UNIVERSITY OF MAKATI

J. P. Rizal Ext., West Rembo, Makati City

COLLEGE OF BUSINESS AND FINANCIAL SCIENCE
Department of FINANCE MANAGEMENT
Course Title Title
Module
5
No. FINANCIAL MANAGEMENT 2

FINMAN 2 Module Leader PROF. RENNIEL B. HALLERA

Module
none
Contributors
Time Frame:
You are expected to finish all the activities, assignments, and
assessments of this 6th week of the semester.

How to Complete this .

module? 1. Complete the reading assignment
2. View the shared educational video/reading materials about the course.
3. Participate in this week’s discussion (if any)
4. Complete the Module 5 requirement given by the professor
5. Submit other required outputs

Teaching Strategies Use of UMAK-LMS- TBL, Suggested Education video about the subjects ,
Online discussion (GoogleMeet, Zoom, Messenger, Google classroom) Voice-
over PowerPoint, or video-recorded lectures, Online links, and Online quizzes.

INTRODUCTION
INTRODUCTION

A financial forecast tries to predict what your business will look like (financially) in the future.
Pro forma statements are how you make those predictions somewhat concrete.

Depending on your goals, these statements (Balance sheet, Income statement, Cashflow
statement) will cover different time spans. If you’re creating a financial forecast for your planning
purposes, you should create pro forma statements covering six months to one year in the future.
LEARNING OUTCOMES

By the end of this module , you should be able to

1. Knowledge: Definition and Importance of Financial Forecasting and Budgeting

2.
3. Skills: Assess the best practices in financial forecasting

4. Attitude: The learner will be eager to learn how to conduct financial forecasting and
budgeting.

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 FINANCIAL FORECASTING

After you’ve completed your goals and actions, assess the financial viability of your strategic
plan. While your action items and goals are fresh in your mind, estimate the costs associated
with the implementation of each item. All the best-laid strategic plans are subject to time and
money.

Financial forecasting is the process of estimating or predicting how a business will perform in
the future. The most common type of financial forecast is an income statement, however, in a
complete financial model, all three financial statements are forecasted. In this guide on how to
build a financial forecast, we will complete the income statement model from revenue to
operating profit or EBIT (Earnings before interest and taxes).

Forecasting Revenue

There are inherent tensions in model building between making your model realistic and keeping
it simple and robust. The first-principles approach identifies various methods to model revenues
with high degrees of detail and precision. For instance, when forecasting revenue for the retail
CONTENT

industry, we can forecast the expansion rate and derive income per square meter.

When forecasting revenue for the telecommunications industry, we can predict the market size
and use current market share and competitor analysis. When forecasting revenue for any
service industries, we can estimate the headcount and use the income for customer trends.

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 On the other hand, the quick and dirty approach to robust models outlines how you can model
revenues in a much more straightforward way, with the benefit that the model will be more
simple and easy to use (although less accurate and detailed). With this approach, users predict
future growth based on historical figures and trends.

Forecasting Gross Margin and SG&A Expenses

Once we finish forecasting revenues, we next want to forecast gross margin. Gross margin is
usually forecast as a percent of revenues. Again, we can use historical figures or trends to
forecast future gross margin. However, it is advised to take a more detailed approach,
considering factors such as the cost of input, economies of scale, and learning curve. This
second approach will allow your model to be more realistic, but also make it harder to follow.

The next step is to forecast overhead costs: SG&A expense. Forecasting Selling, General, and
Administrative costs is often done as a percentage of revenues. Although these costs are fixed
in the short term, they become increasingly variable in the long term. Therefore, when
forecasting over shorter periods (weeks and months), using revenues to predict SG&A

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 (expense) may be inappropriate. Some models forecast gross and operating margins to leave
SG&A (expense) as the balancing figure.

Budgeting vs. Financial Forecasting

When you create a budget for your business, you plan to set aside money for certain costs,
taking into account your income and expenses. The budget you make may be based on info
from your financial forecast, but it’s distinct from the forecast itself.

Think of financial forecasting as a prediction, and budgeting as a plan. When you make a
financial forecast, you see what direction your business is headed in, based on past
performance and other factors, and use that to anticipate the future.

When you make a budget, you plan how you’re going to spend money based on what you
expect your finances to look like in the future (your forecast).

