Premium Essay

Financial Forecasting

In:

Submitted By sam78
Words 624
Pages 3
A financial forecast is a financial plan or budget for a business. A financial forecast is derived by trying to estimate two things. These are the income that the business is expected to receive and the expenses that it is expected to have to pay. Of course, it is impossible to know for sure how much income a business will get or how much its expenses will be. However, it is possible to make educated guesses on these issues. These guesses make up a financial forecast.
While financial forecasts are not likely to be perfect, they are important. There are two main reasons why it is important for a business to engage in financial forecasting. First, financial forecasting allows a business to plan ahead. Imagine, for example, that you work for an airline. One of the major expenses that an airline incurs is the price of fuel. If you foresee that fuel costs will rise dramatically two years from now, you will want to take steps to raise revenues to offset the cost increases that you are predicting. Second, financial forecasting can be important if you think that your business is going to need loans or other inputs of capital from outsiders. For example, imagine that you are going to open a small business and that you need a loan to do so. You will need to have plausible financial forecasts that show when you believe that you will start to make a profit. Any bank will want to see such forecasts (and to analyze them) before they will be willing to risk lending you any money.
In these ways, financial forecasts are a vital ingredient in the planning process for any business, whether it be a start-up or an established firm.
The 6 Steps to Creating a Financial Forecasting Plan
1) Identify all sources of monthly income. Consider all sources of income such as salary, bonuses, dividends, alimony, child support, etc.
2) List all expenses. This might take a few tries

Similar Documents

Premium Essay

Financial Forecasting

...6t8t2011 Learning Objectives At the end of this chapter, you should be able to: a Explain the purpose and importance of financial a a a a a forecasting ldentify and explain the various forecasting techniques Prepare various budgets for a particular scenario in a firm Prepare proforma financial statements Provide suggestions as to the alternatives available to a firm when it faces cash shortfalls Explain the limitation of the percent of sales forecast method O$=lzl\drvtCal tnts L*\ I A Jr.,o'**=*fncnoJ ft". Vno$na+b or..a \2-, . 3f4h'+ evqz.-! +'to- Y,oi. + \'"1*t*OY*+hd T:^^ -f \t\ lrtoClrElorrai:r . b (r^r\" ar.L\^ra,Gba-t €€hsnae=a ,) y't*'f*tT M\ tjru6 rF'.t* ur$ntrut. L\r d/r*lPh$' *^-l ?. Shsr+-f-n^trt \* -c)eta-tV G"'''B-aj-r' s a-F$if* eaA^\ta-*' Bs\"F= 4 firrr,. ff^=l**fr .tfnn \a -, Eaz._-tfrd'ts' Csr.gtga'* fri" fT-"- F^ S.or*1 i* d-tfeult.$ora rtc-\s*ro$ €..Lt*l **1trU[r.i"'a b.r]tl"= qe- dtof,s+bs d^{t^rt: t aE- t*a I 6t8t2011 j t\uuru*a e\ocannrd ttur a br,ornaes w*r.s.^* Introduction an integral part of any planning process that is undertaken by all firms. Firms must make decisions today that will affect the firm in the future. It means thinking in advance about the future, and being able to devise alternative actions that can be implemented. It represents the firm's ability to respond to events that present itself in the future. ala^d-f\tt) . furzaa;}r..-g t...

Words: 293 - Pages: 2

Premium Essay

Financial Forecasting

...HealthCare Financial Management Financial Forecasting Case Study 31 U04A1 December 9, 2014 Mary Wilsie MBA 6273 Professor Wolfe In statistics, regression analysis is a statistical process for estimating the relationships among variables. It includes many techniques for modeling and analyzing several variables, when the focus is on the relationship between a dependent variable and one or more independent variables. More specifically, regression analysis helps one understand how the typical value of the dependent variable changes when any one of the independent variables is varied, while the other independent variables are held fixed. Most commonly, regression analysis estimates the conditional expectation of the dependent variable given the independent variables – that is, the average value of the dependent variable when the independent variables are fixed. In all cases, the estimation target is a function of the independent variables called the regression function. In regression analysis, it is also of interest to characterize the variation of the dependent variable around the regression function which can be described by a probability distribution. Regression analysis is widely used for prediction and forecasting, where its use has substantial overlap with the field of machine learning. Regression analysis is also used to understand which among the independent variables are related to the dependent variable, and to explore the forms of these relationships....

