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Financial Forecasting

Financial Forecasting - Financial Forecasting I Financial...

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Financial Forecasting I. Financial forecasting is used to estimate the additional financing that may be required in an upcoming period. Pro forma financial statements play an important part in the financial forecasting process. Pro forma financial statements project the results of an assumed or planned event. A. Percentage of sales forecasting assumes that most balance sheet items vary directly with sales and that the firm’s profit margin (Net Income/Sales) is constant. This approach uses the sales forecast to obtain estimates of changes in the other balance sheet accounts. B. Pro forma statements can also be used to determine how much additional financing firms will need in a future period. We are going to use a combination of these two methods to perform our financial forecasting: There are three steps to this process: 1. Determine what balance sheet accounts will change with the sales increase and how much that change will be. Usually all the current assets will change in proportion to the change in sales. Plant and equipment could either change directly with sales or they may increase by a specified amount. Current liabilities that are spontaneous (which means they did not have to be formally contracted to obtain) like accounts payable, wages payable and taxes payable will also increase directly with the sales increase. All other accounts will remain the same until steps 2 and 3. 2. Determine how much of the financing will be provided internally by retained earnings. Increased Forecasted retained = earnings after - Dividends (D) earnings tax (EAT) The difference between the total amount of financing needed and the amount that will provided by internal financing. This number is referred to as the additional funds needed
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