Economic
Financial Management
Financial Planning and Forecasting
Key Chapter Concepts 1. Firms need to conduct two types of planning —strategic planning, and a subset, operational planning.
a. Strategic planning is long range in nature and deals with the overall direction of the firm.
b. Operational planning serves as a blueprint detailing where the firm wants to be at some future point in time and what resources are needed to get there. 2. Financial forecasting involves the estimation of the firm’s future needs for funds. Pro forma financial statements, i.e., balance sheets, income statements, and cash budgets, are an integral part of financial forecasting. They show the results of assumed events rather than actual events. 3. Cash flows are the ultimate source of financial value. Therefore, cash flow analysis and forecasting are important parts of a firm’s financial plans. 4. After-tax cash flow is equal to earnings after tax plus noncash charges. 5. The statement of cash flows shows the effects of a firm’s operating, investing, and financing activities on its cash balance. 6. The percentage of sales forecasting method is used in estimating the amount of additional financing that a firm will need for a given increase in sales, based on certain assumptions about the relationship between sales and the various asset and liability accounts.
A cash budget is the projection of a firm’s cash receipts and disbursements over a future time period and is useful in determining the amount of short-term funds the firm will need to borrow.
Financial Forecasting in the Telecom Industry: What Went Wrong?
The 1990’s technology boom saw investments of over $750 billion in telecom company stocks and bonds. Many companies built fiber -optic data transmission networks based on the expectation that demand (i.e., Internet traffic) would continue growing at extremely high rates. This led to massive overcapacity and plummeting prices in 2001 and 2002. It is estimated
Financial Planning and Forecasting
Key Chapter Concepts 1. Firms need to conduct two types of planning —strategic planning, and a subset, operational planning.
a. Strategic planning is long range in nature and deals with the overall direction of the firm.
b. Operational planning serves as a blueprint detailing where the firm wants to be at some future point in time and what resources are needed to get there. 2. Financial forecasting involves the estimation of the firm’s future needs for funds. Pro forma financial statements, i.e., balance sheets, income statements, and cash budgets, are an integral part of financial forecasting. They show the results of assumed events rather than actual events. 3. Cash flows are the ultimate source of financial value. Therefore, cash flow analysis and forecasting are important parts of a firm’s financial plans. 4. After-tax cash flow is equal to earnings after tax plus noncash charges. 5. The statement of cash flows shows the effects of a firm’s operating, investing, and financing activities on its cash balance. 6. The percentage of sales forecasting method is used in estimating the amount of additional financing that a firm will need for a given increase in sales, based on certain assumptions about the relationship between sales and the various asset and liability accounts.
A cash budget is the projection of a firm’s cash receipts and disbursements over a future time period and is useful in determining the amount of short-term funds the firm will need to borrow.
Financial Forecasting in the Telecom Industry: What Went Wrong?
The 1990’s technology boom saw investments of over $750 billion in telecom company stocks and bonds. Many companies built fiber -optic data transmission networks based on the expectation that demand (i.e., Internet traffic) would continue growing at extremely high rates. This led to massive overcapacity and plummeting prices in 2001 and 2002. It is estimated