Financial Forecasting

Financial Forecasting
What is Financial Forecasting?

• This is a financial projection that is made to
aid in any decision-making essential in
predicting the future performance of a
business.
Report By: Cristine Nunez

How is it Important?
• Failure to project the financial state of a
business makes you blind of what’s possibly
going to happen. That’s why it is beneficial to
conduct a regular business forecasting such as:

i. Annual Budget Planning
• What is annual budget?
- This is the budget that’s laid out for the
company’s expenditures for a year.
- This helps the business have its budget
balanced out with the expenses and
income/revenue of the company for a year.

ii. Establishing realistic business goals
• A precise projection will aid in determining
whether (& how much) your business will
expand or contract. As a result, you can
moderate your expectations and set goals that
are attainable and practical.

iii. Identifying problem areas
• Financial forecasting helps the business
identify its current problems by analyzing the
past performance of the business. Also, the
company can identify the problems by looking
out of what the future holds.

iv. Reduction of Financial risk
• Without financial forecasting, your business
may be at risk with overspending because you
do not have a concrete plan on where your
money should be going and you don’t have a
proper division of your finances.

v. Greater company appeal to attract
investors
• Investors rely on financial forecasts to predict
the future health of your company and the
potential Return on Investments (ROIs). Your
regular forecasts assures your investors that
you have a concrete plan for the future.

CATEGORIES OF FINANCIAL
FORECASTING
1. Sales Forecasting
• This is the process of predicting the amounts
of product/service you expect to sell within a
projected fiscal period
• Beneficial to the budgeting & planning
production cycles.
• Helps the business manage & allocate its
resources efficiently.

How to Forecast Sales?
i. Assess historical trends
- Examine your sales from the previous year
from a specific time period
- Look at your growth between months,
quarters, and years, and assume that those
percentages will carry forward as you
continue to grow your profit margins.

How to Forecast Sales?
ii. Incorporate changes
- After knowing the basic sales run rate, you
will modify it according to the changes you
see such as Pricing, Customers, Channels,
Product Changes.
iii. Anticipate Market trends
iv. Monitor competitors
Report By: Princess Decio

2. Cash Flow Forecasting
• This process refers to estimating the flow of
cash in and out of the company
• This is based on income and expenses
• This helps in estimating future sales because
this has something to do with your cash if it’s
enough to run the business or expand it
• This also helps in tracking if there’s more cash
going out of the business than in.

Why is it important to track the cash?
• It is important for a business to have enough
money to pay bills, purchase needs, and
business operations to make profit.
• It’s important for a business to know how well
it is generating cash and how much does it
have

3. Budget Forecasting
• This is a combination of forecasting and
budgeting
• This helps aligning goals of the organization and
plans for future development of the business
• This provides basis for a strategic business and
financial decisions that are realistic
• The managerial staff is responsible for the
forecast budget.

Budget vs Forecast
• Forecast is an estimate of what your business
might achieve
• It is a projection of what might actually
happen
• Generally restricted to revenue and expenses

Budget vs Forecast
• Budget sums up where you’d like your
company to be over a particular financial
period.
• It is a summary of your goals over the next few
months or even years.
• You will base your budget on your forecast

4. Income Forecasting
• This is the process of analyzing the company’s
past revenue performance and its growth rate
to estimate future income.

PRO FORMA STATEMENTS
What are Pro Forma Statements?
• This is used to project how the business will
be managing its assets in the future.
• This provides a numerical perspective of a
business’ financial position and performance
in future periods.

Report By: Adelyn Mainit
This provides a projection on
the anticipation of profits
over a subsequent period

Pro Forma Income Statement
• Four Important Steps:
1. Establish a sales projection.
 Let us assume that ABC Corporation’s two
primary products : wheels and casters

 Let us assume that ABC Corporation’s two
primary products : wheels and casters
Wheels Casters
Quantity...... 1,000 2, 000
Sales Price.... $30 $35
Sales Revenue.. $30,000 $70, 000
Total................................................. $ 100,
000
 STOCK OF BEGINNING INVENTORY
 Number of units produced will depend on beginning
inventory.
Wheels Casters
Quantity...... 85 180
Sales Price.... $16 $20
Sales Revenue.. $1,360 $3, 600
Total................................................. $ 4, 960
2. Determine a production schedule (use of
new material, direct labor, and overhead) to
arrive at gross profit.
 To determine the production requirements,
you need to take note of:
 Projected Unit Sales

 Desired Ending Inventory
 Beginning Inventory
 Units to be produced
2. Determine a production schedule to arrive at
gross profit.
 Production Requirements (for 6 months)
Wheels Casters
Projected unit sales 1, 000 2, 000
Desired ending inventory
(assumed to represent 10%
of unit sales) 100 200
Beginning inventory (85) (180)
Units to be produced 1, 015 2, 020
gross profit.
 Computing Unit Cost:
-Cost to produce each unit
Wheels Casters
Materials........................ $ 10 $ 12
Labor.............................. 5 6
Overhead....................... 3 4
Total .................... $ 18 $ 22

gross profit.
 Total Production Cost
Wheels Casters
Units to be produced..... 1,015 2,020
Cost per unit ................. $18 $22
Total Cost .................... $18, 270 $44, 440
Overall Total .............. $ 62, 710

gross profit.
 Cost of Goods Sold
-Cost associated with units sold during the
time period.
-FIFO (first-in, first-out) accounting is used,
wherein assets purchased or acquired first are
disposed of first. Then, the remaining
inventory consists of items purchased last.

