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FINANCIAL FORECASTING AND PLANNING - Coggle Diagram
FINANCIAL FORECASTING AND PLANNING
is an important aspect of the firm's operation, 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 - usually done by means of pro-forma financial statements
CASH BUDGET
Is a statement of the firm's planned inflows and outflows of cash.
is used by the firm to estimate its short-term cash requirement, with particular attention to planning for surplus cash and for cash shortages.
1) cash surplus : the firm can plan for short term investments
2) cash shortages : the firm must arrange for short term financing notes payable
STEPS PREPARE CASH BUDGET :
1) determine the amount and timing of cash receipts
2) determine the amount and timing of cash disbursement
3) determine the net cash flow
4) prepare the cash reconciliation accounts
POINT TO REMEMBER!
1) non cash expenses such depreciation does not actually involve any actual cash flows and exclude in cash budget
2) if have deficit amount - normally it has to borrow
FINANCIAL PLANNING
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.
typically involves forecasting sales and expenses incurred to generate those sales.
most widely used method is percent-of-sales method.
WHY NEED FOR FORECASTING ?
to determine the future financing needs of firms
BASIC STEPS
1) project's the firm sales revenues and expenses
2) estimate the levels of investment in current and fixed assets that are necessary to support the projected sales
3) determine the firm's financing needs throughout the planning period
PERCENT OF SALES METHOD OF FINANCIAL FORECASTING
these numbers are then used to design a pro forma income statement and balance sheet
in the percent of sales method, assets, liabilities and total expenses are estimated as a percentage of sales that are then compared with projected sales.
PRO FORMA BALANCE SHEET
SPONTANEOUS ITEM
is the items that vary directly with sales activity
NON SPONTANEOUS ITEM
any items that do not vary directly with sales and remain constant
STEPS NECESSARY TO COMPUTE A PRO FORMA BALANCE SHEET
1) determine the sales growths
2) determine the spontaneous item-adjust the item by a factor if 1+sales growth
3) project the pro-forma balance sheet values - all non spontaneous item remained unchanged as per balance sheet value
4) calculate the new level of retained earnings
5)determine the additional fund needed