Words: 1195 - Pages: 5

Premium Essay

101 Financial Forecasting

...Financial Modelling and Forecasting Lecture 1 Introduction and Descriptive Statistics The need for forecasts    A forecast helps deal with an uncertain future by making decisions today No single forecasting method will lead to an accurate forecast. Forecasts can be wrong! “What’s the point of forecasting?”  A business requires predictions as inputs  E.g., Inventory, Personnel, Ordering, Production planning.  Governments require forecasts to guide monetary and fiscal policy Lecture 1 2 Lecture 1 1 Forecasting Considerations  Application to Finance  A sensible forecast allows proactive decisions to be made today  Without it, management decisions are reactive.      Need to ensure sales forecasts can actually be satisfied Eliminate bias Sometimes forecasting can be too difficult Correct model selection is an important factor  Financial management decisions are often classified into Investment and Financing The investment decision relates to the analysis and selection of ‘good’ assets  One critical input the CFO must consider are the future sales of a new project Financial analysts value a business by forecasting the future cash flows of the entire firm Lecture 1 4  The entire firm is a just collection of assets  Not all relationships are linear Lecture 1 3 Quantitative Forecasting  Example   Forecasts can be classified as quantitative or qualitative. Quantitative forecasting...

Words: 1730 - Pages: 7

Premium Essay

Economic Financial Forecasting

...Meghan Corvington February 29. 2016 EC492 Forecasting Prof. Orlowski PROBLEM SET #1 (Due date: February 29, 2016) Use the quarterly data base from the Federal Reserve Bank of St. Louis FRED provided to you in the EViews program to answer the following questions: 1. Choose the real US export of goods and services (REXPGS), real import of goods and services (RIMPGS) and disposable personal income (DPI) variables. View their descriptive statistics. Analyze skewness, kurtosis and volatility (measured by the coefficient of variation) of each of them. Discuss possible economic factors underlying the data asymmetry, kurtosis and relative volatility. In this example, all three variables are left skewed, while kurtosis is between 1.99 and 2.29 for each of the three variables. I measured volatility based on the standard deviation of the three variables. DPI is extremely volatile, while RIMPGS and REXPGS are not as volatile as DPI. It seems as if there is a strong correlation between the amounts of standard deviations compared to the kurtosis. There is a lack of asymmetry between the three variables, as there is no equivalence in various measurements. | |REXPGS |RIMPGS |DPI | | Mean | 747.1115 | 962.0551 | 4682.076 | | Median | 447.5000 | 636.0000 | 3400.400...

Words: 2014 - Pages: 9

Premium Essay

Financial Forecasting

...notes chapter 4 Financial Forecasting                           Author's Overview   Developing pro forma statements is a fairly involved process.  However, the rewards to students are high in terms of understanding the interaction of accounting data and financial forecasting.  The development of pro forma financial statements is an integrative exercise, so there is little reward for a halfway approach.   The percent-of-sales method, presented at the back of the chapter, is a second approach to financial forecasting. It has the virtue of being easily understood and quickly mastered, but it does not have  the full validity of developing pro forma statements.   It is really a matter of instructor preference.                                                                 Chapter Concepts   *          Financial forecasting is essential to the strategic growth of the firm.   *          The three financial statements for forecasting are the pro forma income statement, the cash budget and the pro forma balance sheet.   *          The percent-of-sales method may also be used for forecasting on a less precise basis.   *          The various methods of forecasting enable the firm to determine the amount of new funds required in advance.   *          The process of forecasting forces the firm to consider seasonal and other effects on cash flow.                                                Annotated Outline and Strategy   I.          Need for Financial Planning   ...

