Financial Forecasting

Financial Management

Hular, Kay Mart Kier

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FINANCIAL PLANNING
 formulates the way in which financial goals are to be achieved.
A financial plan is thus a statement of what is to be done in the
future. Most decisions have long lead times, which means they
take a long time to implement.
 is a continuous process of directing and allocating financial
resources to meet strategic goals and objectives.
This can be also be viewed as a single process that
encompasses both operations and financing.

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FINANCIAL PLANNING PROCESS
 Planning that begins with long-term, or strategic, financial plans
that in turn, guide the formulation of short-term, or operating,
plans and budgets.

LONG-TERM (STRATEGIC) FINANCIAL PLANS

Lay out a company’s planned financial actions and the
anticipated impact of those actions over periods ranging from 2
to 10 years.

SHORT-TERM (OPERATING) FINANCIAL PLANS

Specify short-term financial actions and the anticipated impact
of those actions.
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Long-Term Plans

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Steps in Financial Planning:

1. Determine Your Goals

Establishing and defining our goals.

2. Evaluate Your Assets

Work out what assets and liabilities you have – write

them down

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Steps in Financial Planning:

3. Perform a Gap Analysis

Evaluate your current financial position – how close

are you to achieving your goals?

4. Consider Your Options

Develop and present recommendations / alternatives.

Develop your plan – create a “route map” for achieving
your different goals 6
Steps in Financial Planning:

5. Implement your Strategy

Implement your recommendations - make the

changes and make it happen

6. Monitor your Plan

Monitor and review your plan; and make

adjustments when needed
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Importance of Financial Planning
• Adequate funds have to be ensured.

• Helps in ensuring a reasonable balance between outflow and inflow of funds so

that stability is maintained.

• Ensures that the suppliers of funds are easily investing in companies which
exercise financial planning.

• Helps in making growth and expansion programs which helps in long-run survival
of the company.

• Reduces uncertainties with regards to changing market trends which can be

faced easily through enough funds.

• Helps in reducing the uncertainties which can be a hindrance to growth of the

company. This helps in ensuring stability and profitability in concern.

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Financial Forecasting
• Financial forecasting is looking ahead to develop a financial plan for the
future
• Very important for the strategic growth of a firm
• Uses mathematical models/formula

2 Methods of Financial Forecasting:

– Using Pro Forma, or Projected, Financial Statements (more exact, time
consuming)
– Percent-of-Sales Method (less precise, easier to calculate)

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3 Financial Statements for Forecasting

• Pro Forma Income Statement (I/S)

• Cash Budget
• Pro Forma Balance Sheet (B/S)

The first step is to develop a sales projection

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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)

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Steps in a Pro Forma Income Statement (I/S)

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Percent-Of-Sales Method
• a Financial Forecasting approach which is based on the premise that most
Balance Sheet and Income Statement Accounts vary with sales. Therefore, the
key driver of this method is the Sales Forecast and based upon this, Pro-Forma
Financial Statements (i.e., forecasted) can be constructed and the firms needs
for external financing can be identified.

• A short-cut, less exact, easier method of determining financing needs (The

“quick and dirty” approach)

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Percent-Of-Sales Method

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Percent-Of-Sales Method

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Seasonality
• a characteristic of a time series in which the data experiences regular and
predictable changes that recur every calendar year. Any predictable
fluctuation or pattern that recurs or repeats over a one-year period is said to be
seasonal.

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Computer-Based Forecasting
• Two major advantages of modern computers are the incredibly high speed and
great accuracy with which they can do calculations. Hence any forecasting
method can be programmed to run on a computer. Even the most calculation-
intensive methods can be run on a micro-computer within a few minutes.

• Example of Best Software for forecasting

1. SCORO
2. CENTAGE
3. PROPHIX
4. MAXIPLA
5. TAGETIK

Before, MS Excel is one of the known tool for forecasting, however, companies that use Excel for
managing their budgets nowadays are far more likely to make mistakes as close to 90% of
spreadsheets contain errors.
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THANK YOU

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