• 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

-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

-Determine the amount and timing of cash receipts

Determine the amount and timing of cash disbursement

-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

-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.

Spontaneous Item- is the items that vary directly with sales activity (sales increase, spontaneous item also increase)

Non-Spontaneous Item- Any items that do not vary directly with sales and remain constant

2. Determine the spontaneous item-adjust the item by a factor of 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 (projected) of retained earnings

5. Determine the additional fund needed (AFN). The difference between total assets and total liabilities and equity = AFN