MAT 540 FORECASTING

# MAT 540 FORECASTING - Forecasting 1 Learning Objectives The...

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1 Forecasting

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2 Learning Objectives Learning Objectives The importance of forecasting to business success. The financial forecasting process. Preparation of pro forma financial statements. The importance of analyzing forecasts.
3 Why is forecasting important? Why is forecasting important? If you produce too much of a product, or a product that no one wants to buy, you still must pay for materials , labor, and storage. If you produce too little of a product, you will lose sales and possibly market share. Mistakes are costly:

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4 Forecasting Approaches Forecasting Approaches Experience Probability Correlation Financial managers concentrate on three general approaches to financial forecasting:
5 Experience Experience Managers who have been in the business for a long time have developed a sense for the patterns in sales, expenses, consumer demand factors, etc. Example: Editors who work for book publishers regularly read submitted manuscripts and make judgements about whether their company should buy the rights to publish the books.

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6 Probability Probability Past history often tells us a lot about what will happen in the future. Managers can use this information to estimate the future. Example: In the past, a 7-11 manager has found that she will lose 1% of candy inventory to shoplifters. She can use this information to estimate future losses and also to design better controls.
7 Correlation Correlation Correlation is a measure of the relative movement of two variables relative to each other. Example: If interest rates go up, a real estate agent knows that home sales will tend to fall (because the higher cost of financing makes it harder for buyers to qualify for mortgages). Example: Sales of umbrellas are higher in rainy seasons.

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8 Finance Department The Sales Forecasting Process The Sales Forecasting Process Marketing (sales estimate) Top Management (policy, strategy) Production (capacity, schedules) Accounting (financial statements, depreciation, taxes) SALES SALES FORECAST FORECAST
9 94 95 96 97 98 99 00 01 02 03 Time Sales Plot of Past Sales Forecast future sales based on past sales growth

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10 94 95 96 97 98 99 00 01 02 03 Time Sales Forecast future sales based on past sales growth Trend Line
11 94 95 96 97 98 99

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## This document was uploaded on 05/10/2011.

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MAT 540 FORECASTING - Forecasting 1 Learning Objectives The...

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