Financial Management

(PGDM: 2021-23)

Session – 3: Financial Planning and Forecasting

Sriranga Vishnu
Faculty (F&A Area)
 Financial Planning
• Financial planning indicates a firm’s growth,
performance, investments and requirements of funds
during a given period of time, usually long-term.

• It involves the preparation of projected or pro forma

profit and loss account, balance sheet and funds flow
statement.

• Financial planning helps a firm’s Finance Manager to

regulate flows of funds.
 Financial Planning
• Financing planning process involves the following facets:

– Evaluating the current financial condition of the firm

– Analysing the future growth prospects and options
– Appraising the investment options to achieve the stated
growth objective
– Projecting the future growth and profitability
– Estimating funds requirement and considering alternative
financing options
– Comparing and choosing from alternative growth plans and
financing options
– Measuring actual performance with the planned
performance
 Financial Planning
• Corporate Strategy – Vision, Mission, Purpose, Strategy,
Plan, etc. – Basis of any Financial Planning

• Financial Plan as a sub-set of Operating Plan

– Preparation of projected financial statements in accordance
with the operating plan (projected profits)

– Determination of the funds required in next 5-10 years

– Forecasting funds availability – internal and external sources

– Establishing and maintaining a system of control

 Financial Planning
• Financial Plan as a sub-set of Operating Plan:
– Developing system to make adjustments to the basic plan
– Establishing a performance –based compensation system

• Sales forecast:
– Historical Growth rate
– Level of economic activity – market expansion
– Probable market share
– Effect of inflation on Pricing
– Effect of promotional activities
 Financial Forecasting
• Financial forecasting is an integral part of financial planning.
It uses past data to estimate the future financial requirements.

• Sales Forecast as a precursor to Financial Statement

Forecasting.

• In practice, long-term financial forecasts are prepared by

relating the items of profit and loss account and balance sheet
to sales. This is called the percentage to sales method.

• Percentage -of -Sales Method:

– Reasonable forecasts and determination of relationships
– Proportionate increase in items of Financial Statements
 Pro Forma Analysis
• Estimate typical relation between revenues and sales-driven
accounts

• Estimate fixed burdens, such as interest and taxes

• Forecast Revenues

• Estimate sales-driven accounts based on forecasted revenues

• Construct future period Income Statement and Balance Sheet

Pro Forma Income Statement
Pro Forma Balance Sheet
 Percentage-of-Sales Method
Particulars 2015 Forecast Basis 2016

Sales 3000 1.1 x 2015 Sales 3300

Costs except Depreciation 2616 0.872 x 2016 Sales 2878
Depreciation 100 0.1 x 2016 Net Plant 110
Total Operating Costs 2716
EBIT 284
Interest 88 ------->
EBT 196
Taxes (40%) 78
Net Income 118
Dividend 62
Addition to Retained Earning 56
 Percentage-of-Sales Method
Particulars 2015 Forecast Basis 2016

Sales 3000 1.1 x 2015 Sales 3300

Costs except Depreciation 2616 0.872 x 2016 Sales 2878
Depreciation 100 0.1 x 2016 Net Plant 110
Total Operating Costs 2716 2988
EBIT 284 312
Interest 88 -------> 88
EBT 196 224
Taxes (40%) 78 89
Net Income 118 135
Dividend 62 72
Addition to Retained Earning 56 63
Thank You