FINANCIAL

FORECASTING
Presented by: Wilfredo V. Dangue
INTRODUCTION
Long-range planning is a means of systematically
thinking about the future and anticipating possible
problems before they occur.

It focuses on the big picture, which means that it is

concerned with the major elements of a firm’s financial
and investment policies without dealing with individual
components of those policies in detail.

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WHAT IS FINANCIAL PLANNING?
Financial planning formulates the way in which financial
goals are to be achieved. A financial plan is thus, a
statement of what is to be done in the future.

Many decisions have a long lead time which means

they take a long time to implement.

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 GROWTH AS FINANCIAL MANAGEMENT GOAL

Increasing the market value of the owners’ equity

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PERSPECTIVE OF FINANCIAL PLANNING
Planning Horizon
▪ Short-run planning, in practice, usually covers the coming
12 months
▪ Long-run planning is takes to be the coming 2 to 5 years.

Aggregation
▪ Involves the determination of all of the individual projects
together with the investment required that the firm will
undertake and adding up these investment proposals to
determine the total needed investment which is treated as
one big project
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PERSPECTIVE OF FINANCIAL PLANNING
After the planning horizon and level of aggregation are
established, a financial plan requires inputs in the form
of alternative sets of assumptions about important
variables.

This type of planning is particularly important for cyclical

businesses or business firms whose sales are strongly
affected by the overall state of the economy or business
cycles

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BENEFITS THAT CAN BE DERIVED FROM FINANCIAL
PLANNING.
1. Provides a rational way of planning options or
alternatives
2. Interactions or Linkages between investment
proposals are carefully examined
3. Possible problems related to the proposal projects
are identified actions to address them are studied.
4. Feasibility and internal consistency are ensured
5. Managers are forced to think about goals and
establish priorities

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FINANCIAL PLANNING MODELS

1. Economic Environment Assumption

2. Sales Forecast
3. Pro-forma Statements
4. Asset requirements
5. Financial requirements
6. Additional Funds Needed (AFN)

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FINANCIAL PLANNING MODELS

Economic Environment Assumption

▪ Inflation rates
▪ Interest rates
▪ Tax rates

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FINANCIAL PLANNING MODELS

Sales Forecast
▪ Determinants of Growth Rates
➢ Profit margin
➢ Dividend policy
➢ Financial policy
➢ Asset Turnover

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FINANCIAL PLANNING MODELS

Pro-forma Statements
▪ SFP
▪ SCI
▪ SCE
▪ SCF

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FINANCIAL PLANNING MODELS

Asset Requirement
▪ Changes in Total Fixed Assets
▪ Net working capital

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FINANCIAL PLANNING MODELS

Financial Requirement
▪ Debt policy
▪ Dividend policy

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FINANCIAL PLANNING MODELS

Additional Funds Needed (AFN)

▪ Financial “plug” is the designated source(s) of
external financing needed to deal with any shortfall
(or surplus) in financing and thereby bring the
statement of financial position into balance

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FINANCIAL PLANNING PROCESS

The planning process begins with sales forecast for the

next five or so years. Then the assets required to meet
the sales targets are determined, and decision is made
concerning how to finance the required assets. At that
point, income statements and statements of financial
position can be projected, and earnings per share, as
well as the key ratios can be forecasted.

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PROJECTED FINANCIAL STATEMENT METHOD

Determination of Financial Requirements

A. How much money the firm will need during a given
period
B. How much money the firm will generate internally
C. Subtracting the funds generated from the funds
required to determine the external financial
requirements

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PROJECTED FINANCIAL STATEMENT METHOD

The projected financial statement method is one simply

projects the asset requirements for the coming period,
then projects the liabilities and equity that will generated
under normal operations, and subtracts the projected
liabilities/capital from the required assets to estimate the
additional funds needed (AFN).

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STEPS OF PROJECTED FINANCIAL STATEMENT
METHOD
1. Forecast the Income Statement
2. Forecast the Statement of Financial Position
3. Raising the Additional Funds Needed
4. Consider financing feedbacks

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1. Forecast the Income Statement

1. Establish a sales projection

2. Prepare the production schedule and project the
corresponding production cost; direct materials,
direct labor, and overhead
3. Estimate selling and administrative expenses
4. Consider financing expenses, if any
5. Determine the profit

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2. Forecast the Statement of Financial Position

1. Project the assets that will be needed to support projected

sales
2. Project funds that will be spontaneously generated (through
accounts payable and accruals) and by retained earnings
3. Project liability and stockholders’ equity accounts that will
not rise spontaneously with sales (e.g. notes payable, long-
term bonds, preferred stock and common stock) but may
change due to financing decisions that will be made later.
4. Determine if additional funds will be needed by using the
following formula.
AFN = Required Increase in Assets-Spontaneous Increase in
Liabilities – Increase in Retained Earnings 20
3. Raising the additional funds needed

Financing decision will consider the following factors.

1. Target capital structure
2. Effect of short-term borrowing on its current ratio
3. Conditions in the debt and equity markets
4. Restrictions imposed by existing debt agreements

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4. Consider financing feedbacks

Consideration should be given on additional interest

expense in the income statement or dividends, thus
decreasing the retained earnings.

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ILLUSTRATION

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