Financial Planning & Forecasting (PowerPoint PPT Slide Deck)

Financial Planning & Forecasting

Lecture Outline
1. Additional Funds Needed (AFN) formula
2. Sales forecasts
3. Financial Planning
4, Pro Forma Financial Statements
5. Steps in Financial Forecasting
6. AFN (Additional Funds Needed): Key Assumptions
7. Projecting Pro Forma Statements with the Percent of Sales Method
8. Sources of Financing Needed to Support Asset Requirements
9. Implications of AFN
10. How to Forecast Interest Expense
11. Basing Interest Expense on Debt at End of Year
12. Basing Interest Expense on Debt at Beginning of Year
13. Basing Interest Expense on Average of Beginning and Ending Debt
14. A Solution that Balances Accuracy and Complexity
15. Assumptions about How AFN Will Be Raised
16. How will the AFN be financed?
17. Forecasted Ratios
18. What are the forecasted free cash flow and ROIC?
19. Economies of Scale
20. Lumpy Assets

Financial Planning and Forecasting is the estimation of value of a variable or set of variables at some future point. A Forecasting exercise is usually carried out in order to provide an aid to decision – making and planning in the future.

Business Forecasting is an estimate or prediction of future developments in business such as Sales, Expenditures and profits. Given the wide swings in economic activity and the drastic effects these fluctuations can have on profit margins, business forecasting has emerged as one of the most important aspects of corporate planning. Forecasting has become an invaluable tool for business to anticipate economic trends and prepare themselves either to benefit from or to counteract them. Good business forecasts can help business owners and managers adapt to a changing economy.

Financial planning and forecasting represents a blueprint of what a firm proposes to do in the future. So, naturally planning over such horizon tends to be fairly in aggregative terms. While there are considerable variations in the scope, degree of formality and level of sophistication in financial planning across firms, we need to focus on common elements which include Economic assumptions, Sales forecast, Pro forma statements, Asset requirements and the mode of financing the investments.
In general usage, a financial plan can be a budget, a plan for spending and saving future income. This plan allocates future income to various types of expenses, such as rent or utilities, and also reserves some income for short-term and long-term savings. A financial plan can also be an investment plan, which allocates savings to various assets or projects expected to produce future income, such as a new business or product line, shares in an existing business, or real estate.

Financial forecast or financial plan can also refer to an annual projection of income and expenses for a company, division or department. A financial plan can also be an estimation of cash needs and a decision on how to raise the cash, such as through borrowing or issuing additional shares in a company.