financial planning and forecasting financial statements pdf

Financial planning and forecasting financial statements pdf

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What is Financial Forecasting And How Does It Work?

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Part 3: Forecast financial statements

What is Financial Forecasting And How Does It Work?

Sales 9. Must be raised from external sources. Big Assumption: None of the ratios change.

Embed Size px x x x x The operating plan provides detailed implementation guidance designed to accomplish corporate objectives. It details who is responsible for what particular function, and when specific tasks are to be accomplished. The financial plan details the financial aspects of the corporations operating plan.

What is Financial Forecasting And How Does It Work?

Not a MyNAP member yet? Register for a free account to start saving and receiving special member only perks. Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book.

With the sources and uses identified in the previous chapter, the next step is to project the revenues and expenditures into the future in order to build a sustainable financial plan. There are a number of different methods that can be used to forecast revenues and expenses.

This chapter provides background on those methods commonly used by transportation organizations and outlines steps for TAM practitioners to follow when forecasting for the TAM financial plan. Fortunately, state DOTs are already in the practice of forecasting revenue sources and expenditures.

TAM profes- sionals therefore do not have to develop forecasts on their own, but still need to understand the methodologies and assumptions used in forecasting. This chapter offers background informa- tion and key fundamentals of forecasting revenues and expenditures, but the TAM professional developing the financial plan for asset management is encouraged to utilize the efforts already in place within the agency to project revenue in the future.

At this point, the TAM professional should be equipped with a list of asset management-related sources and uses, populated with the current-year budget values. The steps at the end of this chapter will guide the practitioner through the process of forecasting to obtain a year forecast of agency revenues and non-asset management uses. The forecast of asset management uses will then be covered in the next chapter. The final product will vary by agency, but Table shows an example of a forecasting worksheet based on data from the Texas Department of Transportation Texas Department of Transportation Forecasting Sources A variety of methods have been developed previously for forecasting revenue.

For example, historical data might indicate a particular growth rate on a sales tax used for transportation. Assuming this same growth rate into the future allows agencies to predict future revenue in a straightforward manner.

Trend extrapolation is a straightforward application of basic statistical methods. Expert Consensus Another method states employ to project revenue is that of expert consensus. NCHRP Synthesis notes that this method can be used in combination with other methods as expert panels are asked to review forecasts already produced and to make necessary adjustments. For expert consensus, the agency can have a panel of experts meet together to discuss the forecast, or the agency can elect to do a Delphi survey.

In a Delphi survey, the agency sends information regarding the forecast and asks various experts for feedback. This feedback is then summarized by the agency and sent out again to the experts. The iterative nature of a Delphi survey helps to achieve consensus on the forecast. Econometric Models Econometric models, like regression analysis, are used to quantify relationships between vari- ables.

This involves identifying the independent and dependent variables that affect a particular revenue source and then establishing the relationship between the two. An agency might have a different set of regression equations for each revenue source Wachs and Heimsath Econometric models can be as simple as linear regression that defines a relationship between a single independent variable and a dependent variable.

For example, the relationship between the price per gallon of gasoline and the gallons of gasoline consumed could be described by linear regression. Models can also be more complicated by incorporating multiple independent variables also called multivariate to predict an outcome. These models find a fit for the input data and predict revenue from a source based on statistically estimated coefficients of the inde- pendent variables Wachs and Heimsath The Oregon DOT uses more than equations to forecast revenue.

Again, an econometric model can be as sophisticated as an agency desires by incorporating independent variables to describe a particular outcome. Table sum- marizes three states from the report and includes the methods and data inputs they use to obtain future funding levels. All forecasting methods involve differing degrees of sophistication in the application of statistics. While trend extrapolation works with stable funding sources, expert consensus can work well when funding and expenses are subject to volatile market and political forces, among others, and econometric models are preferable when reliable data exists to predict funding and price level.

The TAM professional may have to coordinate with bridge engineers and pavement engineers on construction cost inflation assumptions and discount rates see discussion of these below. The TAM professional will likely play a role in the setting of performance targets that help determine funding needs, and even help achieve consistency between various program managers in their forecasting and reporting methodologies. There are several uses of funds that are commonly prioritized above asset management uses.

For example, TAM professionals should look to budget officers to provide known annual debt service payments in building the forecast. Comparable state programs may also be delineated. State forecasting examples. FHWA also acknowledges the iterative nature of forecasting expenditures. Scenarios allow certain key assumptions or variables to change from iteration to iteration.

Scenario planning, the process of creating scenarios that assume different levels of funding to see the impact on overall agency asset man- agement, can help inform the projection of revenues and expenditures Twaddell et al. Developing investment strategies impacts the allocation of the expenditures. Both concepts are detailed in the following chapter on Investment Strategies and Scenarios; it is important for an asset manager developing a financial plan to consider scenario planning and investment strate- gies even in the stages of projecting future revenues and expenditures.

