Financial Projection – Earnings and

Cash Flow Forecast and Projected

Statements

A. N. K. Mizan

June 13, 2023 1

FINANCIAL FORECASTING
 Essential for the Strategic Plan
 Helps to Determine the Amount of New
Funds Required in Advance

 Methods of Financial Forecasting

 Proforma Statement Method
 Constant Ratio Method

June 13, 2023 2

 PERFORMA STATEMENT
 The Most Comprehensive Method

 Estimate its future level of Receivables, Inventory,

Payable, and other corporate accounts as well as
Anticipated Profits and Borrowing requirements

 The statements are often required by bankers and

other lenders as a guide for the future

June 13, 2023 3

 FINANCIAL STATEMENTS
FOR FORECASTING

 Proforma Income Statement

 Cash Budget
 Proforma Balance Sheet

June 13, 2023 4

 FORECASTING: PROCESS
Prior Balance
Sheet

1 3
Sales Proforma Proforma
Production Income Balance
Projection Plan Statement Sheet
2

Cash Budget

Other
Supportive
Figure: System Approach Budgets
June 13, 2023 5
 PROFORMA INCOME
STATEMENT
 Establish a Sales Projection
 Determine a Production Schedule
 Material
 Labor
 Overhead
 Compute Other Expenses
 Complete the Proforma Statement
June 13, 2023 6
 CASH BUDGET

 Cash Receipts Section

 Cash Disbursement Section
 Cash Excess or Deficiency Section
 Financing Section

June 13, 2023 7

PROFORMA BALANCE SHEET
 Projection of Financial Position (at the end)
 Relatively Simple to Integrate all
 B/S represents Cumulative changes in the
Corporation over time.
 Developed by
 Preceding Period B/S and
 Adjustment of data from Various Schedules.
June 13, 2023 8
CONSTANT RATIO METHOD
 Steps for financial forecasting:
 Determine the percentage relationship of
various assets and liabilities to sales
 Show the change in other accounts as the
volume of sales changes.

June 13, 2023 9

 CONSTANT RATIO METHOD
 In certain cases, there may be excess capacity, and plant
and equipment will not increase.
 No percentages are computed for notes payable, term
loans, common stock and retained earnings. Because they
are not assumed to remain direct relationship with sales
volume.
 Percentage are computed for spontaneous sources of
finance viz. trade payable (accounts payable & bills
payable), accrued expenses, etc.

June 13, 2023 10

 CONSTANT RATIO METHOD
A L
 RNF = (S )  (S )  PS 2 (1  D)
S S
 A/S = Percentage relationship of variable assets to sales
 ∆S = Change in Sales
 L/S = Percentage relationship of variable Liabilities to sales
 P = Profit Margin
 S2 = New Sales Level
 D = Dividend payout ratio

June 13, 2023 11

 THANKING YOU……

June 13, 2023 12