FORECASTING

is a projection of future sales, revenues, earnings, or costs and other possible variables the firm would possibly think of that would be of help in the firms operations

always been the starting point of business planning making it as one of the most important functions to be applied in business.

FORECASTING APPROACHES Users of Forecast Consumer Marketjudgmental) Sales Force Polling Expert Opinion Survey Delphi method Qualitative (or Quantitative Top Management Production Manager Firms of variety of opinion, used at a can conduct in has similar a times be companies to arrive viewsby different with high level of use to group useful approach theManager a their own also Purchasing expert surveys to accumulate forecasts at their of experts. However, in a groupsalesmanagers, information expertise or short-termThe sales and mathematical models that formulating forecast. often what Marketing fromsupplementor direct and/or people, on historical data contact makes it different statistical models, combination withthethat, they arewith rely having the can customers is projections Finance Manager potential customer regarding futuregenerate a forecast. A the averaged tohave a significant asked individually Department arecausal variables to forecast consumers purchasing Human Resource through plans. based on the use of any of the Surveys are regarding through, contribution conductedthe for questionnaires about their forecast of leading business magazinecondition demand. Colleges and Universities qualitative methods. telephone inquiries, In way, of the future market. thisthis of wellthe future events. In questionnaires, instance, uses certain numberpeer and interviews. It consensus approach, each sales help not only in pressure or group canperson is known practitioners who usually meet preparing estimates forecast on be in avoided. aas its jury willexecutive as a groupwhat salesbut alsoin his or improving These forecasts are the her region.give a good grasp onthen opinion to product design, planning for new products and determining reviewed to of the that they future trend ensureeconomy. are consumer behavior. realistic. Then they are combined at the district and national levels to reach an overall forecast.

Two Types of Quantitative Forecasting Exponential Method MovingProjectionsAverage Time Series Smoothing Weighted Moving Trend Averages Naive Model fits simplest or Causal predicts It the simplest toand the of is is uses the forecastingmethod Thea trend weightedseries time Time seriesline amongeconomical more powerful a moving Associative way to forecast historical data demand in average technique tool compared In that the series assumption wherein more to the models. to moving the onassume thatpoints and then projects given into the past. weight is They are of recent data average. the number the used average, a functionequal to the next period linebewidelyfuture future is thewill to theof period n Associative (ormostrange andmedium-to-long are used where repeated forecasts for which the movingaaverages demand in weight to recent Thus, historical casual)more to lesser the data models, such aspast. problemis like sumforecasts. future method distant linear regression, required-uses methods will be Nave model with this period. theA This using is predictcomputed should be incorporate asthetrend that the kind of technique benchmark supported and is periods. of-the-digitsthe variables decided. consideredby equalthat or sequence with thebelief it only factors Other model which of the visualizes the dependent future that might influence the adjustment methods. A weighted model.is more relationshiponthe quantityaverage nave model be being forecast. given recentvariables. movingbeat the on the may cannotpast than (WMA) distant past. Exponential smoothing is expressed mathematically as; a should be disregarded. popular technique = Wt Dt not WMAt + 1 that does involve voluminous records to forecast, easy to use and found out to be effective for short-run forecasting.

Correlation Coefficients for regression Lines StandardRegression Estimate Multiple Regression Linear Error of the It is regression accuracy The a practical equation of the two variables: the dependent To measure theextensionis one simple shows the relationship betweenway of regression model we just explored. It allows us to the independent variable. We expressing the nature of must regression estimates, wethe relationship can use the same variable and build a model with a several independent variables instead of just one the model between two variables.error employedthe computevariable. Forthat weof if Nodelin the least squares method mathematicalstandardexample,the They describe Construction wants to include average annual interest rates a its relationships among performin linear-regression estimates, Syx. This computation regression analysis. The of trend projection tovariables. Themodel for forecasting renovation sales, the proper variables deviation equation shows how that variable is called the standardone we want relates to dependent equation would be of to forecast will still be . But now the regression: Itvariable, another b1x1 + b2x2 the time. value and changes in x, = a variable. independent measures the + is no longer need r == a + bx error from the dependent dependent variable, sales where - = xy nxy variable, where x=- (x)][ny value= a the variable to be predicted(called the y, to the regression line, (y)] constant [n computed - rather a of dependent variable) and x2 = values of the two independent variables, than to the mean. x1 S yx = a = -y-axis bxy y ay - interceptpayroll and interest rates, respectively area nb = slope and b2regression line (or the rate of change in y b1 2of the = coefficient for the two independent variables for given changes in x) x = the independent variable (which in this case in time) Statisticians have developed equations that can use to find the values of a and b for any regression line. The slope b is found by b = 7xy nx 7x2 nx 2

