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Finance 3rd Edition

Cornett, Adair, and Nofsinger

15

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Financial Planning

and Forecasting

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Financial Planning

Strategic planning for a firm Formulating, implementing, and evaluating

cross-functional decisions to achieve long-term

objectives

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Financial Planning

Firms financial plan Base case is underlying set of assumptions

Base case projections

Set internal goals

Provide information to shareholders and external

stakeholders

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Forecasting Sales

Nave approachAssume future periods sales will be equal to

last observed period

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Forecasting Sales

Need to examine how much error exists inusing the nave approach

Measure forecast error with Mean Absolute

Percentage Error (MAPE)

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MAPE Approach

Measures efficiency of forecastingtechnique

Uses one set of historic data to forecast a later

set of testing data

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MAPE Approach

Calculated across nforecasts of a testingperiod

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Average Approach

Better than nave approach Uses larger sample

Takes mean of multiple historic

observations

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Target Historic vs. Average Annual Sales

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Average Approach

Average approach uses more observationscompared to nave forecasts

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Estimating Sales--Systematic Variations

Accurate future sales predictions mustmake adjustments for strong patterns

De-seasonalize

divide each months actual sales by theseasonal index

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External Financing

Simple approach: Additional Funds Needed(AFN)

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Additional Funds Needed (AFN)

Capital intensity ratio Divide amount of assets tied to sales by amount

of current sales

Multiply capital intensity ratio by projected salesdelta

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Necessary Increase in Assets Calculation

Capital intensity ratio

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Additional Funds Needed

Spontaneous liabilities ratio Divide the amount of liabilities tied directly to

sales by amount of current sales, then multiply

by projected increase in sales

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AFN with Unused Capacity Assets

Firms often do not fully use fixed assets Unused capacity can support increases in

sales

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AFN with Lumpy Assets

Fixed assets are not infinitely divisible Fixed assets are bought in discrete, non-

divisible, integer-based quantities

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AFN Using Pro Forma Statements

Identify and compute balance sheet andincome statements items that change

Adjust amounts for change in sales impact

Determine change strategy for items thatdo not vary proportionately with sales