
• 2 Methods of Financial Forecasting
• 3 Financial Statements for Forecasting
• Steps in a Pro Forma Income Statement (I/S)
• Determining Production Requirements
• Percent-of-Sales Method

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What is Financial Forecasting?

• Financial forecasting is looking ahead to develop
  a financial plan for the future
• Very important for the strategic growth of a firm

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2 Methods of Financial Forecasting

• Using Pro Forma, or Projected, Financial
  Statements (more exact, time consuming)
• Percent-of-Sales Method (less precise, easier
  to calculate)
• Often times these statements are required
• by lenders

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3 Financial Statements forForecasting

• Pro Forma Income Statement (I/S)
• Cash Budget
• Pro Forma Balance Sheet (B/S)
• The first step is to develop a sales projection

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Steps in a Pro FormaIncome Statement (I/S)

• Establish a sales projection
• Determine a production schedule (or production
  requirements)
• Compute other expenses
• Determine profit by completing an actual pro
  forma income statement (I/S)

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Determining ProductionRequirements

• Projected Units Sales PLUS
• Desired Ending Inventory (EI) MINUS
• Beginning Inventory (BI) EQUALS
• Production Requirements
• (or Units to be Produced)

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FIGURE 4-1 Developmentof pro formastatements
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FIGURE 4-2 Development of a pro formabalance
sheet
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Percent-of-Sales Method

• A short-cut, less exact, easier method of
  determining financing needs (The quick and
  dirty approach)
• Assumes that B/S accounts will maintain a
  constant percentage relationship to sales
• Assets / Current Sales of Sales

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Percent-of-Sales Method

• RNF A/S (change S) L/S (change S) PS2(1-D)
• Where
• A/S relationship of assets to sales
• change S Change in Sales (forecast prior
  sales)
• P Profit margin
• S2 Forecasted Sales
• D Dividend Payout Ratio. (1-D) is retention
  rate.

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