Financial Planning and Forecasting Financial
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 8 is really a problem, but one that can be discussed. Therefore, we
base our lecture primarily on the BOC model, ch08BOC-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 major components of the strategic plan include the firm’s
scope of its operations
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 senior executives.
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.
the financial statements are used to simulate the company’s operations
under different economic conditions and corporate strategic plans.
Since the strategic plan is necessarily somewhat nebulous, it is
sometimes neglected in practice on the grounds that it is difficult to
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
a. The sales forecast is the
of the financial plan.
Forecasted sales determine the amount of capacity needed, inventory
and receivables levels, profits, and capital requirements.
company forecasts its sales incorrectly, this can be disastrous, as
Cisco and Lucent learned recently.
We discuss sales forecasting in the BOC model.
b. 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.
c. See the BOC model for a detailed explanation.
project the assets that will be required to support the forecasted
Answers and Solutions:
8 - 1