Fundamentals of Financial Management, Third Edition

SUMMARY

Financial forecasting is the backbone of financial planning in any firm. If the forecast is accurate, planning particularly for assets and for the funds to finance them will be successful and this will in turn reduce the risk and raise profitability to a great extent. The first step in financial forecasting is to forecast the individual variables of the income statement and the balance sheet. First, sales is forecast on the basis of the past and current trend. Then, on the basis of the sales figure, other variables are estimated. The method used is either the percent-of-sales method or regression analysis. However, this requires a good deal of subjective judgement.

After individual variables have been estimated, they are combined into ...