FINANCIAL PLANNING AND BUDGETING

Dimension ofPlan Long-RangePlan Short-Range Plan Financial Financial Financial Planning Planning With of covers the time frame of better to think that encountering financial It usuallyshort-range and twelve (12) months. They arefuture For planning purposes, it long-range plan or placed,tend Onethethethat has anext iscited reasons why firmsyears and does not is a plan most common always 2 to 5 in more financial categorized details. require great deal of as short-range to achieve in the to focus or failure prepared. needed plan is long-range has to beplans arethe actions Financial planshort-range and distressawhat are is due to lack of effectiveandalso known long-range as a These They coming year. It is a process of transforming the in the plan.budget.dimensions of plans the not only planned financial planning. tend to look atdiffervolatility of the period courses but also into their operations, financial strength market, of stability ofquantitative termsand is rate of coveredtheactionin purpose, orientation, thatthe in the form Financial planning takes a painful process of setting the primary objective, the of money technology change in (Mejorada, in the D.). and degree of detail Nenita coming year that affects alternative courses of actions and choosing the best alternative to achieve their product lines and production processes. Shorttheir objective. It also involves systematically thinking about the possible range plan provides a great deal of details and provide barriers they have to confront. Although, there is no exact answer on what the direct guidelines from time to time to the different heads firm is looking for, but preparing for the best logical and fundamentally stable of the organization. plan will help them to cope with the risk they are about to face.

Approaches to Financial Planning Incremental Approach. Zero Based Based Approach. This the name itself zero, meaning the budgets baseline Fromapproach is the traditional approach in budgeting. The is zero. budget starts with is previous years budget and then adds Last years budgetthealready irrelevant in allocating financial or subtract an amount according Managers preparing a zero based resources for the current year. to the anticipated needs. In this type of are required increment is always all the to justification. A budget approach, anto present and justify subjectrequired expenses common disadvantage One common disadvantage of is approach is included in the budget. of incremental-based approachthisthat it does requires lot of documentation, that is, aside from those that itnot have a free way for changes (Mejorada, Nenita D.) schedules required in the normal structure of the budget, it requires identifying all activities and operations in decision packages and is ranked in accordance to their relative importance (Garrison, Ray H. et. al).

Objectives of Budget Planning Master PlanFinancial Operating This budget measure plan of firm is using to determine if the set objectives It Planning. Financial planning forces the company to set their objectives 1.is a controlshows the that the operations where the details of The master budget is classified into two categories: the are and their courses of actions. With expensesset of objectives, the firm is attained. sales, productions, and the clear are looking forward to the financial bethe of the operating budget and place itself tobudget.form of major players in the shown. Operating budget takes in one the industry. income statement showing the budgeted operating results of the firm in the coming year. 2. Coordination. Financial planning creates harmonious relationship among The operating budget is composed of: the different units of the organization. Though departments are created with different functions, but with a clear set of objectives, departments learned to coordinate, communicate and work with each other. 3. Control. Financial plan becomes an important tool in enhancing and measuring the performance of the company. With the diligent preparation of summarized reports containing comparison with the planned objectives, any differences are analyzed for improvements.

Direct Budget budget Sales materials Selling and administrative budget It refers to theshowing how many materials isthat in selling shows the planned administrative expenses the is a budgetselling andvolume of production required to the products of the company. meet the is expected to sell based on forecasted sales. company productions units and how many units must be purchased. It determines first how many units of materials is needed per unit of statement Productionincome production. Pro-forma Budget Direct labor budget schedules inbe produced after sales It refers to the number of units to financial planning is one of the major showing the projected income of ending inventory has budget has been established andthe company. It refers to a budget that provides the total cost of labor to been set forth. meet the production requirements. Ending Inventory budget Factory overhead budget It is a budget that refers to the number of units that the company desires to have in their balance sheet than direct It is a schedule of all manufacturing costs other at the end of the period. direct labor. materials and

Basic Steps in Preparing the Budget Sales Forecast It the process of estimating isProject the firms sales. the volume of sales. It serves as Determine of all the budgets that the mother the production volumeevery subsequent operating and financial budget will rely on it. It is prudent Materials cost enough to make the sales Materials purchases forecast to be as reasonable and accurate as possible to be useful. Direct labor cost Factory overhead The inventory level Cost of goods sold Selling and administrative expenses Cash Budget Pro forma Income statement Pro forma Balance sheet

