Process of Forecasting Financial Statements

There are multiple steps involved in forecasting of financial statements for one to able to arrive at the forecasted income statements, balance sheets, and budget and expense statements, which in turn are used by the head of management and departments for the purpose of decision making. It is important to note that the forecast that happens at the end of the year is more accurate compared to the forecast done in a period of five years. This is because at this particular time, departments have all the necessary information needed for the forecast.

However, forecasts made in long term assist the management in making long term planning and future building. The forecasting process will assist a firm in coming up with the goals and priorities and also ensure that they are consistent. This process will assist the firm when it comes to asset requirements that might need external funding.

The principal driver when it comes to forecasting process is the sales forecast (Zenwealthn, 2013). Because of the fact that most balance sheet and also the income statement are related to sales he forecasting process plays an important role in helping the firm to increase its fixed as well as current assets which might be needed for supporting the forecasted sales level.

The most common and basic method used in forecasting financial statements is the percent sales method. This particular method assumes that certain expenses, liabilities, and assets maintain a certain relationship that is constant to that level of sales. In this method, there are a total of two inputs; sales forecast (which is exogenous) and the percentages which are always assumed to be constant. Some of the stages involved in the entire process include developing the budget. Here, the selling price and the product cost are determined.

After this we determine the sales budget, purchase budget and direct manufacturing labor budget, after which manufacturing factory overhead budget is developed. After this, we develop our ending inventory as well as the budget of the total goods sold (Businessplanhut, 2013). Next is to develop the fixed asset budget, operating expenses budget, drawings and dividend budget, and then determine all the cash investment into the company, after which the opening balance sheet is determined together with the interest expense budget and tax rate budget.

After having conducted all the above mentioned steps, we then create a forecasted cash flow statement, forecasted income statement, balance sheet, forecasted ratio analysis, forecasted breakeven point, forecasted sensitivity and lastly, create notes to forecasted financial statement.

One way in which accuracy can be increased during forecasting of the financial statements is by encapsulating as many time periods of time as possible. By doing this, the probability of receiving irrelevant figures can be minimized.

References

Zenwealthn (2013) Financial Forecasting Available At <Http://Www.Zenwealth.Com/Businessfinanceonline/FF/Financialforecasting.Html> [Accessed On February 19, 2013]

Businessplanhut (2013) Forecasting Financial Statements < Http://Www.Businessplanhut.Com/Forecasting-Financial-Statements-And-Examples> [Accessed On February 19, 2013]