FINANCIAL

PLANNING AND
FORECASTING
By Gaurav Santoshkumar Vishwakarma
Financial Planning:
Financial Planning is the process of estimating the capital required and determining it's
competition. It is the process of framing financial policies in relation to procurement, investment
and administration of funds of an enterprise.

Objectives of Financial Planning

To Determining capital requirements:
This depend upon factors
- Cost of current and fixed assets,
- Promotional expenses,
- Range planning.
Capital requirements have to be looked with both aspects: short-term and long-term
requirements.
To Determining capital structure:
The capital structure is the composition of capital,
This includes decisions of debt- equity ratio- both short-term and long-term.
To Frame financial policies with regards to cash control, lending, borrowings, etc.
A finance manager ensures that the scarce financial resources are maximally utilized in the best
possible manner at least cost in order to get maximum returns on investment.
To Better Decision Making Process
Importance of Financial Planning
Financial Planning is process of framing objectives, policies, procedures, programmes and budgets
regarding the financial activities of a concern. This ensures effective and adequate financial and
investment policies.
The importance can be outlined as
➤ Adequate funds have to be ensured.
➤ Financial Planning helps in ensuring a reasonable balance between outflow and inflow of funds so
that stability is maintained.
➤ Financial Planning ensures that the suppliers of funds are easily investing in companies which
exercise financial planning.
➤Financial Planning helps in making growth and expansion programmes which helps in long-run
survival of the company.
➤ Financial Planning reduces uncertainties with regards to changing market trends which can be
faced easily through enough funds.
➤ Financial Planning helps in reducing the uncertainties which can be a hindrance to growth of the
company.
This helps in ensuring stability and profitability in concern.
 What is Financial Forecasting?
Assessment of probable future events.
- Financial Position
- Results of Operations
- flow of Fund & Cash
• It is a Part of Planning process.
• They are inferences as to what the future may be.
• Extends over a time horizon.
Based on:
i. Economic assumptions (interest rate, inflation rate, growth rate and so on).
ii. AL Sales forecast.
iii. Pro forma statements of Income account and Balance sheet.
iv. Asset requirements.
v. V Financing plan.
vi. Cash Budget

The Need
Financial Manager prepares Pro forma or projected financial statements to:
▪ Assess the firm's forecasted performance is in line with Targets and expectations of investors.
▪ Examine the effect of proposed operating changes.
▪ Anticipate the financing needs of the firm.
▪ Estimate the future free cash flows.
Techniques of Financial projections
1. Regression Analysis
2. Pro-forma Financial Statements.
3. Po-forma of Budgets.

1. Regression Analysis
✓ Regression analysis is widely used for prediction and forecasting.
✓ It is analysis of average relationship between two or more variables.
✓ In this method basically there are two type of variables
i. Dependent Variable
ii. Independent Variable

2. Pro forma Financial Statements

Prepared with Hypothetical Financial Figures based on previous business operations.
❖ A comprehensive look at the likely future financial performance.
❖ Pro forma Income Statement. (Represents the operational plan for the whole organization.)
❖ Pro forma Balance sheet. (Reflects the cumulative impact of anticipated future decisions).
Pro Forma Income Statements
Percent of Sales Method
➢ Assumes that future relationship between various elements of cost to sales will be similar to
their historical relationships.
➢ These cost ratios are generally based on the average of previous two or three years.
➢ Goods sold may be expressed as a percentage of Sales.
Budgeted Expense Method
➢ Estimate the expenses of each item on the basis of expected developments in the future
period for which the pro forma P&L a/c is being prepared.
➢ Calls for greater effort on the part of Management, since they have to define the likely
happenings.
Combination method
➢ A combination of both methods work best.
➢ Items which have stable relationship to sales can be forecasted using the Percent of sales
method.
➢ For items where the future is likely to be very different from the past, budgeted expense
method can be used.
3. Pro Forma of Budgets

• Budgeting
• Budget
• Long duration Forecasting - for Investment planning

Functional Budgeting:
❑ Cash Budgets
❑ Operational Budgets
❑ Sales Budgets
THE END