Financial Forecasting

8 Pages Posted: 12 Jun 2009

See all articles by Robert M. Conroy

Robert M. Conroy

University of Virginia - Darden School of Business

Abstract

This note presents simple techniques for forecasting income statements and balance sheets. It focuses on a percentage-sale approach, but also introduces the use of financial ratios for the same purpose.

Excerpt

UVA-F-0899

Rev. May 1, 1991

Financial Forecasting

One of the most important financial functions is to forecast financing needs in the future. The key relationship is between sales and assets. As sales change, so do assets. Increases in sales result in an increase in cash, accounts receivable, inventory, and possibly in fixed assets. These increases in assets must be funded. The liability and net worth side of the balance sheet must also increase to support the increases on the asset side. Some items such as accounts payable and accrued liabilities increase automatically with sales. Retained earnings also increase, but the increase depends on how much of earnings are retained by the firm. If the increases in spontaneously changing liabilities and retained earnings are not enough to offset the increase in assets, outside funds are required. Determining how much outside funding will be needed is important for planning. By forecasting funding needs, managers can either arrange the financing or revise their plans if funding is inadequate. This planning is done by producing pro-forma income statements and balance sheets for future periods.

The easiest way to see how financial forecasting is done is to follow an example.

Example

. . .

Keywords: financial planning, financial ratios, forecasting

Suggested Citation

Conroy, Robert M., Financial Forecasting. Darden Case No. UVA-F-0899, Available at SSRN: https://ssrn.com/abstract=1417847

Robert M. Conroy (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

HOME PAGE: http://www.darden.virginia.edu/faculty/conroy.htm

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