FINANCIAL

PLANNING AND
FORECASTING

Prepared by: ROGELYN M. BALBERDE

 “
If you don’t know where
you’re going, you
probably won’t get there.

Yogi Berra
What is Financial
Planning and
Forecasting
3

It is the estimation of value

of a variable or set of
variables at some future
point.
FINANCIAL
PLANNING

It is the process of estimating the

capital required and determining
it’s competition.
FINANCIAL
PLANNING

It is the process of framing

financial policies in relation to
procurement, investment and
administration of funds of an
enterprise.
The Financial Planning Process

 Financial planning involves guiding, coordinating

and controlling the firm’s actions to achieve its
objectives.
 Two key aspects of financial planning are cash
planning and profit planning.
 Cash planning involves the preparation of the firm’s
cash budget.
 Profit planning involves the preparation of both cash
budgets and pro forma statements
The Financial Planning Process:
Long-Term (Strategic) Financial
Plans
 Long-term strategic financial plans range
from 2 to 10 years.
 Firms that are exposed to a high degree of
operating uncertainty tend to use shorter
plans.
 These plans are one component of a
company’s integrated strategic plan (along
with production and marketing plans) that
guide a company toward achievement of
its goals.
The Financial Planning Process:
Long-Term (Strategic) Financial
Plans
 Long-term financial plans consider a number
of activities including:
- Proposed fixed asset investments
- Research and development activities
- Marketing and product development
- Capital structure (debt to equity mix)
- Sources of financing (changing to cheaper/less
risky sources)
 These plans are generally supported by a series
of annual budgets and profit plans.
The Financial Planning Process:
Short-Term (Operating)
Financial Plans

 Short-term (operating) financial plans specify

short-term financial actions and the anticipated
impact of those actions and typically cover a one
to two year operating period .
The Financial Planning Process:
Short-Term (Operating)
Financial Plans

 Key inputs include the sales forecast and other

operating and financial data.
 Key outputs include operating budgets, cash
budget, and pro forma financial statements.
 This process is described graphically on the
following slide.
Exhibit 1:
Short-Term Financial Planning
The Financial Planning Process:
Short-Term (Operating)
Financial Plans cont.
• As indicated in the previous exhibit, a short term
financial planning begins with a sales forecast.
• From this sales forecast, production plans are
developed that consider lead times and raw material
requirements.
• From the production plans, direct labour, factory
overhead and operating expense estimates are
developed.
• From this information, the pro forma income statement
and cash budgets are prepared – ultimately leading to
the development of the pro forma balance sheet.
Cash Planning: Cash Budgets

• The Cash Budget or Cash Forecast is a statement of

the firm’s planned inflows and outflows of cash. (used
to check predictions with actual)
• It is used to estimate short-term cash requirements with
particular attention to anticipated cash surpluses and
shortfalls.
• Surpluses must be invested and deficits must be
funded.
• The cash budget is a useful tool for determining the
timing of cash inflows and outflows during a given
period.
Cash Planning: Cash Budgets
(cont)

• The cash budget begins with a sales forecast, which is

simply a prediction of the sales activity during a given
period.
• A prerequisite to the sales forecast is a forecast for the
economy, the industry, the company and other external
and internal factors that might influence company
sales.
• The sales forecast is then used as a basis for estimating
the monthly cash inflows that will result from
projected sales – and outflows related to production,
overhead and other expenses.
The Sales Forecast
• The prediction of the firm’s sales over a given period,
based on external and/or internal data; used as the key
input to the short-term financial planning process.
• The financial manager estimates the monthly cash flows
that will result from projected sales and from outlays
related to production, inventory and sales.
• This may be based on analysis of external data, internal
data or a combination of the two.
The Sales Forecast:
Internal forecast
• A sales forecast based on build up or consensus of sales
forecasts through the firm’s own sales channels.
• The firm’s sales people in the field are ask to estimate
how many units of each type of product they expect to
sell in the coming year.
• These forecasts are collected and totalled by the sales
manager, who may adjust the figures using knowledge of
specific markets or of the salesperson’s forecasting
ability.
The Sales Forecast:
External forecast

• A sales forecast based on the relationships observed

between the firm’s sales and certain key external
economic indicators such as the gross domestic
product (GDP), new housing starts, consumer
confidence and disposable personal income.
The Sales Forecast:

• Firms generally use a combination of external and

internal forecast data to make the final sales forecast.
• The internal data provide insight into sales expectations
• The external data provide a means of adjusting these
expectations take into account general economic factors.
Cash Planning: Preparing the Cash
Budget

