Chapt

er

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:
LT 4-3
Using Pro Forma, or Projected, Financial
Statements (time
consuming)
Percent-of-Sales Method (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 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.

Steps in a Pro Forma Income

Statement (I/S)

LT 4-5

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
LT 4-6
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.

PPT 4-1

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

PPT 4-8

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

PPT 4-4

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

PPT 4-9

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

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
LT 4-7

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)

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.