Words: 1382 - Pages: 6

Premium Essay

Financial Analysis and Forecasting for Kkd

...company’s growth seemed unstoppable and Krispy Kreme was able to beat Wall Street’s expectations. Krispy Kreme continued to outperform until 2004 when some accounting woes were brought to light and analysts starting noticing other anomalies that indicated that things were not quite as good as they seemed. The firm’s stock price quickly plummeted from its peak and lost more than 80 percent of its value in only 16 months. This case study focuses on the use of financial statement analysis, and other factors that an equity analyst would use to gauge the health of a firm, to help identify symptoms that demonstrate things where not as good as they seemed at Krispy Kreme. The report starts by introducing Krispy Kreme, their history, structure and strategy. We will then discuss Krispy Kreme's financials and other tell tales that were available to predict the demise of the firm. To wrap up the report we will conclude by summarizing all the signs that demonstrated things were amiss and answer the question: "Can financial statement analysis predict the future?" Krispy Kreme History Krispy Kreme began as a small business in Winston Salem, North Carolina in 1937 shortly after the company’s founder, Vernon Rudolph, purchased a doughnut recipe from a French chef from New Orleans. Krispy Kreme was initially a doughnut wholesaler that sold its products directly to supermarkets. Krispy Kreme doughnuts were such a hit with consumers that Rudolph decided to make them available at...

Words: 3525 - Pages: 15

Premium Essay

Financial Forecasting

...UNIT 3 FINANCIAL FORECASTING FOR BUSINESS TASK 1 Start-up costs are linked and associated with setting-up a business such as legal fees, purchasing of equipment, rented property deposit. Start-up costs means a different sort of costs, which a new business owner should get in so that the business can exist. Operating costs are expenses that relate to a business activities and they are divided into fixed and variable costs. Different businesses have different costs associated with them. Variable costs are expenses which keep changing in proportion to the activities of a business. Also they are one of the components in calculation of a total costs and they vary for example with the level of sales. Variable costa are the raw materials, labour of costs, machine maintenance and packaging. Fixed costs are expenses which do not vary with changes in production level or level of sales. For example the shop owner has to pay the shop rent whether how sales he has. Fixed costs are also water and electricity bills, insurance and business rate. JD Sports Plc is the one of the leading retailer of branded sportswear and fashion wear. JD Sports start the business in 1981 with one single shop in Bury, UK and today they have over 800 stores in four countries. Their revenue for 2014 is £ 1,330 892 000 which is higher than 2013 where the profit was £ 1 258 892 000.Operetaing expenses where fixed costs and variable costs are included for 2014 are £19.1 million which is quite higher than...

Words: 1698 - Pages: 7

Premium Essay

Financial Planning & Forecasting

...Introduction Financial forecasts are, quite simply, your forecast of how your business will perform financially over, say, the year ahead. Preparing forecasts will help you to assess your likely sales income, costs, external financing needs and profitability. Financial forecasts are essential if you need to raise money from a third party, such as a bank. But they also provide you with the means to monitor performance on, say, a monthly basis and thereby exercise effective financial control - arguably the second most important management function in running a business. Objectives The aim of this section is to help you to prepare financial forecasts. It will enable you to: • Understand costing and pricing; • Use break-even analysis as a way of setting sales targets; • Understand financial forecasting; and, • Assess working capital requirements. Assignment The purpose of these assignments is to ensure that you are able to prepare the necessary financial forecasts for your business. Satisfactory completion of the set of assignments will demonstrate that you know and understand how to: • Identify and calculate the financial outlines it will be necessary to prepare. • Calculate your own personal survival budget. • Determine the funding/materials requirements of starting in business. • Consider how you will take and keep effective financial control of the business. • Consider and plan to deal with...