gross profit.
Allocation of Manufacturing Cost and

Determination of Gross Profit
(shown next page)
Report By: Jericah Andaya

gross profit.
Value of Ending Inventory
Beginning inventory.............................. $ 4,960
Total production costs.......................... 62, 710
Total inventory available for sales......... 67, 670
Cost of goods sold................................ 61, 470
Ending Inventory.................................. $ 6, 200

3. Compute other expenses
 Must be subtracted from gross profits to arrive at net
profit.
 Earning before taxes
-General & administrative expenses, & interest expenses
are subtracted from gross profits.
 Aftertax income
-Taxes are deducted from the earning before taxes
 Contribution to retained earnings
- Dividends are deducted from aftertax income (earnings
after tax)
4. Determine profit by completing the actual Pro Forma
Statement
Sales Revenue............................................. $100, 000
Cost of goods sold...................................... 61, 470
Gross profit................................................. 38, 530
General & administrative expense.............. 12, 000
Operating profit.......................................... 26, 530
Interest Expense......................................... 1,500
Earnings before tax..................................... 25, 030
Taxes (20%)................................................. 5, 006
Earnings after taxes..................................... 20, 024
Common stock dividends............................ 1, 500
Increase in retained earnings...................... Report$18, 524 Andaya
By: Jericah
must be translated to cash flows.
-The long term is divided into
short-term
-This more precise time frames is
set to help anticipate the patterns
of cash inflows & outflows.

 CASH RECEIPTS
-In the case of ABC Corporation, the Pro
Forma Income Statement is taken for the first
half year (6 months)
-a careful analysis of the past sales and
collection record shows:
 20% of sales is collected in the month
 80% of the previous month’s sales

 CASH RECEIPTS
Dec Jan Feb Mar Apr May Jun
Sales $12,000 $15,000 $10,000 $15,000 $25,000 $15,000
$20,000
Collections:
(20% of
current sales) $3,000 $2,000 $3,000 $5,000 $3,000
$4,000
Collections:
(80% of the prev.
Month’s sales) $9,600 $12,000 $8,000 $12,000 $20,000
$12,000
Total cash receipts $12,600 $14,000 $11,000 $17,000 $23,000

$16,000
 CASH PAYMENTS
 Costs are incurred on an equal monthly basis
over a six-month period
 Sales volume varies each month
 Employment of level monthly production to
ensure maximum efficiency

 CASH PAYMENTS
 AVERAGE MONTHLY MANUFACTURING COSTS
Average
Total Cost Time Frame Monthly Cost
Materials................. $34,390 6months $5,732
Labor...................... 17,195 6months 2,866
Overhead............... 11,125 6months 1,854
Report By: Rodge Gallarde

 CASH PAYMENTS
 Summary of All Monthly Cash Payment

 ACTUAL BUDGET
-The difference between monthly receipts &
payments is the net cash flow for the month
-This allows the firm to anticipate the need for
funding at the end of each month.

 ACTUAL BUDGET
Monthly Cash Flow
Total receipts
Total payments
Net Cash Flow

 ACTUAL BUDGET
Cash Budget with Borrowing & Repayment
Provisions
We assume that the ABC

Company has a beginning cash
balance of $5,000 on January 1,
2010 and desires a minimum
Monthly ending cash balance of
$5,000

 ACTUAL BUDGET
Cash Budget with Borrowing & Repayment
Provisions

This represents the cumulative
changes over time.
-It’s important to examine the prior
period’s balance sheet
-Some accounts will remain unchanged,
while others take new values
-Info is derived from the pro forma
income statement and cash budget.
Development of a Pro Forma Balance
Sheet

Development of a Pro Forma Balance Sheet
Balance Sheet
December 31, 2009
Pro Forma Balance Sheet
June 30, 2010

Analysis of the Pro Forma Statement
• The $25,640 growth was financed by accounts

payables, notes payable, and profit.
Total Assets (June 30, 2010)..... $76,140

Total Assets (Dec. 31, 2009)..... $50, 500
Increase....................................... $25, 640

Financial Forecasting

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Financial Forecasting

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Financial Forecasting

What is Financial Forecasting?

Report By: Cristine Nunez

Report By: Cristine Nunez

Report By: Cristine Nunez

Report By: Cristine Nunez

Report By: Cristine Nunez

Report By: Cristine Nunez

Report By: Cristine Nunez

Report By: Cristine Nunez

Report By: Cristine Nunez

Report By: Princess Decio

Report By: Princess Decio

Report By: Princess Decio

Report By: Princess Decio

Report By: Princess Decio

Report By: Princess Decio

Report By: Princess Decio

Report By: Princess Decio

Report By: Adelyn Mainit

Report By: Adelyn Mainit

 Projected Unit Sales

Report By: Adelyn Mainit

Report By: Adelyn Mainit

Report By: Adelyn Mainit

Allocation of Manufacturing Cost and

Report By: Jericah Andaya

Report By: Jericah Andaya

Report By: Jericah Andaya

Report By: Jericah Andaya

Total cash receipts $12,600 $14,000 $11,000 $17,000 $23,000

Report By: Jericah Andaya

Report By: Rodge Gallarde

Report By: Rodge Gallarde

Report By: Rodge Gallarde

Net Cash Flow

Report By: Rodge Gallarde

We assume that the ABC

Report By: Rodge Gallarde

Report By: Rodge Gallarde

Report By: Rodge Gallarde

Report By: Rodge Gallarde

• The $25,640 growth was financed by accounts

Total Assets (June 30, 2010)..... $76,140

Report By: Rodge Gallarde

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