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Foundations of Financial Management Page 1

Chapter 4
Financial Forecasting

Chapter 4 - Outline
What

LT 4-1

is Financial Forecasting? 2 Methods of Financial Forecasting 3 Financial Statements for Forecasting Steps in a Pro Forma Income Statement (I/S) Determining Production Requirements Percent-of-Sales Method
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What is Financial Forecasting?


Financial

LT 4-2

2 Methods of Financial Forecasting:


Using Pro Forma, or Projected, Financial Statements (more exact, time consuming)

LT 4-3

forecasting is looking ahead to develop a financial plan for the future important for the strategic growth of a

Very

Percent-of-Sales Method (less precise, easier to calculate)

firm Often times these statements are required by lenders


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Foundations of Financial Management Page 2

PPT 4-1

3 Financial Statements for Forecasting


Pro

LT 4-4

FIGURE 4-1 Development of pro forma statements

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

PPT 4-2
LT 4-5

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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TABLE 4-1 Projected wheel and caster sales (first six months, 2005)

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PPT 4-3

PPT 4-3

TABLE 4-2 Stock of beginning inventory

TABLE 4-3 Production requirements for six months

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PPT 4-3

PPT 4-3

TABLE 4-4 Unit costs

TABLE 4-5 Total production costs

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PPT 4-3 TABLE 4-6 Allocation of manufacturing cost and determination of gross profits TABLE 4-7 Value of ending inventory

PPT 4-3

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PPT 4-4 TABLE 4-8

Steps in Cash Budget


Estimate

cash sales and collection timing of credit sales Forecast cash payments Determine monthly cash flow Construct cash budget Determine cash excess or need for borrowing
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Foundations of Financial Management Page 5

PPT 4-5

PPT 4-5

TABLE 4-10 Monthly cast receipts TABLE 4-9 Monthly sales pattern

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PPT 4-5

PPT 4-6

TABLE 4-11 Component costs of manufactured goods

TABLE 4-12 Average monthly manufacturing costs

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PPT 4-6 TABLE 4-13 Summary of all monthly cash payments TABLE 4-14 Monthly cash flow

PPT 4-7

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PPT 4-7 TABLE 4-16

PPT 4-8

TABLE 4-15 Cash budget with borrowing and repayment provisions

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PPT 4-9 FIGURE 4-2 Development of a pro forma balance sheet TABLE 4-17

PPT 4-10

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Percent-of-Sales Method

TABLE 4-18

PPT 4-11

LT 4-7

A short-cut, less exact, easier method of determining financing needs (The quick and dirty approach) Assumes that B/S accounts will maintain a constant percentage relationship to sales
Assets / Current Sales = % of Sales

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2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

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2005 The McGraw-Hill Companies, Inc., All Rights Reserved.