Words: 4172 - Pages: 17

Premium Essay

Financial Planning and Forecasting Financial Statements

...Assignment Chapter 14 True/False Indicate whether the statement is true or false. __F__ 1. Pro forma financial statements, as discussed in the text, are used primarily to assess a firm's historical performance. __T__ 2. The first, and most critical, step in constructing a set of pro forma financial statements is the sales forecast. __T__ 3. A typical sales forecast, though concerned with future events, will usually be based on recent historical trends and events as well as on forecasts of economic prospects. __F__ 4. Errors in the sales forecast can be offset by similar errors in costs and income forecasts. Thus, as long as the errors are not large, sales forecast accuracy is not critical to the firm. __T__ 5. As a firm's sales grow, its current assets also tend to increase. For instance, as sales increase, the firm's inventories generally increase, and purchases of inventories result in more accounts payable. Thus, spontaneously generated funds arise from transactions brought on by sales increases. __T__ 6. The term "spontaneously generated funds" generally refers to increases in the cash account that result from growth in sales, assuming the firm is operating with a positive profit margin. __F_ 7. A rapid build-up of inventories normally requires additional financing, unless the increase is matched by an equally large decrease in some other asset. ((( Increase in liabilities to suppliers) __F__ 8. If a firm wants to maintain its ratios...

Words: 3155 - Pages: 13

Premium Essay

Forecasting

...Forecasting is an important aspect in today’s business world. Every day businesses strive or lose, depending on the successfulness and accurateness of their forecasting. For successful forecasting, the forecaster needs to have a clear understanding of the current business activities, past trends, and the company’s business strategy. Case 5 exhibits key principles on the way financial forecasting is done. Understanding the Financial Relationships of the Business Enterprise Forecasters use current information to predict the future business activities of the company. This information is found on the financial statements of the company. For example, the balance sheet provides a snapshot of the business’ assets, liabilities and equity at a specific point in time, whereas the incomes statement provides a view of the flow of costs during a specific time frame. Financial ratios measure the relationships between various items on the financial statements. By comparing various ratios with those of previous years, trends can be identified. Because many financial ratios tend to be perserved over time, these ratios are very valuable for the forcaster. The forecaster can estimate only one financial statement line item and, by applying this number to the various ratios, he can make a complete forecast. Grounding Business Forecasts in the Reality of the Industry and Macroenvironment An accurate forecast is made by recognizing not only internal data, but also external data. The environment...

Words: 510 - Pages: 3

Premium Essay

Supply Chains Design

...Supply Chains Design Paper OPS/571 Supply Chains Design Paper Riordan Manufacturing is a company owned by Fortune 1000 Riordan Industries, Inc. The company is a leader is manufacturing plastic with customers which “include automotive parts manufacturers, aircraft manufacturers, the Department of Defense, beverage makers and bottlers, and appliance manufacturers”(Riordan, 2005.) A review of Riordan Manufacturing will include the company’s manufacturing strategy, process flow chart for the electric fan supply, metrics to evaluate the electric supply chain, and how the supplier relationship and the effects on the supply chain. Additionally, the review will also explain the lean production schedule, forecasting techniques, aggregate production plan, master schedule, and materials requirement schedule. Riordan Manufacturing Strategy The manufacturing strategy which best fits Riordan’s manufacturing strategy is a stable workforce. Stable workforce is the best manufacturing strategy because “it schedules production of fans to meet the forecasted sales and the forecast is calculated by taking the average of sales for the last three years and extrapolating it into the next year” (Riordan, 2005). Another indication can be found in the employee turnover report for 2009-2012. The percentage of involuntary separations decreased from 3.4% in 2009 to 2.0% in 2012. The decrease in involuntary turnovers indicates maintenance of a stable workforce. The stability of the workforce benefits...

Words: 1957 - Pages: 8

Premium Essay

Distribution and Channel Managemet

...Distribution and Channel Management MT211 The main aim of my essay is to show my understanding of the main principles and concepts of distribution and channel management through the use of notes on Moodle, information I gathered from attending lectures and also from literature that I have read on this topic. The Supply Chain is the sequence of suppliers that contribute to the creation and delivery of a good or service to end customers, meanwhile Supply Chain Management is organizing the cost effective flow and storage of materials, in-process inventory, finished goods and related information from point of origin to point of consumption to satisfy customer requirements. A major element of the supply chain is the use of logistics which is the management of the storage and flow of goods, services and information throughout your organisation. Logistics can be broken down into three major elements, Firstly, materials management which is the sourcing and receiving of raw materials or unfinished products for subsequent use. Secondly, material flow system which can be defined as the ability to locate and schedule material through to end production and disposition, and finally the physical distribution which is the delivery of finished goods to customers. The main aim of a supply chain management is to evolve a company’s supply chain into an optimally efficient, customer-satisfying process, where the effectiveness of the whole supply chain is more important than the effectiveness of...

