Financial Forecasting and Planning Model

Financial Forecasting and Planning Model - 9/15/2009...

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9/15/2009 1 Financial Forecasting and Financial Planning Models Finance 4310 Hierarchy of Decision Making Strategic What Business to Be In? What Geographic Area to Operate / Market In? What Growth Rate? Decisions Tactical Decisions Aggregate Production Planning Inventory Policy Capacity Planning Financial Planning Operational Decisions Daily / Weekly Work Scheduling Quality Control
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9/15/2009 2 Financial Forecasts in the Hierarchy Most in the tactical decision area • Most in the tactical decision area. • Some in strategic decisions and operational decisions. • Financial forecasting for strategic decisions typically simpler than for tactical decisions Why Forecast? Firm must deal with uncertainty • Firm must deal with uncertainty. • Try to minimize the error term.
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9/15/2009 3 Minimizing the Forecast Error Actual Sales Time Series Forecast Naïve Forecast Uses of the Forecast Create Pro forma financial statement • Create Pro forma financial statements • Estimate future financing requirements • Sensitivity analysis
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9/15/2009 4 When does the firm need the most external funds, when it is losing money or when it is most profitable? The typical assumption is that funds • The typical assumption is that funds shortages result from low or negative profit low growth periods. In actuality, periods of high profits that are associated with high growth are often the times when the firm needs the most funds from outside. Example Year 1 Estimated Year 2 Sales $100,000 $200,000 5% NPM $ 5,000 $ 10,000 Asset Base Req’d (50% of Sales) $ 50,000 $100,000 Need an additional $50,000, only get an additional $5,000 from doubling profits from operations. The other $45,000 must come from outside the firm.
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9/15/2009 5 Steps in the Financial Forecasting Process 1. Forecast Sales 2. Estimate the asset base required to support the forecast sales. 3. Estimate the financing required for the change in asset base a. Internal financing b. External Financing 1. Short term debt 2. Long term debt 3. New equity The Percent of Sales Forecasting Technique Based on the assumption that many • Based on the assumption that many financial statement accounts maintain a relatively constant relationship to sales.
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Financial Forecasting and Planning Model - 9/15/2009...

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