Forecasting Financial Statements
4.1 Role of Financial Forecasting in Planning
The financial forecast is a key input to strategic planning, a firm's process of defining strategy and making decisions about allocating resources.
AFN is "additional funds needed," and refers to the additional resources that will be needed for a company to expand its operations.
Capacity adjustment takes into account maximum production levels and the alteration of this level depending on how the firm wants to grow.
4.2 Overview of Forecasting
The main inputs of forecasting include time series, cross-sectional and longitudinal data, or using judgmental methods.
Steps Required to Forecast
Steps of forecast include problem definition, cash flow forecast, profit forecast, balance sheet forecast and profit determination.
4.3 Forecasting the Income Statement
Sales Forecast Input
Target volume, price, and contribution margin per unit are the key inputs to a sales forecast.
Production Schedule Input
Production schedule can be divided into raw materials, work in process, finished goods and goods for resale.
COGS is difficult to forecast due to the sheer amount of expenses included and differing methods of estimating each.
Other Expenses Input
Other expenses include SG&A, depreciation, amortization, R&D, finance costs, income tax expense, discontinued operations expenses.
Pro Forma Income Statement
A pro forma income statement is planned and prepared in advance to of a transaction to project the future status of the company.
4.4 Forecasting the Balance Sheet
Pro Forma Balance Sheet
A pro forma balance sheet summarizes the projected future status of a company after a planned transaction, based on the current financial statements.
Balance Sheet Analysis
Balance sheet analysis is process of understanding the risk and profitability of a firm through analysis of reported financial information.
4.5 Building a Cash Budget
Forecasting cash receipts requires an intimate knowledge of the internal and external sources of this revenue.
Cash payments describe cash flowing out of a business resulting from operating activities, investment activities and financing activities.
The Forecast Budget
In order to determine the optical cash balance for a company, cash flows are estimated and a forecast is prepared.
4.6 Analyzing the Forecasts
Ratio Analysis and EPS
Ratio analysis and EPS are used to compare the strengths and weaknesses of various companies with industry or company benchmarks.
Impacts on the Business
Since actual business activities are planned in relation to forecasting, it is very important that realistic expectations and estimations be undertaken.
Regression Analysis for Forecast Improvement
Regression Analysis is a causal / econometric forecasting method that is widely used for prediction and forecasting improvement.
Impact of Modifying Inputs: Accounts Receivable, Inventor...
Modifying inputs such as accounts receivable, inventory, and accounts payable will significantly influence forecasting and business operations.