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Financial Forecasting and Planning - Coggle Diagram
Financial Forecasting and Planning
Financial Planning
Is an important aspect of the firm’s operations it provides a road maps for guiding, coordinating and controlling the firm’s actions to achieve its objectives
Key aspects of financial planning process are:
Cash planning- involves preparation of the firm’s cash budget
Profit planning – is usually done by means of pro-forma financial statements
Cash Budget
Is a statement of the firm’s planned inflows and outflows of cash
It is used by the firm to estimate its short-term cash requirement, with particular attention to planning for surplus cash and for cash shortages.
Cash budget gives the financial manager a clear views of the timing of the firm’s expected cash inflows & outflows over a given period.
For surplus of cash - the firm can plan for short term investments (marketable securities)
If cash shortages – the firm must arrange for short term financing notes payable)
Steps in preparing Cash Budget
Determine the amount and timing of cash receipts
Determine the amount and timing of cash disbursement
Determine the net cash flow
Prepare the cash reconciliation accounts
Financial forecasting
Financial forecasting is an essential part of all financial planning of a corporation as it is the basis for budgeting activities and estimating future financing needs of the company.
Financial forecasting typically involves forecasting sales and expenses incurred to generate those sales. When making a financial forecast, directors typically use an estimate of various expenses, sales & liabilities
The most widely used method for making such projections is the percent-of-sales method.
Why need for forecasting?
To determine the future financing needs of the firms
Basic steps:
Project’s the firm sales revenues and expenses
Estimate the levels of investment in current and fixed assets that are necessary to support the projected sales
Determine the firm's financing needs throughout the planning period
Percent of sales method of financial forecasting
In the percent of sales method, assets, liabilities & total expenses are estimated as a percentage of sales that are then compared with projected sales.
These numbers are then used to design a pro forma (planned or projected) income statement and balance sheet.
Pro-forma Balance sheet
Spontaneous Item
is the items that vary directly with sales activity (sales increase, spontaneous item also increase)
ASSET
All current assets are spontaneous
Other assets – pattern & goodwill
Fixed asset will only spontaneous if the firm is operating FULL CAPACITY
LIABILITY
Retained earnings* - (refer to step 4 to compute proforma b’ce sheet)
Account payable
Accruals (taxes payable)
Non-Spontaneous Item
Any items that do not vary directly with sales and remain constant
ASSET
Fixed asset are regarded as non- spontaneous if the firm operating BELOW ITS CAPACITY
LIABILITY
Notes payable
Long term debt
Equity