7/28/2019 BF04ppt

1/7

Foundations of Financial Management Page 1

Chapter 4

Financial Forecasting

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Chapter 4 - Outline LT 4-1

What is Financial Forecasting?

2 Methods of Financial Forecasting

3 Financial Statements for Forecasting

Steps in a Pro Forma Income Statement(I/S)

Determining Production Requirements

Percent-of-Sales Method

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

What is Financial Forecasting? LT 4-2

Financial forecasting is looking ahead todevelop a financial plan for the future

Very important for the strategic growth of a

firm

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

2 Methods of Financial Forecasting: LT 4-3

Using Pro Forma, or Projected, FinancialStatements (more exact, time consuming)

Percent-of-Sales Method (less precise, easier

to calculate)

Often times these statements are required

by lenders

7/28/2019 BF04ppt

2/7

Foundations of Financial Management Page 2

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

3 Financial Statements forForecasting LT 4-4

Pro Forma Income Statement (I/S)

Cash Budget

Pro Forma Balance Sheet (B/S)

The first step is to develop a sales projection

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

PPT 4-1

FIGURE 4-1

Development

of pro forma

statements

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Steps in a Pro Forma

Income Statement (I/S)

Establish a sales projectionDetermine a production schedule (or

production requirements)

Compute other expenses

Determine profit by completing an actual

pro forma income statement (I/S)

LT 4-5

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

PPT 4-2

TABLE 4-1

Projected wheel and

caster sales (first six

months, 2005)

7/28/2019 BF04ppt

3/7

Foundations of Financial Management Page 3

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

PPT 4-3

TABLE 4-2

Stock of beginning

inventory

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

PPT 4-3

TABLE 4-3

Production

requirements for six

months

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

PPT 4-3

TABLE 4-4

Unit costs

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

PPT 4-3

TABLE 4-5

Total production costs

7/28/2019 BF04ppt

4/7

Foundations of Financial Management Page 4

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

PPT 4-3TABLE 4-6

Allocation of manufacturing costand determination of gross profits

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

PPT 4-3

TABLE 4-7

Value of ending

inventory

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

PPT 4-4

TABLE 4-8

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Steps in Cash Budget

Estimate cash sales and collection timing ofcredit sales

Forecast cash payments

Determine monthly cash flow

Construct cash budget

Determine cash excess or need forborrowing

7/28/2019 BF04ppt

5/7

Foundations of Financial Management Page 5

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

PPT 4-5

TABLE 4-9

Monthly sales pattern

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

PPT 4-5

TABLE 4-10

Monthly cast receipts

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

PPT 4-5

TABLE 4-11

Component costs of

manufactured goods

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

PPT 4-6

TABLE 4-12

Average monthly

manufacturing costs

7/28/2019 BF04ppt

6/7

Foundations of Financial Management Page 6

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

PPT 4-6

TABLE 4-13Summary of all monthly

cash payments

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

PPT 4-7

TABLE 4-14

Monthly cash flow

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

PPT 4-7

TABLE 4-15

Cash budget with borrowing and

repayment provisions

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

PPT 4-8TABLE 4-16

7/28/2019 BF04ppt

7/7

Foundations of Financial Management Page 7

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

PPT 4-9

FIGURE 4-2

Development

of a pro forma

balance sheet

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

PPT 4-10TABLE 4-17

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Percent-of-Sales Method LT 4-7

A short-cut, less exact, easier method ofdetermining financing needs (The quick and

dirty approach)

Assumes that B/S accounts will maintain a

constant percentage relationship to sales

Assets / Current Sales = % of Sales

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

PPT 4-11TABLE 4-18