Professional Documents
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Forecasting
for Strategic Growth
FINANCIAL FORECASTING FOR
STRATEGIC GROWTH
Financial forecasting is the process of using pat financial data and current
market trends to make educated assumptions for future periods. It is an
important part of the business planning process and helps inform decision-
making. Effective forecasting relies on pairing quantitative insight with
creative evaluation.
PERSPECTIVE OF FINANCIAL PLANNING
For planning purposes, it is often useful to think of the future as having a short-run
and a long-run. The short-run planning, in practice, usually covers the coming 12
months while financial planning over the long-run is takes to be the coming two to
five years. This time period is referred to as the planning horizon and this is the first
dimension of the planning process that must be established.
The second dimension of the planning process that needs to be determined is the
level of aggregation. Aggregation involves the determination of all of the individual
projects together with the investment required that the firm will undertake and
adding up these investment proposals to determine the total needed investment
which is treated as one big project.
After planning horizon and level of aggregation are established, a financial plan
requires inputs in the form of alternative sets of assumptions about important
variables. This type of planning is particularly important for cyclical businesses or
business firms whose sales are strongly affected by the overall state of the economy or
business cycles.
WHAT ARE THE BENEFITS THAT CAN BE DERIVED FROM
FINANCIAL PLANNING?
Due to the amount spent in examining the different scenarios and variables that will eventually
become the basis for a company’s financial plan, it seems reasonable to ask what the planning
process will accomplish. Among the more significant benefits of derived from financial
planning are the following.
The financial plan enables the proponents to show explicitly the linkages between
investment proposals for the different operating activities of the firm and its available financing
choices. For example, if the firm is planning on expanding or undertaking new investments
and projects, all other relevant variables such as source, terms and timing of financing are
thoroughly examined.
3.Possible problems related to the proposal projects are identified actions to address them
are studied.
Financial planning should identify what may happen to the firm if different events take place.
Specifically, it should address what actions the firm will take if expectations do not materialize and
more generally, if assumptions made today about the future are seriously in error. Thus, one
objective of financial planning is to avoid surprises and develop contingency plans.
4. Feasibility and internal consistency are ensured.
Financial planning is a way of verifying that the goals and plans made for specific areas of
a firm’s operations are feasible and internally consistent. The financial plan makes explicit the
linkages between different aspects of a firm’s business such as the market share, return on
equity, financial leverages, and so on. It also imposes a unified structure for reconciling goals
and objectives.
Through financial planning, directions that the firm would take are established, risks are
calculated and educated alternative courses of action are considered thoroughly.
FINANCIAL PLANNING PROCESS
Well run companies generally base their operating plans on a set of
forecasted financial statements. The planning process begins with a sales forecast
for the next five or so years. Then the assets required to meet the sales targets are
determined, and decision is made concerning how to finance the required assets.
At that point, income statements and statements of financial position can be
projected, and earning per share, as well as the key ratios can be forecasted.
Once the “base-case” forecasted statements and ratios have been prepared,
top managers will ask questions such as:
• Are the forecasted results as good as we can realistically expect, and if not,
how might we change our operating plans to produce better earnings and a
higher stock price?
• How sure are we that we will be able to achieve the projected results? For
example, if our base-case forecast assumes a reasonably strong economy but
a recession occurs, would we be better off under an alternative operating plan?
THE PROJECTED FINANCIAL STATEMENT METHOD
Any forecast of financial requirements involves:
(a) Determining how much money the firm will need during a given period,
(b) Determining how much money the firm will generate internally during the
same period, and
(c) Subtracting the funds generated from the funds required to determine the
external financial requirements.
The projected financial statement method is straightforward, one simply projects the
asset requirements for the coming period, then projects the liabilities and equity that
will be generated under normal operations, and subtracts the projected
liabilities/capital from the required assets to estimate the additional funds needed
(AFN).
The steps in the procedures are as follows:
Step 1. Forecast the Income Statement.
a. Establish a sales projection.
b. Prepare the production schedule and project the corresponding production
costs; direct materials, direct labor and overhead.
c. Estimate selling and administrative expenses.
d. Consider financial expenses, if any.
e. Determine the net profit.
Using the percent-of-sales method, determine whether the company has external financing needs or
a surplus of funds.
Therefore, the Millennium Co. has an additional funds needed (AFN) of 3,500 pesos.
The Relationship Between Financial Planning and Control
The relationship between financial planning and control is essential for ensuring
that the company stays on track to achieve its strategic goals. Financial planning
provides the roadmap, while control systems monitor the actual performance and
make adjustments as needed. This iterative process helps companies adapt to
changing market conditions, manage financial risks, and achieve their strategic
objectives.
THANK YOU
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