Session:18 Financial Forecasting
Summary
Principles of Finance | Leadership Development – Micro-Learning Session
Rice University 2020 | Michael Laverty, Colorado State University Global Chris Littel, North Carolina State University| https://openstax.org/details/books/principles-finance
18.1 The Importance of Forecasting
Forecasting financial statements is important to different users for different reasons. In finance, it’s most important for assessing the value of future growth plans and planning for future cash flow needs.
18.2 Forecasting Sales
The sales forecast is the foundation on which much of the rest of the forecast is built. Thus, the sales forecast is completed first. Historical sales data and any other information on the firm, its products, the economy, its customers, and its competitors are all used to create the most accurate sales forecast possible.
18.3 Pro Forma Financials
Pro forma financial statements are forward looking in nature. They use the sales forecast, historical data, financial statement analyses, relationships between accounts and statements, and any other information known about the firm, the environment, and the future to create the most accurate financial statement forecast possible.
18.4 Generating the Complete Forecast
Interrelationships among historical data, the forecasted income statement, and the forecasted balance sheet are all used to estimate each line item in the financial statements.
18.5 Forecasting Cash Flow and Assessing the Value of Growth
Once the income statement and balance sheet forecasts are complete, data from those statements, information on company policies, and account relationships are used to generate a cash forecast. The cash forecast is important for identifying any gaps in cash flow so that financial managers can plan for cash needs. It’s also important to review not only the cash forecast but all forecasted financial statements to assess the overall impact and value of proposed firm growth.
18.6 Using Excel to Create the Long-Term Forecast
Excel can be a powerful tool for creating financial forecasts. Formulas that complete mathematical functions and tie accounts and financial statements together are used to create the statements, ensure that they balance, and facilitate scenario and sensitivity analyses.