IE 5325 Advanced Economic Analysis Week 5: Projection of Financial Requirements
Business Planning <ul><li>Vision, mission, goals, objectives </li></ul><ul><li>Strategic plans </li></ul><ul><ul><li>Short...
Time Frame <ul><li>Next quarter </li></ul><ul><li>Next year </li></ul><ul><li>Three to five years </li></ul>
Why Financial Projections? <ul><li>Managers – help them plan </li></ul><ul><li>Investors – inform them </li></ul><ul><li>L...
Financial Projections <ul><li>Pro forma financial statements </li></ul><ul><ul><li>Income statement </li></ul></ul><ul><ul...
Pro Forma Income Statement <ul><li>Forecast sales (marketing) </li></ul><ul><li>Forecast costs </li></ul><ul><ul><li>Adjus...
Pro Forma Balance Sheet <ul><li>Short term </li></ul><ul><ul><li>Inventory adjustments </li></ul></ul><ul><ul><li>Payables...
Pro Forma Cash Flow <ul><li>Based on balance sheet, income statement </li></ul><ul><li>Working capital changes </li></ul><...
Cash Budgets <ul><li>Project receipts </li></ul><ul><li>Project disbursements </li></ul><ul><li>Time lags </li></ul><ul><l...
Operating Budget <ul><li>Projected unit sales (by product) </li></ul><ul><li>Projected sales price (by product) </li></ul>...
Estimating Techniques <ul><li>Parametric </li></ul><ul><ul><li>Estimate per unit (square feet) </li></ul></ul><ul><ul><li>...
Parametric Financial Estimates <ul><li>Estimate the big picture </li></ul><ul><ul><li>Sales levels and mix </li></ul></ul>...
Bottom-up Financial Estimates <ul><li>Start with big picture trends (corporate) </li></ul><ul><li>Subdivide the company al...
Forecasting Basics <ul><li>Time series (periodic) historical data </li></ul><ul><li>How much data is needed? </li></ul><ul...
Forecasting Techniques <ul><li>Smoothing (average, moving average, weighted average) </li></ul><ul><li>Curve fitting (line...
Sensitivity Analysis <ul><li>All assumptions are somewhat uncertain </li></ul><ul><li>Where uncertainty is large, effects ...
Chapter 5 Summary <ul><li>Making business decisions requires looking into the future, not just the past </li></ul><ul><li>...
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5325ch05.ppt

  1. 1. IE 5325 Advanced Economic Analysis Week 5: Projection of Financial Requirements
  2. 2. Business Planning <ul><li>Vision, mission, goals, objectives </li></ul><ul><li>Strategic plans </li></ul><ul><ul><li>Short term </li></ul></ul><ul><ul><li>Long term </li></ul></ul><ul><li>Financial effects of business plans </li></ul>
  3. 3. Time Frame <ul><li>Next quarter </li></ul><ul><li>Next year </li></ul><ul><li>Three to five years </li></ul>
  4. 4. Why Financial Projections? <ul><li>Managers – help them plan </li></ul><ul><li>Investors – inform them </li></ul><ul><li>Lenders – help them evaluate the big picture </li></ul>
  5. 5. Financial Projections <ul><li>Pro forma financial statements </li></ul><ul><ul><li>Income statement </li></ul></ul><ul><ul><li>Balance sheet </li></ul></ul><ul><ul><li>Cash flow statement </li></ul></ul><ul><li>Cash flow projections </li></ul><ul><li>Operating budget projections </li></ul>
  6. 6. Pro Forma Income Statement <ul><li>Forecast sales (marketing) </li></ul><ul><li>Forecast costs </li></ul><ul><ul><li>Adjust actual costs </li></ul></ul><ul><ul><li>Adjust percentage of sales </li></ul></ul><ul><ul><li>Forecast expenses </li></ul></ul><ul><li>Adjustments </li></ul><ul><ul><li>Dividends </li></ul></ul><ul><ul><li>Depreciation and taxes </li></ul></ul>
