Chapter14 - CHAPTER 14 Financial Forecasting, Planning, and...

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405 CHAPTER 14 Financial Forecasting, Planning, and Budgeting CHAPTER ORIENTATION This chapter is divided into two sections. The first section includes an overview of the role played by forecasting in the firm’s planning process. The second section focuses on the construction of detailed financial plans, including budgets and pro forma financial statements for future periods of the firm’s operations. A budget is a forecast of future events and provides the basis for taking corrective action and can also be used for performance evaluation. The cash budget and pro forma financial statements provide the necessary information to determine estimates of future financing requirements of the firm. These estimates are the key elements in our discussion of financial planning and budgeting. CHAPTER OUTLINE I. Financial forecasting and planning A. The need for forecasting in financial management arises whenever the future financing needs of the firm are being estimated. There are three basic steps involved in predicting financing requirements. 1. Project the firm’s sales revenues and expenses over the planning period. 2. Estimate the levels of investment in current and fixed assets which are necessary to support the projected sales level. 3.
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406 1. The percent of sales method involves projecting the financial variable as a percent of projected sales. 2. A slightly more refined technique involves the use of a scatter diagram in which the financial variable is plotted against corresponding levels of sales (or another predictor variable). A line is then visually fitted to the scatter plot and is used to predict the financial variable. 3. Regression analysis represents a method for mathematically "fitting" a line to a scatter plot. The resulting equation can then be used to predict the level of the subject financial variable. The regression method can be used whenever there is a single "predictor" variable (referred to as the independent variable , e.g., firm sales) and a single "predicted" variable (referred to as
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Chapter14 - CHAPTER 14 Financial Forecasting, Planning, and...

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