Production Budget Sales Budget The next step planned sales budget is company is expected This It refers to the after the volume that the the production budget.to budget gives forecasted sales. the also required operating sell based on an assurance that It is unitswhere theto produce the sales requirement for each starts. budget and financial budgetperiod will be met. The production budget will also serve as the basis in getting the budget for the Expected sales in unitslabor, factory overhead and other expenses xxx direct materials, direct Multiply bydirectly associated with the production. The expected Pxxx which can the unit selling price Total salesproduction is determined as follows: Pxxx volume of Planned sales Add: Desired Ending inventory Total needs Less: Beginning Inventory Units to be produced Pxxx xxx Pxxx xxx Pxxx

Direct Materials Budget Direct Labor Budget Like the direct materials budget, the production budget is direct When the production requirements has been computed, aalso the preliminary point can now be prepared to direct labor cost materials budget for the preparation of theshow how many budget. materials is required and how much of it must be purchased to meet production requirements. Units to be produced xxx Multiply by the direct volume xxx Required production labor hours per unit Number of hours required Add: Materials allowed per unit of production xxx Multiply by the directproduction per hour xxx Materials needed in labor cost Total Desired Ending inventory of materials xxx Add: direct labor cost Total needs xxx Less: Beginning Inventory of materials xxx Direct materials budget xxx

Factory Overhead Budget The next step in preparing the budget is the factory overhead budget. Factory overhead budget provides schedules for indirect materials, indirect labor, and all other manufacturing costs that cannot conveniently charged to specific units, jobs, or products. Indirect materials refers to materials needed for the completion of the product but whose consumption with regard to the product is either so small or so complex that it would be futile to treat it as direct materials item.

Ending Inventory Budget Once all the needed data had been computed for the unit production cost, you can now prepare the ending inventory budget. This budget is necessary in computing for the cost of goods sold in the pro forma income statement and ending balance of the merchandise inventory for the unsold units to be presented in the pro forma balance sheet. To determine the unit cost for the unsold units, the formula shall be as follows:

Direct materials Unit cost of direct materials Multiply by raw materials per unit of production

Pxxx xxx Pxxx

Total unit cost of direct materials Direct labor Labor rate per hour Pxxx Multiply by direct labor hours per unit of production xxx Total unit cost of direct labo Variable factory overhead Predetermined variable overhead rate Pxxx Multiply by direct labor hours per unit of production xxx Total unit cost of variable factory overhead Total variable manufacturing cost

Pxxx

Pxxx Pxxx

Selling and Administrative Expense Budget The selling and administrative expense budget lists the overall budgeted operating expenses in areas other than those included in the manufacturing. Just like the factory overhead, the selling and administrative expense is segregated into variable and fixed expenses. The variable selling and administrative expense varies in direct proportion with sales while the fixed selling and administrative expense remains to be unchanged unless the firm goes beyond its normal capacity. To arrive at the estimated cash payment for selling and administrative expenses, all non-cash expenses shall be excluded. Cash Budget One of the final stages in the preparation of a budget is the Cash budget. Cash budget is a continuous process that can be checked for consistency and accuracy by comparing budgeted amounts with amounts that can be expected from using typical ratios or financial statement relationships.

Cash budget four major sections cash surplus or deficit section cash receipts section simply shows of all the cash inflows, the cash financing, gives the lists the difference betweenexcept forreceipts section and the cash payments budget. Cash receipts during the covered period of thesection. This section will tell us if the firm will need to borrow funds to support the starts with the beginning balance where the cash operations of the company or added. collections from our sales are use the excess money paying their obligations or invest in other profitable activities. cash payment section financing section outflows included in the budget period. consists of all cash Cash payments to be included are direct materials shows the borrowings and payments madeand the cash purchases, direct labor, factory overheads by other company. payments included in the budget preparation.

Budgeted Income Statement From the various budgets prepared, the pro forma income statement can now summarize the various components of planned revenue and expenses for the budgeting period. The pro forma income statement will serve as a control device in measuring the firms performance by means of comparison. Budgeted Balance Sheet The budgeted balance sheet is developed by using the previous years actual balance sheet. All the accounts entered in the balance sheet are real accounts and are used to carry forward the remaining balances. The same balances from the previous years balance sheet will be used to add or subtract the budgeted accounts appearing from the different budgets to arrive at the budgeted balance sheet.