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Chapter

Financial Forecasting

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

Chapter 4 - Outline

LT 4-1

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 (Required New Funds RNF)

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

What is Financial Forecasting?

LT 4-2

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 (time consuming) Percent-of-Sales Method (easier to calculate)

LT 4-3

Often times these statements are required by lenders

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

3 Financial Statements for Forecasting


LT 4-4

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.

LT 4-5

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

LT 4-6

Production Requirements (or Units to be Produced)

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

PPT 4-1

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PPT 4-8

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PPT 4-4

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PPT 4-9

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PPT 4-10

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

Percent-of-Sales Method

LT 4-7

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

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

Percent-of-Sales Method
RNF = A/S (S) L/S (S) PS2 (1-D) Where A/S = % relationship of assets to sales (S) = Change in Sales (forecast previous sales) L/S = % relationship of liabilities to sales P = profit margin S2 = Forecasted Sales D = Dividend Payout ratio {(1-D) is called retention rate)

LT 4-7

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

PPT 4-11

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