Financial Planning and Forecasting Financial Statements
ANSWERS TO BEGINNING-OF-CHAPTER QUESTIONS
We like to use discussion questions along with relatively simple and easy to follow calculations
for our lectures.
Unfortunately, forecasting is by its very nature relatively complex, and it simply
cannot be done in a realistic manner without using a spreadsheet.
Accordingly, our primary
“question” for Chapter 9 is really a problem, but one that can be discussed. Therefore, we base
our lecture primarily on the BOC model, ch09BOC-model, and we use the class period to discuss
forecasting and Excel modeling.
We cover the chapter in about 2 hours, and then our students
work a case on the subject later in the course.
The major components of the strategic plan include the firm’s
scope of its
specific (quantified) objectives
, and its
Engineers, economists, marketing experts, human resources people, and so on all
participate in strategic planning, and development of the plan is a primary function of the
Regional and world economic conditions, technological changes,
competitors’ likely moves, supplies of resources, and the like must all be taken into
The effects of all these forces, under alternative strategic plans, are analyzed by use of
forecasted financial statements.
In essence, the financial statements are used to simulate
the company’s operations under different economic conditions and corporate strategic
Since the strategic plan is necessarily somewhat nebulous, it is sometimes neglected
in practice on the grounds that it is difficult to quantify.
We can only note that if a
company doesn’t think about the direction in which its industry is going, it is likely to
end up in bankruptcy, as most bankruptcies occur because an inaccurate business plan.
The sales forecast is the
of the financial plan.
determine the amount of capacity needed, inventory and receivables levels, profits,
and capital requirements.
If a company forecasts its sales incorrectly, this can be
disastrous, as Cisco and Lucent learned recently.
We discuss sales forecasting in the
See the BOC model for a detailed explanation.
Essentially, we take the prior year’s
financial statements and then change them to reflect (1) changes in sales and (2)
policies that will affect things like the amount of inventories carried to support a
given amount of sales.
Answers and Solutions:
9 - 1