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Financial Forecasting and Cash Budgeting

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Short-term forecasts focus on cash budgeting and cash-flow planning ... Short-term Forecasts and Cash Budgeting. A plan for the near future expressed in dollars ... – PowerPoint PPT presentation

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Title: 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
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