Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. What is Financial Forecasting?  Financial forecasting is looking ahead to develop.

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Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 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

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 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

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

3 Financial Statements for Forecasting  Pro Forma Income Statement (I/S)  Cash Budget  Pro Forma Balance Sheet (B/S) The first step is to develop a sales projection

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Steps in a Pro Forma Income 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 )

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Determining Production Requirements Projected Units Sales PLUS Desired Ending Inventory (EI) MINUS Beginning Inventory (BI) EQUALS Production Requirements (or Units to be Produced)

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

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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