FINANCIAL

FORECASTING
▰ A financial forecast identifies trend in
external and internal historical data,
and projects those trends in order to
provide decision-makers with
information about what the financial
status of the company is likely to be at
some point in time.
Financial Management

Planning, organizing and controlling the

acquisition and use of financial
resources for the purpose of achieving
organizational goals.
The Daily Activities of Financial Management

▰ Credit Management
▰ Inventory Control
▰ Receipt and Disbursement
of Funds
Objectives of the Firm

A. Financial Goal - refers to shareholders wealth

maximization
1. Profitability –ability of an organization to maximize
profit which satisfies the basic goal of all business.
2. Liquidity -the ability of an organization to pay its
debts as they fall due.
Objectives of the Firm

3. Efficiency - setting objectives to increase output

from a given set of inputs so the business achieves a
competitive advantage or edge in the industry
4. Growth - setting objectives for increasing the
value of the business by growth through direct
expansion or merging with, or acquiring other
businesses
Objectives of the Firm

5. Return on Capital – indicate how effective a

company is at turning capital into profits.
B. Social and Community Goals -pertains to
providing benefits to its community through pollution
control, equitable hiring practices and fair trade and
pricing standards.
Importance of Financial Forecasting

1. Demonstrate the financial viability of a new business

venture
2. Allows you to measure the actual financial operation
of the business
3. Allows you to guide your business in the right
decision and take control of your cash flow
Importance of Financial Forecasting

4. Provides a benchmark against which to measure

future performance
5. Identifies potential risks and cash shortfalls
6. Provides an estimate of future cash needs
Difference between
financial forecast and
financial plan
Types of forecasting

▰ Qualitative Techniques
▰ Quantitative Techniques
Qualitative Techniques

1. Market Research
Qualitative Techniques

2. Opinions of knowledgeable personnel

Qualitative Techniques

3. Delphi Method
•Decision
makers/experts
•Coordinator
Quantitative Techniques

1. Pro forma Statements

Quantitative Techniques

2. Cause-Effect Method
Quantitative Techniques

3. Time-series forecasting
Steps in
constructing a Pro
Forma Income
Statement
Step 1: Establish a Sales Projection

▰ The Goldman Corporation has two primary products:

wheels and casters. Our sales projection calls for
the sale of 1,000 wheels and 2,000 casters at prices
of P30 and P35, respectively.
Step 2: Determine a Production Schedule
and the Gross Profit

▰ Based on anticipated sales, we determine the

necessary production plan for the six-month period.
Stock of Beginning Inventory

Wheels Carters

Quantity 85 180

Cost P16 P20

Total Value P1,360 P3,600

Total P4,960
Formula to determine the production
requirements

Projected Sales
+Desired Ending Inventory
-Beginning Inventory
Production Requirements
Step 3: Compute other expenses

▰ For the Goldman Corporation, we shall assume

general and administrative expenses are P12,000,
interest expense is P1,500 and dividends are
P1,500.
Step 4: Determine profit by completing the
actual pro forma statement.
Percent of Sales
Method
Percent of Sales Method

The Percentage of Sales Method is a

Financial Forecasting approach which is
based on the premise that most Balance
Sheet and Income Statement Accounts vary
directly with sales.
The steps necessary to compute a pro forma
balance sheet under the percent of sales method

1. Express balance sheet items that vary directly with

sales as a percentage of sales. Any items that do not
vary directly with sales e.g. long term debt, retaining
earnings, common stock & property/plant/equipment
are designated as not applicable (n/a).

2. Multiply the percentages from step 1 by the sales

projected to obtain the amounts for future periods.
The steps necessary to compute a pro forma
balance sheet under the percent of sales method

4. Calculate the projected retained earnings using the below

formula:
Projected Retained Earnings = Present retained earnings + Projected Net Income –
Cash Dividends Paid

5. Total up the assets account to obtain a total projected assets

number, then add projected liabilities & equity accounts to
determine the total shortfall. This shortfall indicates the total
external financing that is required to keep the company running
at present operational levels
The forecasted Sales growth rate in this example
is 25%
 Additional Funds
Needed (AFN)
▰ FORMULA METHOD
Additional Funds Needed (AFN)

Additional Funds Needed (AFN) is the

amount of money a company must raise
from external sources to finance the
increase in assets required to support
the increased level of sales. It is also
called external financing needed
Additional Funds Needed (AFN)

The simplified formula is:

AFN= Projected increase in assets –

spontaneous increase in liabilities – any
increase in retained earnings
• If the AFN is negative, this means the action or project
which is being undertaken will generate extra income for
the company, which can be invested elsewhere.
• The mathematical formulas used to determine AFN are
based on showing how liabilities will grow relative to new
assets and sales when a project is undertaken and can
be used as tools to determine whether a project or
operational expansion is worthwhile.
 Riverdale Co.
Statement of Comprehensive Income
Year 2018
(In Thousands)

Sales 2,000
Less: Operating costs 1,900
EBIT 100
Interest 16
EBT 84
Taxes (40%) 34
Net Income 50
Dividends (30%) 15
Add. To RE 35
 Riverdale Co.
Statement of Financial Position
Year 2018
(In Thousands)

Assets
Cash 20
Accounts Receivable 240
Inventories 240
Total Current Assets 500
Net Fixed Assets 500
TOTAL ASSETS 1,000
Liabilities and Equity
Accounts Payable 100
Notes Payable 100
Total Current Liabilities 200
Long-term debts 100
Common stock 500
Retained Earnings 200
TOTAL LIAB and EQUITY 1,000
Key Assumptions

Interest rate = 8% for any debt

▰ Operating at full capacity
▰ Each type of assets grow proportionately with sales
▰ Payables grow proportionately with sales
▰ 2018 payout (30%) will be maintained
▰ No new common stock will be issued
▰ Sales are expected to increase by 25%
Required:

1. Calculate the AFN.

2. How will the AFN be financed?
ANALYSIS OF THE
FORECAST