CHAPTER 3

Financing Forecasting
and Planning

FIN242
FUNDAMENTALS OF FINANCE
Prepared by:
Sylviannie Jimius
Chapter Contents:
3.0 Financing forecasting and planning
3.1 Cash budget
3.2 Methods of forecasting
3.0 Financing forecasting and
planning
• Financing forecasting refers to future projection of revenues and costs;
hence the future performance of the firm. As such, forecasts are important
for planning activities that concern with:
1. Formulation of consistent financial objectives
2. Projection of financial impact of the alternative strategies
3. Assessing the performance relative to the firm’s financial objectives and
policies
4. Developing contingency plans for expected deviations in the strategies
adopted

• There are four major financial forecasts:

1. Economic Forecast
2. Industry Forecast
3. Sales Forecast
4. Funds Forecast
FINANCIAL PLANNING

• Financial planning: Process of allocating the firm’s resources in order to

achieve firm’s objective.

• Help the firm to decide where to obtain funds and how to use the funds.

• Important as it assessing the effectiveness of a strategy on the firm’s

financial condition (e.g cash flows, need for external financing and earnings)
and to oversee any problem that arise

FINANCIAL FORECASTING

• Financial forecasting is the process of estimating or projecting some

financial event or condition of a firm and it serves as the basis for
establishing budgets. It usually begins with a cash budget and then sales
forecasting.
3.1 Cash budget
• Cash budget shows the expected flow of cash in from
collections and out through disbursements of the firm for
the specified time periods.

• Cash budget also reveals the net cash flows, beginning

cash balances, ending cash balances, minimum cash
requirement and surplus or deficit balances for the
specified time periods.

• Depreciation is not included in the cash budget because

it is a non-cash expense.
• Benefits of cash budgeting to a Financial
Manager:
1. Able to determine the cash
requirements of the firm ahead of time.
2. Help to develop a sound plan for the
financing of future cash needs.
3. Can monitor the cash and liquidity of
the firm.
4. It helps to develop plans for investment
of surplus cash.
STRUCTURE OF A CASH BUDGET

COMPANY NAME
STATEMENT OF CASH BUDGET FOR THE YEAR ENDED DEC 31, XXXX
(RM)

MONTH MONTH MONTH

SALES XX XX XX
CASH INFLOWS
- Cash payment XX XX XX
- Credit payment XX XX XX
- XX XX XX XX
- XX XX XX XX
TOTAL CASH INFLOWS/ XX XX XX
RECEIPTS
(cont.)
PURCHASES XX XX XX
CASH OUTFLOWS
- Cash payment XX XX XX
- Credit payment XX XX XX
- XX XX XX XX
- XX XX XX XX
TOTAL CASH OUTFLOWS/
DISBURSEMENTS XX XX XX
CASH RECONCILIATION

Net cash flow XX XX XX

+) Beginning balance XX XX XX
Ending balance XX XX XX
-) Minimum balance XX XX XX
SURPLUS/ (DEFICIT) XX XX XX
3.2 Methods of forecasting
• Sales forecasting is important as it can help to reduce the serious
consequences to the firm which are:
1. Customer dissatisfaction
2. Reduce the demand of firm’s products
3. Reduce the profit of the firm
4. The firm may loss its market share

• Percent of sales method will be used as a tool to forecast expenses,

assets or liabilities.

• It uses the historical relationship between sales and each of the other
income statement accounts and between sales and each of the
statement of financial positions accounts.

• Here, we will calculate Proforma of Statement of Financial Positions.

STEPS IN PERCENT OF SALES METHOD:

1. Express the statements of financial positions accounts or items that

vary directly with sales.
2. Determine the level of RE:
(net income/current sales) x new sales x
[1-(cash dividend/net income)]
3. Express the statements of financial positions accounts or items
that vary directly with sales.
4. Determine the level of RE:
[( in assets/current sales) x sales] –
[( in liabilities/current sales) x sales] – new RE

5. Find out how much the firm’s additional funds needed.

 Projected Income Statement

Sales
-) C.O.G.S________________________________
Gross Profit
-) Operating expenses_______________________
Operating Profit/ Operating Income/EBIT
-) Interest_________________________________
Earning Before Tax (EBT)
-) Taxes___________________________________
Earning After Tax (EAT)/ Net Income/ Net Profit
 ! REMINDERS !
vLook for exercises from past year
questions.

vDon’t forget to read the slides

together with your book.

“A budget tells us what we can’t afford, but it doesn't keep us from

buying it.” – W.F.