Assumptions, Inflation, and Uncertainty Assumptions, inflation, and uncertainty are all inherent in the process of forecasting. The individual or group that develops the forecasts within a state DOT makes certain assumptions about funding levels, selects the inflation rates and how to apply them, and deals with uncer- tainty.

Below are some common issues that TAM professionals may encounter as they handle assumptions, inflation, and uncertainty in the TAM financial plan. Assumptions Dealing with assumptions in forecasting is another aspect of financial planning that can draw from the practices agencies already use to develop the STIP. The key is to determine which assumptions are reasonable and which are unreasonable.

In order to include a revenue source in a financial plan and proceed with a projection of funds into the future, it should be clear that the funds will be available. FHWA provides a few examples of reasonable and not reasonable funding sources to assume when developing a financial plan. These are summarized in Table This is not a comprehensive list of assumptions, but gives asset managers a flavor of the assumptions that are reasonable to make. It is important to document all the assumptions that are made during the process of pro- jecting revenues and expenditures.

This will ensure clarity when developing other parts of the financial plan and consistency when making future projections. Inflation Inflation, the general increase in prices over time, is an important consideration in making financial projections. In many cases it is necessary to make assumptions about inflation to project future costs and revenues. Even when it is not necessary to make explicit. There are multiple inflation indices as prices of different goods increase at different rates.

For instance, the Consumer Price Index is used to establish the infla- tion rate for consumer goods; and the National Highway Construction Cost Index is often used to predict construction inflation, as are various other industry and state-specific indices.

FHWA allows considerable flexibility in estimating inflation. Con- cerning which inflation index to use, FHWA suggests examining past trends in tax receipts and cost of living indices to forecast revenue sources. For future expenditures, it is suggested that agencies use a construction cost index for projections.

When possible, the FHWA encourages states and metropolitan planning organizations MPOs to use local cost data to develop cost inflation indices. Inflation rates are different from discount rates and cannot be used interchangeably. Inflation rates measure historic growth or anticipate the future growth in unit costs.

They help demon- strate the loss in purchasing power over time assuming inflation prevails over deflation. By contrast, the discount rate is used to quantify the time value of money and is used to compute the present value of a stream of future revenues or costs. Uncertainty Due to the nature of financial projections and the assumptions inherent in the process, there will be uncertainty in the estimates of revenue and expenditure in the financial plan for asset management.

Two methods for understanding the impact of uncertainty on financial projec- tions are to consider different funding scenarios and to perform a sensitivity analysis.

Again, scenario planning is covered in more detail in the next chapter of this guide but can be helpful in the stage of projecting revenue and expenditure. Asset managers may develop scenarios to illustrate different levels of funding over the long term.

New funds from upcoming statewide, regional, or local ballot if polls indicate strong likelihood of defeat or there is past history of repeated defeat of similar ballot initiatives. A new tax for transportation purposes, if there is clear evidence of governmental and public support to enact the tax and a strategy exists for securing approvals.

An increase in gas tax revenues if there is not a history of consistent gas tax increases. An increase in the state gas tax, if there is historical success in increasing the gas tax and it is clear that the trend will continue. Funding that would result in one metropolitan area receiving a disproportionately high percentage of the total national program dollars to support multiple large-scale transportation projects.

Table Differences between reasonable and unreasonable assumptions regarding revenue sources. Financial Forecasting 47 could illustrate the effects of decreased transportation funding. Different scenarios help identify gaps in funding expectations versus needs. They illuminate the financial situation of the agency further in order to overcome the uncertainty in financial projections. Similar to scenario planning sensitivity analysis is a method to help understand how differ- ent inputs to the projection of revenues and expenditures impact the outcome.

Changing the revenue sources, different independent variables contained within an econometric model, or the inflation rate, for example, can reveal what projection inputs influence the outcome the most. Other Variables A number of resources exist to help strengthen the use of economic and financial principles in the financial plan.

The appendix provides further explanation on the time value of money and points the reader to additional literature. Now it is time to forecast revenues and expenditures for the next 10 years.

The following steps guide you in understanding how your agency does forecasting for other financial planning activities and what information you need to forecast revenues and non-asset management expenditures for the TAM financial plan.

Forecasting TAM-related expenditures is detailed in the next chapter. Step 1: Establish Roles and Responsibilities Your agency already does forecasting for other financial planning activities.

The STIP and the long-range plan are two common plans, but there may be other purposes for which your agency does some form of forecasting and looking ahead at revenues and expenditures. As a TAM prac- titioner, you likely will not have to forecast revenues and expenditures for the TAM financial plan on your own.