Words: 1718 - Pages: 7

Premium Essay

Individual Assignment

...Forecasting Forecasting is one of the most important business functions because all other business decisions are based on a forecast of the future. Poor forecasting results in incorrect business decisions and leaves the company unprepared to meet future demands. The consequences can be very costly in terms of lost sales and can even force a company out of business. Forecasts are so important that companies are investing billions of dollars in technologies that can help them better plan for the future. For example, the ice-cream giant Ben & Jerry’s have invested in business intelligence software that tracks the life of each pint of ice cream, from ingredients to sale. Each pint is stamped with a tracking number that is stored in an Oracle database. Then the company uses the information to track trends, problems, and new business opportunities. They can track such things as seeing if the ice-cream flavor Chocolate Chip Cookie Dough is gaining on Cherry Garcia for the top sales spot, product sales by location, and rates of change. This information is then used to more accurately forecast product sales. Numerous other companies, such as Procter & Gamble, General Electric, Lands’ End, Sears, and Red Robin Gourmet Burgers, are investing in the same type of software in order to improve forecast accuracy. (R. Dan Reid & Nada R. Sanders, 2009) It is not possible to accurately forecast the future. Because of the qualitative nature of forecasting, a business can come up with different...

Words: 1886 - Pages: 8

Premium Essay

The Hr Planning Process

...HR Plan-08s The HR Planning Process I. HR Forecasting: Meaning II. Forecasting Activity Categories III. HR Forecasting Time Horizons IV. Determining Net HR Requirements I. HR Forecasting: Meaning HR forecasting constitutes the heart of the HR planning process. It can be defined as ascertaining the net requirement for personnel by determining the demand for and supply of human resources now and in the future. After determining the demand for and supply of workers, the organization's HR staff develop specific programs to reconcile the differences between the requirement for labour in various employment categories and its availability, both internally and in the organization's environment. Programs in such areas as training and development, career planning, recruitment and selection, managerial appraisal, and so on are all stimulated by means of the HR forecasting process. II. Forecasting Activity Categories Forecasting activity can be subdivided into three categories: • transaction-based forecasting, • event-based forecasting, and • process-based forecasting. # Transaction-based forecasting analyses focus on tracking internal change instituted by the organization's managers. # Event-based forecasting is concerned with change in the external environment. # Process-based forecasting is not focused on a specific internal organizational event but on the flow or sequencing of several work activities (e.g., the warehousing shipping process)...

Words: 2305 - Pages: 10

Free Essay

Economic Theory

...Discussion Questions: 1,7, and 15 1: (a) What is forecasting? Why is it so important in the management of business firms and other enterprises? (b) What are the different types of forecasting? (c) How can the firm determine the most suitable forecasting method to use? a) Forecasting is used to try and predict the economic activity of a firm’s future. It aims to reduce risk/uncertainty that is faced in the short-term operational decision making. It is also used to plan for the firm’s long-term growth. Forecasting helps make decisions by using macroforecasts of the general economic activity as inputs for their microforecasts of the industry’s and firm’s demand and sales. Forecasting helps decide a firm’s marketing strategy, production needs, sales forecast, and helps predict financial needs such as cash flow, profits, and outside financing. Furthermore, it helps make personal based decisions, as well as assist for the long-term future of the firm (Salvatore, 2012). b) Forcasting types range from expensive to inexpensive, as well as simple to complex. Forecasting techniques can be qualitative, and others can be quantitative. Salvatore focuses on qualitative forecasts. These forecasts include: time-series, smoothing techniques (moving averages), barometric forecasts with leading indicators, econometric forecasts, and input-output forecasts. c) A firm determines the most suitable forecasting method to use by using the following criterion: ...

Words: 2521 - Pages: 11