  7. 7. Pro Forma Balance Sheet <ul><li>Short term </li></ul><ul><ul><li>Inventory adjustments </li></ul></ul><ul><ul><li>Payables/receivables </li></ul></ul><ul><li>Long-term assets (business plan) </li></ul><ul><ul><li>Deduct depreciation, write-off, assets sold </li></ul></ul><ul><ul><li>Add capital investments, acquisitions </li></ul></ul><ul><li>Long-term debt </li></ul><ul><ul><li>Deduct scheduled payments </li></ul></ul><ul><ul><li>Add expected borrowing </li></ul></ul><ul><ul><li>Compute interest expense (income statement) </li></ul></ul>
  8. 8. Pro Forma Cash Flow <ul><li>Based on balance sheet, income statement </li></ul><ul><li>Working capital changes </li></ul><ul><li>Funds flow projections </li></ul>
  9. 9. Cash Budgets <ul><li>Project receipts </li></ul><ul><li>Project disbursements </li></ul><ul><li>Time lags </li></ul><ul><li>Net differences by period </li></ul>
  10. 10. Operating Budget <ul><li>Projected unit sales (by product) </li></ul><ul><li>Projected sales price (by product) </li></ul><ul><li>Projected cost of production </li></ul><ul><ul><li>Projected sales (by product) </li></ul></ul><ul><ul><li>Projected costs (material, labor, energy) </li></ul></ul><ul><li>Other costs </li></ul><ul><ul><li>Marketing, advertising, shipping, support </li></ul></ul>
  11. 11. Estimating Techniques <ul><li>Parametric </li></ul><ul><ul><li>Estimate per unit (square feet) </li></ul></ul><ul><ul><li>Based on parameters (style, quality) </li></ul></ul><ul><li>Bottom-up </li></ul><ul><ul><li>Estimate individual work packages </li></ul></ul><ul><ul><li>Add them up </li></ul></ul>
  12. 12. Parametric Financial Estimates <ul><li>Estimate the big picture </li></ul><ul><ul><li>Sales levels and mix </li></ul></ul><ul><ul><li>Pricing levels </li></ul></ul><ul><ul><li>Relative costs </li></ul></ul><ul><li>Adjust parameters accordingly </li></ul><ul><ul><li>Cost percentages </li></ul></ul><ul><ul><li>Margins </li></ul></ul>
  13. 13. Bottom-up Financial Estimates <ul><li>Start with big picture trends (corporate) </li></ul><ul><li>Subdivide the company along organizational lines </li></ul><ul><li>Each department provides budget projections </li></ul><ul><li>Add them up and do a sanity check </li></ul>
  14. 14. Forecasting Basics <ul><li>Time series (periodic) historical data </li></ul><ul><li>How much data is needed? </li></ul><ul><li>Is the data any good? </li></ul><ul><li>Problems </li></ul><ul><ul><li>Significant changes in business makeup </li></ul></ul><ul><ul><li>Changes in accounting practices </li></ul></ul><ul><ul><li>Bad or missing data points </li></ul></ul>
  15. 15. Forecasting Techniques <ul><li>Smoothing (average, moving average, weighted average) </li></ul><ul><li>Curve fitting (linear, non-linear) </li></ul><ul><li>Decomposition </li></ul><ul><ul><li>Trend </li></ul></ul><ul><ul><li>Seasonal </li></ul></ul><ul><ul><li>Cyclical </li></ul></ul><ul><li>Complex model (Box-Jenkins, ANN) </li></ul>
  16. 16. Sensitivity Analysis <ul><li>All assumptions are somewhat uncertain </li></ul><ul><li>Where uncertainty is large, effects should be explored </li></ul><ul><ul><li>Generate alternate scenarios (2 or 3) </li></ul></ul><ul><ul><li>Compute results based on alternate assumptions </li></ul></ul><ul><ul><li>Highlight results that change significantly </li></ul></ul>
  17. 17. Chapter 5 Summary <ul><li>Making business decisions requires looking into the future, not just the past </li></ul><ul><li>All projections or forecasts are based on assumptions </li></ul><ul><li>Short and long term business plans are the basis of these assumptions </li></ul><ul><li>Sensitivity analysis can shed light on the effects of uncertainty </li></ul>

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