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Financial%20Forecasting

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Title: Financial%20Forecasting


1
Chapter 4
  • Financial Forecasting

2
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

3
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

4
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

5
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

6
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)

7
Determining ProductionRequirements
  • Projected Units Sales PLUS
  • Desired Ending Inventory (EI) MINUS
  • Beginning Inventory (BI) EQUALS
  • Production Requirements
  • (or Units to be Produced)

8
FIGURE 4-1 Developmentof pro formastatements
9
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10
FIGURE 4-2 Development of a pro formabalance
sheet
11
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12
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13
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

14
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.

15
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