Exhibit 2. The General Format of the Cash Budget

Cash Planning: Cash Budgets
Cash Receipts

• Cash Receipts include all of a firm’s inflows of cash

during a given financial period.
• The most common components of cash receipts are
cash sales, collections of accounts receivable and
other cash receipts.
Cash Planning: Cash Budgets An
Example: Coulson Industries

• Coulson Industries, a defense contractor, is developing a

cash budget for October, November and December.
Halley’s sales in August and September were $100,000
and $200,000 respectively. Sales of $400,000, $300,000
and $200,000 have been forecast for October, November
and December. Historically, 20% of the firm’s sales have
been cash, 50% have been collected after 1 month and the
remaining 30% after 2 months. In December, Coulson
will receive a $30,000 dividend from stock in a
subsidiary.
Cash Planning: Cash Budgets (cont)
Exhibit 3. A Schedule of Projected Cash Receipts for
Coulson Industries
Cash Planning: Cash Budgets
Cash Receipts

• Forecast sales – this initial entry is merely

informational. It is provided as an aid in calculating
other sales-related items.
• Cash sales – represent 20% of the total sales
forecast for that month
• Collections of AR – these entries represent the
collection of accounts receivable resulting from
sales in earlier months.
Cash Planning: Cash Budgets
Cash Receipts (cont.)

• Lagged 1 month – these figures represent sales

made in the preceding month that generated
accounts receivable collected in the current month.
• Lagged 2 months – these figures represent sales
made 2 months earlier that generated accounts
receivable collected in the current amount
Cash Planning: Cash Budgets
Cash Receipts (cont.)

• Other Cash Receipts – these are expected from

sources other than sales. Interest received,
dividends received, proceeds from the sale of
equipment, stock and bond sale proceeds and lease
receipts may show up here.
• Total Cash Receipts – this figure represents the total
of all the cash receipts listed for each month.
Cash Planning: Cash Budgets An
Example: Coulson Industries
(cont.)

• Coulson Company has also gathered the relevant

information for the development of a cash disbursement
schedule. Purchases will represent 70% of sales – 10%
will be paid immediately in cash, 70% is paid the month
following the purchase and the remaining 20% is paid 2
months following the purchase. The firm will also expend
cash on rent, wages and salaries, taxes, capital assets,
interest, dividends and a portion of the principal on its
loans. The resulting disbursement schedule thus follows.
Cash Planning: Cash Budgets (cont)
Exhibit 4. A Schedule of Projected Cash Disbursements for
Coulson Industries
Cash Planning: Cash Budgets An
Example: Coulson Industries
(cont.)

• The Cash Budget for Couslon Industries can be derived

by combining the receipts budget with the disbursements
budget. At the end of September, Coulson’s cash balance
was $50,000, notes payable was $0 and marketable
securities balance was $0. Coulson also wishes to
maintain a minimum cash balance of $25,000. As a result,
it will have excess cash in October and deficit of cash in
November and December. The resulting cash budget
folloes.
Cash Planning: Cash Budgets (cont)
Exhibit 5. A Cash Budget for Coulson Industries
Evaluating the Cash Budget
 Cash Budgets indicate the extent to which cash shortages or
surpluses are expected in the months covered by the forecast.

 The excess cash of $22,000 in October should be invested in

marketable securities. The deficits in November and
December need to be financed.
Two ways of Coping with
Uncertainty in the Cash Budget

• One way to cope with cash budgeting uncertainty is to

prepare several cash budgets based on several forecasted
scenarios (e.g., pessimistic, most likely, optimistic).
• Develop a Cash Budget stimulation with detailed
assumptions of possible outcomes and their underlying
probability distributions.
Profit Planning:
Pro Forma Statement

• Profit Planning relies on accrual concepts to project the

firm’s profit and overall financial position
• Pro forma statements are projected or forecast income
statements and balance sheets.
• Two inputs are required for preparing pro forma
statements: 1) Financial statements for the preceding year
and 2) the sales forecast for the coming year
Example Pro forma
Income Statement
CY 2021 CY 2022 CY 2023