 For instance, if your financial forecast for next year says you’ll have an extra Php
5,000,000.00 in revenue, you might create a budget to decide how it will be spent Php
2,000,000.00 for a new website, Php1, 000,000.00 for Facebook ads, and so on.

Budgeting and financial forecasting are tools that companies use to establish a plan for where
management wants to take the company budgeting and whether it is heading in the right
direction.

Although budgeting and financial forecasting are often used together, distinct differences exist
between the two concepts. Budgeting quantifies the expectation of revenues that a business
wants to achieve for a future period, whereas financial forecasting estimates the amount of
revenue or income that will be achieved in a future period.

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  Budgeting is the financial direction of where management wants to take the company,
helping quantify the expectation of revenues that a business wants to achieve for a future
period,
 Financial forecasting tells whether the company is headed in the right direction,
estimating the amount of revenue and income that will be achieved in the future.
 Budgeting creates a baseline to compare actual results to determine how the results vary
from the expected performance.
 Financial forecasting is used to determine how companies should allocate their budgets
for a future period, but unlike budgeting, financial forecasting does not analyze the
variance between financial forecasts and actual performance.

A budget is an outline of expectations for what a company wants to achieve for a particular
period, usually one year. Characteristics of budgeting include:

 Estimates of revenues and expenses.

 Expected cash flows.
 Expected debt reduction.
 A budget is compared to actual results to calculate the variances between the two figures

Budgeting represents a company's financial position, cash flow, and goals. A company's budget
is usually re-evaluated periodically, usually once per fiscal year, depending on how
management wants to update the information. Budgeting creates a baseline to compare actual
results to determine how the results vary from the expected performance.

While most budgets are created for an entire year, that is not a hard-and-fast rule. For some
companies, management may need to be flexible and allow the budget to be adjusted
throughout the year as business conditions change.

Financial forecasting estimates a company's future financial outcomes by examining historical

data. Financial forecasting allows management teams to anticipate results based on previous
financial data. Characteristics of financial forecasting include:

 Used to determine how companies should allocate their budgets for a future period.
Unlike budgeting, financial forecasting does not analyze the variance between financial
forecasts and actual performance.
 Regularly updated, perhaps monthly or quarterly, when there is a change in operations,
inventory, and business plan.
 Can be created for both short-term and long-term. For example, a company might have
quarterly forecasts for revenue. If a customer is lost to the competition, revenue forecasts
might need to be updated.

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  A management team can use financial forecasting and take immediate action based on
the forecasted data.

Financial forecasting can help a management team make adjustments to production and
inventory levels. Additionally, a long-term forecast might help a company's management team
develop its business plan.

Key Difference
 A budget is an outline of the direction management wants to take the company. A
financial forecast is a report illustrating whether the company is reaching its budget goals
and where the company is heading in the future.

 Budgeting can sometimes contain goals that may not be attainable due to changing
market conditions. If a company uses budgeting to make decisions, the budget should
be flexible and updated more frequently than one fiscal year so there is a relationship to
the prevailing market.

 Budgeting and financial forecasting should work in tandem with each other. For example,
both short-term and long-term financial forecasts could be used to help create and
update a company's budget.
ASSIGNMENT

1. Reaction Paper/Analysis about the importance of Financial Forecasting and Budgeting in business
operation.
ASSESSMENT

Recitation or Class Participation thru online via Zoom or any instructed by the school
Lecture Analysis
Reaction paper thru Google classroom

Rule: In a self-paced and self-contained online classroom, Rubric is required to guide students how to
perform the task assessments.

Lesson Analysis of reading materials

Critical Analysis ( reaction paper about the reading materials provided) 80%
RUBRICS

Writing Skills (Grammar/Sentence Construction) 20%

With Online discussion/ Face to face class

Note
In the event of online discussion- Presentation skills 30%
Summary (Quizzes and Activities) 20%
Critical Analysis ( Reaction paper about the reading materials provided) 40%
Writing Skills (Grammar /Sentence construction) 10%

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 REFERENCES

https://bench.co/blog/accounting/financial-forecasting/

https://corporatefinanceinstitute.com/resources/knowledge/accounting/what-is-sga/

https://www.gfoa.org/materials/financial-forecasting-in-the-budget-preparation-process

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