1. Financial Forecasting
& its Related Problems
Submitted By:
Sagar Gulabani
Samir Kumar
Agarwal
Shah Dhwani
Shailesh Kumar
Pandey
Sonal Misra

2. Introduction
 Financial planning indicates a firm‟s
growth, performance, investments and
requirements of funds during a given
period of time, usually three to five years.
 It involves the preparation of projected or
pro forma profit and loss
account, balance sheet and other
statements.
 Financial planning help a firm‟s financial
manager to regulate flows of funds which
is his primary concern.

3. Financial Planning
Financing planning process involves the
following facets:
 Evaluating the current financial condition of the firm.
 Analyzing the future growth prospects and options.
 Appraising the investment options to achieve the stated growth
objective.
 Projecting the future growth and profitability.
 Estimating funds requirement and considering alternative
financing options.
 Comparing and choosing from alternative growth plans and
financing options.
 Measuring actual performance with the planned performance.

4. Financial Forecasting and
Modeling
•Financial forecasting is a planning process with
respect to company‟s management positions, the firm‟s
future activities relative to the expected
economic, technical, competitive and social
environment.
•A financial planning model establishes the relationship
between financial variables and targets, and facilitates
the financial forecasting and planning process.
•A financial planning model has the following three
components:
Inputs
Model

5. Financial Forecasting
Prior Balance
Sheet
Sales Production Pro forma Pro forma
plan Income Balance
Projection Statement Sheet
Cash
Budget

6. Three major Techniques of
Financial Projections:
1.Proforma Financial Statements
2.Cash Budgets and
3.Operating Budgets
 Sales Budget
 Production Budget

7. Proforma Financial Statements
 A comprehensive look at the likely
future financial performance.
 Pro forma Income Statement.
(Represents the operational plan for
the whole organization.)
 Pro forma Balance sheet. (Reflects
the cumulative impact of anticipated
future decisions).

8. Preparation of
Pro Forma Income Statements
Percent of Sales Method
 Assumes that future relationship between various
elements of cost to sales will be similar to their
historical relationships.
 These cost ratios are generally based on the
average of previous two or three years.
 For example, Cost of Goods sold may be
expressed as a percentage of Sales.

9. 2. Budgeted Expense
Method.
 Estimate the value of each item on the basis of
expected developments in the future period for
which the pro forma P&L a/c is being prepared.
 Calls for greater effort on the part of
Management, since they have to define the likely
happenings.

10. 3. Combination method
 Neither the Percent of sales method nor the
Budgeted expense method should be used in
isolation.
 A combination of both methods work best.
 Items which have stable relationship to sales can
be forecasted using the Percent of sales method.
 For items where the future is likely to be very
different from the past, budgeted expense method
can be used.

11. Proforma Income Statement
Actual figures Assumptions Proforma for
for Quarter 31- the qr ended
3-2006 30-6-2006
1.No.of units sold 14000 Sales decline 30% 9800
due to low demand.
2.Net Sales 140000 No change in 98000
100% Product mix. 100%
3.Cost of Goods
sold:
4.Labour 22960 20% of Cost of good 16366
5. Materials 25256 22% of COG 18002.6
6.Distribution 4592 4% of COG 3273.2
cost 61992 44188.2
7. Overhead 114800 54% of COG 81830
8. Total
9. Ratio of CGS 82.0% Increase by 1.5% 83.5%
to Sales. 25200 16170
10. Gross Profit 18% 16.5%
11. GP Margin

12. Contd.
Actuals Assumption Proforma
12. Expenses:
13. Selling 8250 A drop of Rs. 7500
Expenses 4450 750 . 3600
14. Admin. Expense Nil A drop of Rs. Nil
15. Others 12700 850 11100
16.Total 12500 5070
17. Operating Profit 2500 2000
18. Interest 2000 2000
19. Depreciation 7000 Rs.2000 only 1070
20.PBT 2100 321
21. Tax @ 30% 4900 749
22.Net Income 900 0
23.Dividends 4000 749
24.Retained No dividends
earnings. 6000 Carried to B/s. 2749
25. Cash flow after
dividends. Retained earning
+ Depreciation

13. Pro forma Balance sheet only to explain not to be included.
 Projections for Balance sheet can be made as
under:
1. Employ Percent of Sales method to project items
on the asset side, except “Investments” and
“Misc Exp & Losses”.
2. Expected values for Investment and Misc exp
can be estimated using specific information.
3. Use Percent of sales method to project values of
current liabilities and Provisions. (Also referred to
as „spontaneous liabilities‟)
4. Projected values of R & S can be obtained by
adding projected retained earnings from P&L
proforma statement.

