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1. Introduction to Financial Forecasting
   1. Financial forecasting should be one of the main concerns of a financial manager. More often than not, failing to engage in financial forecasting is the downfall of many businesses. Management should spend time planning for growth and developing a comprehensive financial plan. These methods are ____ and the ____( Critical Concept ). See Slide 2 Methods of Financial Forecasting (45.0K) .
   2. Pro Forma Financial Statements. These statements are the best method to use in financial forecasting. They are a set of projected financial statements based on historical firm data, current firm data and future firm and economic conditions. Using pro forma statements allows the financial manager to estimate its future needs for financing, expected levels of assets and cash position. Potential lenders of financing to the business firm also require pro forma financial statements in order to get some picture of the firm's future. The three major pro forma statements are ____, ____ and ____( Critical Concept ). These statements are based on the Generally Accepted Accounting Principles established by the Financial Accounting Standards Board (FASB).
2. Pro Forma Income Statement
   1. Establish a sales projection. This is the first step in developing a pro forma income statement. Based on both historical and anticipated sales, the financial manager must project sales in to the future. Here's an interesting article on building a realistic sales forecast.
   2. Determine A Production Schedule and Gross Profit. Based on the sales forecast, the financial manager has to calculate how much production will be needed of the product( Critical Concept ).
   3. Determine Cost of Goods Sold and Other Expenses. Cost of good sold is usually a variable cost that changes with production. When you have your sales forecast and production requirements, you can then compute cost of goods sold. The three variables that make up cost of goods sold are ____. ____ and ____( Critical Concept ). Other expense items, such as selling and administrative expenses, may not be tied to sales but have to be subtracted out in order to arrive at net profit.
   4. Determine net income. After taking the first three steps, you are now ready to determine net income by developing the pro forma income statement. See Slide Steps in a Pro Forma Income Statement (54.0K) .
3. Cash Budget
   1. Why do we need a cash budget? Financial managers must be able to determine their inflows and outflows of cash each month in order to keep a minimum amount of cash on hand and plan ahead for borrowings. The cash budget allows us to translate accounting entries in to cash flows. See Slide 18 (50.0K)
   2. Cash receipts.A firm's cash receipts are its ____( Key Term ). Cash receipts include what the firm actually collected as cash each month, not what it sold.
   3. Cash Payments. Cash payments are what the firm has paid out to creditors, including payments for materials purchased for manufacturing and plant and equipment.
   4. The Cash Budget. The primary purpose of the cash budget is ____( Critical Concept ). The format of the cash budget allows the financial manager to determine firm needs on a month- by-month basis( Critical Concept ). Here is an article devoted to sales forecasting and development of the cash budget.
4. Pro Forma Balance Sheet
   1. Use the prior time period's balance sheet. In developing the pro forma cash budget, use the prior time period's balance sheet as the starting place. Some of the accounts, perhaps like common stock or bonds, will not change.
   2. Use the pro forma income statement and cash budget. Cash, for example, can come from the firm's cash budget. Inventory will come from the production schedule. Accounts receivable and accounts payable will come from the cash budget.
5. Percent of Sales Method
   1. An alternative to pro forma statement development. The percent of sales method of forecasting is an alternative to pro forma statement development. In the percent of sales method, we show the relationship between ____ and ____( Critical Concept ). The percent of sales method does not show the level of detail that a financial manager may need to forecast future financial needs but is more of a broad-brush approach. See Slide Percent of Sales Method (49.0K) .
   2. Required New Funds. We use an equation to arrive at the required new financing needed if our sales go up or down( Critical Concept ).