Financial forecasting

Financial forecasting is the process of predicting what future financial statements will look like in order to determine what outside funds are needed to support the firm’s operations. The forecasting process allows a firm to express, and examine the consequences of, its goals and priorities. Proforma financial statements (i.e., projected future statements) are often required by banks as a prerequisite to consideration for a loan. They also provide a simple, yet highly effective way, to monitor performance in order to exercise effective financial control. The principal driver in creating proforma statements is the sales forecast. A projected increase in sales will require additional assets. Those assets (i.e., increase in accounts on the left hand side of the balance sheet) must be paid for with corresponding increases in liabilities and equity (i.e., increases in accounts on the right hand side of the balance sheet). The percent of sales method is most often used to forecast future asset, liability accounts and equity. For this process, the direct financing accounts on the right hand side of the balance sheet (in particular, notes payable, long-term debt, preferred stock, and common equity are kept constant. The resulting difference between projected total assets and projected total liabilities and equity is the company’s future need for external funding. The growth rate in sales that results in the future need being zero is called the firm’s sustainable growth rate. This mid-term assignment has three related parts: 1. Create proforma statements for your chosen company for next year. 2. Estimate the sustainable growth rate for your company. 3. Perform a SWOT analysis on your company, using lessons you have learned in weeks one through four concerning microeconomics, macroeconomic, financial analysis and financial forecasting.