14. B/S Contd..
5. Projected value for Equity and preferential capital
can be set tentatively equal to their previous
values.
6. Projected values for loan funds will be tentatively
equal to their previous level less repayments or
retirements.
7. Compare the total of asset side with that of
liabilities side and determine the balancing figure.
(If assets exceed liabilities, the balancing figure
represents external funding requirement. If
liabilities exceeds Assets, the balancing item
represents „surplus available funds‟ )

15. PROFORMA BALANCE SHEET.
Actual Assumptions Proforma Change
for
June
LIABILITIES:
A. CAPITAL 6500 Issue of 7000 +500
B. R& S.(C+D) 4500 shares Rs.500 5250 +750
C. RESERVES 500 500 0
D. P&L 4000 P&L account. 4750 +750
Balance 11000 12250 +1250
E. Total share
holders
funds. 7500 7500 0
F. Total Debt 18500 19750 +1250
G. Total
Liabilities
(E+F)

16. Proforma Balance sheet contd..
Actuals Assumptions Proforma Change
ASSETS;
H. GROSS BLOCK (I+j) 24000 23000 -1000
I. LAND
j. Plant & Machinery 3000 No change 3000 0
K. LESS DEPRECN. 21000 Sale of 1000 20000 -1000
L. NET BLOCK (J-K) 10000 Depreciation of 9500 -500
M. CURRENT ASSETS 11000 9500 10500 -500
(N+O) 14500 16000 +1500
N. INVENTORIES
O. CASH. 10500 12500 +2000
Less: 4000 Increase by 2000 3500 -500
P. CURRENT Maintain CB of
LIAILITIES. 5000 3500 4000 -1000
Q. Provisions
R. Net current assets 2000 Decrease by 1000 2000 0
(M-P-Q) 7500 10000 +2500
s. Total assets (L+R)
t. Additional funds 18500 20500 +2000
required.

17. Other Proforma Statements
Cash Budget Operating Budget
Sales Budget Production Budget
Subjective
Objective Method
Method
Sales Force Regression
Executive Trend Analysis
estimate Analysis
Opinion
1st Factor Population
2nd Factor economic
dev
3rd Factor Seasonal
Variation
4th Factor Erratic events

18. Cash Budget
 Prepared every month or every week.
 Helps in deciding the minimum
amount of cash that can be kept to
allow timely payments of obligations.
 Shows the cash needs or excess.

19. Techniques of Sales
Forecasting
1.Subjective Methods ( based on the
opinions or judgments of knowledgeable
individual within the organization- sales
force to executives)
 Jury of executive opinion
 Sales force estimates
2. Objective Methods
 Trend Analysis Via Extrapolation
 Regression analysis

20. Trend Analysis
While doing trend analysis, the analyst must keep in mind
that the time series of a product‟s past sales is made up of
four major factors:
 Long-term trend- result of basic developments in population,
capital formation and technology
 Cycle-movements of sales as a result of swings in general
economic activity, which tends to be somewhat periodic.
 Seasonal variations- climatic factors, holidays, etc.
 Erratic events- strikes, riots, earthquakes and other natural
calamities.

21. Growth and External
Financing
Requirement
New Investment = growth rate X initial
assets
XYZ Co. started with Rs. 15,00,000 of
fixed
assets and working capital and forecasts a
growth of 10 percent.
What is the required addition to its assets?

22. External Financing
Requirement
EFR = A (ΔS) less L (ΔS) less mS1 (1-d)
S S
Where,
EFR = external financing requirement
A/S = current assets and fixed assets as a proportion of
sales
(ΔS) = expected increase in sales
M = net profit margin
S1 = projected sales for next year
D = dividend payout ratio
L/S = spontaneous liabilities as a proportion of sales

23. Or
EFR = A less L less m (1+g) (1-d)
(ΔS) S S g
Where, g is the growth rate in sales
Example
XYZ Company has the following ratios:
A/S 0 8 ΔS Rs lakh 0 3 = 0.8, =Rs. 5 lakh,
L/S =0.3, m= 0.05, S1= Rs. 50 lakh, and d
= 0.4
Solution:
EFR = (0.8) (5) –(0.3) (5) – (0.05) (50)
(0.6) = Rs.1 lakh

24. The equation highlights that :
External financing depends on the firm‟s
projected growth in sales. Faster growth
more needs in investments more needs
to raise new capital. The firm should use
new securities for new investment.
Low growth less needs in investments
(can be through retained earnings)
external funds is negative (surplus is used to
pay off debt)
Growth rate is zero no needs of new
capital all retained earnings are surplus

25. Sustainable Growth Rate
Though having desire to grow, a firm may resist
to raise external equity due to various reason
like: High issuing cost and Unacceptable
dilution
of control etc. In this case the rate of growth
which it can achieve without resorting to issue
of
external equity is calculated as below:
m(1-d) A/E
g=
A/So – m(1- d) A/E

26. Assumptions:
The assets of the firm will increase
Proportionally to sales
Net profit margin is constant
Dividend-payout ratio and debt-equity ratio
will remain constant
External issue of equity will not be
resorted to

27. Example
M = 0.05, d = 0.4, A/E = 1.5, A/S0 = 0.8.
Find growth out the rate of sustainable
With internal equity.
Solution:
0.05(1-0.4) 1.5
g=
0.8 – 0.05(1- 0.4) 1.5
= 5.96%

28. Problems with Forecasting
Difficulty in comparison
 Differences in the basis of inventory valuation
 Different depreciating method, estimated
working life of assets.
 Different treatment of extraordinary items of
income and expenditure.
Impact of Inflation
Conceptual Diversity