Take the time to determine who in your agency is responsible for forecasting, or those individuals outside the agency who may be able to contribute. You may also want to identify any senior managers responsible for presenting and defending your forecast when it is complete in addition to government relations officers, public informa- tion officers, and policy makers willing to help you communicate your forecast.

Establish the gaps between the forecasting efforts already in place and your needs for the TAM financial plan. Specifically, you need a forecast of revenues and expenditures for TAM-related activities over a year period. Then coordinate with the appropriate individuals or group to utilize forecasts from other financial documents and get the projections necessary for the TAM financial plan.

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Simultaneously, security analysts wereI am looking out the window and can see theIissuing their forecasts of earnings for Stockseasons change yes, the seasons do change in Losprices were extremely volatile, moving up with a goodAngeles—the eucalyptus leaves droop more and theearnings surprise—that is, where reported EPS wassprinklers go on less often. I am reminded that ourhigher than analysts had been expecting—and downrhythms are set by the seasons and that any numberwith unpleasant surprises. Corporate executives knowof human endeavors are ruled by the calendar. Suchthat these reactions will occur, so they generally try toas this annual report.

Embed Size px x x x x The operating plan provides detailed implementation guidance designed to accomplish corporate objectives. It details who is responsible for what particular function, and when specific tasks are to be accomplished. The financial plan details the financial aspects of the corporations operating plan. In addition to an analysis of the firms current financial condition, the financial plan normally includes a sales forecast, the capital budget, the cash budget, pro forma financial statements, and the external financing plan. A sales forecast is merely the forecast of unit and dollar sales for some future period.


In the remainder of this chapter, we explain how to create a financial plan, including its three key components: (1) the sales forecast, (2) forecasted financial​.


Part 3: Forecast financial statements

A business plan is all conceptual until you start filling in the numbers and terms. The sections about your marketing plan and strategy are interesting to read, but they don't mean a thing if you can't justify your business with good figures on the bottom line. You do this in a distinct section of your business plan for financial forecasts and statements. The financial section of a business plan is one of the most essential components of the plan, as you will need it if you have any hope of winning over investors or obtaining a bank loan. Even if you don't need financing, you should compile a financial forecast in order to simply be successful in steering your business.

They often include different scenarios so you can see how changes to one aspect of your finances such as higher sales or lower operating expenses might affect your profitability. This financial projections template pulls together several different financial documents, including:. The template also includes diagnostic tools you can use to test the numbers in your financial projections and make sure they are within reasonable ranges.

What is Financial Forecasting And How Does It Work?

In some cases though, you may prepare financial forecasts that cover a shorter period like six months or longer period one-three years. Financial forecasting involves the use of financial statements prepared in advance to project company revenues or expenses. Used in this manner, the financial statements are called pro forma statements. Taken simply, financial forecasting refers to that process by which business estimates or predicts how it is likely to perform in the future.

In some cases though, you may prepare financial forecasts that cover a shorter period like six months or longer period one-three years. Financial forecasting involves the use of financial statements prepared in advance to project company revenues or expenses. Used in this manner, the financial statements are called pro forma statements. Taken simply, financial forecasting refers to that process by which business estimates or predicts how it is likely to perform in the future. As noted below, forecasting finances for a business involves a look at three main financial statements. Here we mention what financial statements are essential to forecasting and help you understand the difference between creating forecasts and models. For any given business, the present financial status carries a lot of weight- not just for its health, but also to ensure the business satisfies investors.

importance of financial forecasting pdf

Not a MyNAP member yet? Register for a free account to start saving and receiving special member only perks. Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. With the sources and uses identified in the previous chapter, the next step is to project the revenues and expenditures into the future in order to build a sustainable financial plan. There are a number of different methods that can be used to forecast revenues and expenses. This chapter provides background on those methods commonly used by transportation organizations and outlines steps for TAM practitioners to follow when forecasting for the TAM financial plan.

Embed Size px x x x x The operating plan provides detailed implementation guidance designed to accomplish corporate objectives. It details who is responsible for what particular function, and when specific tasks are to be accomplished. The financial plan details the financial aspects of the corporations operating plan. In addition to an analysis of the firms current financial condition, the financial plan normally includes a sales forecast, the capital budget, the cash budget, pro forma financial statements, and the external financing plan.

In Uncategorized Posted gennaio 08, It must be short, to the point and very well written. Request PDF Important Problems in Financial Forecasting In this chapter, the problems addressed in this book are defined in a clear and concise manner. The Importance of Exchange Rate Forecasting Exchange rate forecasts plays a fundamental role in nearly all aspects of international financial management. Financial Planning is process of framing objectives, policies, procedures, programmes and budgets regarding the financial activities of a concern. Forecasting of sales and expenses helps in estimating future financial needs.

Financial Projections Template

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    The reason is that it is very useful and important to forecast how much financing a company will require in future years.

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