Sales Revenue 20,000.00 38,000.00 48,000.00

- -
Cost of Sales 10,000.00 19,000.00 - 24,000.00

Gross Profit 10,000.00 19,000.00 24,000.00

33
Operating Expenses

Rent 1,000.00 1,000.00 1,000.00

Web Hosting 600.00 600.00 600.00

Advertising 3,000.00 4,000.00 5,000.00

Total Operating Expenses 4,600.00 5,600.00 6,600.00

Operating Income 5,400.00 13,400.00 17,400.00

Net Income 5,400.00 13,400.00 17,400.00

Example Pro forma Balance
Sheet
CY 2021 CY 2022 CY 2023
ASSETS
Current Assets
Checking Acct. 13,000 16,000 19,000
Savings Acct. 35,000 41,000 45,000
Accounts Receivable 4,000 2,000 2,000
Inventory 14,000 17,000 21,000
Total Current Assets 66,000 76,000 87,000
NON-CURRENT ASSETS
Video Equipment 14,000 14,000 14,000
Car 9,000 9,000 9,000
Total Non-Current Assets 23,000 23,000 23,000 34
Total Assets 89,000 99,000 110,000
LIABILITIES & EQUITY
Current Liabilities
Accounts Payable 10,000 9,000 11,000
Line of Credit 21,000 19,000 18,000
Total Current Liabilities 31,000 28,000 29,000
Non-current Liabilities
Loan 40,000 36,000 32,000
Total Liabilities 71,000 64,000 61,000
EQUITY
Owner’s Capital 35,000 35,000 35,000
Retained Earnings 45,000 56,000 65,000
Total Equity 80,000 91,000 100,000
Total Liabilities & Equity 151,000 155,000 161,000
Evaluation of Pro Forma
Statements
 Two basic weaknesses of the simplified approaches to pro forma
statements:
1) That the firm’s past financial condition is an accurate indicator
of it’s future
2) That certain variables (such as cash, accounts receivable and
inventories) can be forced to take on certain desired values.
 After analyzing the pro forma statements, the financial manager can
take steps to adjust planned operations to achieve short-term
financial goals.
IMPORTANCE OF
FINANCIAL PLANNING
1. Adequate funds have to be ensured.
2. Financial Planning helps in ensuring a reasonable balance between
outflow and inflow of funds so that stability is maintained.
3. Financial Planning ensures that the suppliers of funds are easily
investing in companies which exercise financial planning.
4. Financial Planning helps in making growth and expansion
programmes which helps in long-run survival of the company.
5. Financial Planning reduces uncertainties with regards to changing
market trends which can be faced easily through enough funds.
6. Financial Planning helps in reducing the uncertainties which can be a
hindrance to growth of the company. This helps in ensuring stability
an d profitability in concern.
 FINANCIAL
FORECASTING:
IN FINANCIAL The Basics
TERMS,
How will the
business look in
the future?
What is Financial Forecasting
 It is the process of estimating or predicting the future
performance of a business
 Involves the use of Financial Statements prepared in
advance
 Is made for a specific period
 Forecasts are less accurate when the future ahead of time is
longer
Why Forecast?
 Financial Analysis tends to look at past financial data to
project the company’s financial statements
 Useful for decision making...but it leaves space for users to
figure out:
 the future financial situation of the company
 The amount of dividends to pay in the next period and
impact of events in the company’s shares
 How much money can be generated to repay liabilities
 The future profitibility, cash flows and financial
position
 A better way of allocating resources
Types of Financial Forecasts

40

1) QUANTITATIVE FORECASTS
2) QUALITATIVE FORECASTS
QUANTITATIVE FORECASTS
Large quantities of historical data analyzed for some trends and patterns
• Proforma Financial Statements - use of sales/revenue, figures and
expected costs
• Time Series Analysis - analysis of trends over time
• Casual Analysis - looking at cause-effect relationships of variables
with other variables (Time series econometrics)

NOTE:Might be less effective when less historical data is available

 QUALITATIVE FORECASTS
 Best used in small businesses or when less historical data is available
 Speculations based on intuition and experience
 Expert opinions - from key personnel
 Reference forecasts - outcomes of planned actions based on
similar scenarios
 Delphi - series of questionnaires that requires re-evaluation to
arrive at widely-held opinions
 Consumer research - market research
 Scenario analysis - based on outcome of scenarios
A Basic Example: Pro-forma Financial Statements

 Financial Forecasting involves creating pro-forma financial statements

 Income Statement
 Statement of Cash Flows
 Pro-forma statement of Financial Position
 Useful for making financial prognoses
What Financial Prognoses can be made?

 Sales Forecast
 Cost Forecast (incl. Cost of Sales)
 Cash Flows
 Income Statement
 Balance Sheet (Statement of Financial Position)
Some Basic Notes on
Financial Forecasting
45
▹ Extrapolating past trends (the future
rarely imitates the past)
▹ Striving for precision
 CONCLUSION
▹ Financial Planning and Forecasting are both
extremely useful in the creation of an operating
budget. While financial planning helps
determine the strategies, goals and operating
procedures for a business, forecasting helps
determine the likely levels of sales and costs for
a given time frame. When combined, financial
planning and forecasting allow business owners,
shareholders or board members to make
informed decisions in nearly any financial
aspect.
THANK
YOU!!! 47