Financial Projection
financial projection essential element of planning that is the basis for budgeting activities and estimating future financing needs of a firm. Financial projections (forecasts) begin with forecasting sales and their related expenses. The basic steps in financial forecasting are: (1) project the firm's sales; (2) project variables such as expenses and assets; (3) estimate the level of investment in current and fixed assets that is required to support the projected sales; and (4) calculate the firm's financing needs. The basic tools for financial forecasting include the percent-of-sales-method, regression analysis , and financial modeling.
Financial Forecasting
Financial Forecasting describes the process by which firms think about and prepare for the future. The forecasting process provides the means for a firm to express its goals and priorities and to ensure that they are internally consistent. It also assists the firm in identifying the asset requirements and needs for external financing.
For example, the principal driver of the forecasting process is generally the sales forecast. Since most Balance Sheet and Income Statement accounts are related to sales, the forecasting process can help the firm assess the increase in Current and Fixed Assets which will be needed to support the forecasted sales level. Similarly, the external financing which will be needed to pay for the forecasted increase in assets can be determined.
Firms also have goals related to Capital Structure (the mix of debt and equity used to finance the firms assets), Dividend Policy, and Working Capital Management. Therefore, the forecasting process allows the firm to determine if its forecasted sales growth rate is consistent with its desired Capital Structure and Dividend Policy.
The forecasting approach presented in this section is the Percentage of Sales method. It forecasts the Balance Sheet and Income Statement by assuming that most accounts maintain a fixed proportion of Sales.
Financial Forecasting
Financial Forecasting describes the process by which firms think about and prepare for the future. The forecasting process provides the means for a firm to express its goals and priorities and to ensure that they are internally consistent. It also assists the firm in identifying the asset requirements and needs for external financing.
For example, the principal driver of the forecasting process is generally the sales forecast. Since most Balance Sheet and Income Statement accounts are related to sales, the forecasting process can help the firm assess the increase in Current and Fixed Assets which will be needed to support the forecasted sales level. Similarly, the external financing which will be needed to pay for the forecasted increase in assets can be determined.
Firms also have goals related to Capital Structure (the mix of debt and equity used to finance the firms assets), Dividend Policy, and Working Capital Management. Therefore, the forecasting process allows the firm to determine if its forecasted sales growth rate is consistent with its desired Capital Structure and Dividend Policy.
The forecasting approach presented in this section is the Percentage of Sales method. It forecasts the Balance Sheet and Income Statement by assuming that most accounts maintain a fixed proportion of Sales.