Financial Management Principals
Financial forecasts are projections of future financial outcomes for firms. These financial forecasts are based on the firm’s past financial statements and sales revenue, which are used in combination with the market and economic indicators to foresee the possible financial occurrences that are likely to emerge within a given period of time, usually in a financial year. This is the means by which economists are able to predict either better or poor financial prospects for a given firm (Besley and Brigham, 2008).
Financial forecasting illustrates the process through which companies reflect on their current positions and then determine policies that strategically position them for the future. It is through the forecasting process that companies get the opportunity to precisely articulate their objectives and priorities and ascertain that their internal organizational structures are consistent with their overall strategic goals.
This process also helps the company to identify the resources needed and the requirements for external financing (Epstein and Lee, 2010). Take sales forecast as an example, it is a primary variable in the forecasting process. Given that, for the most part, balance sheet and Income statement accounts are correlated with sales, the forecasting process is capable of assisting the company evaluate what additions
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Correspondingly, the external financing that may be required to pay for the forecasted expansion of resources can also be determined (Gitman, 2007). Different from a financial plan or a budget, financial forecasts do not have to be utilized as financial planning tools, rather they are frequently used by market analysts to project a firm’s potential growth during the subsequent financial year (Hofstede, 2003). A budget is a record of the entire projected expenditures and revenues.
Budgets are plans for cut backs and expenditure. That is to say, they are organizational financial schedules stated in fiscal terms. In most companies, the objective of drawing up budgets is to present a forecast of income and expenses, that is, create a model of how the firm may possibly perform financially when definite policies, events and plans are executed. Budgeting also facilitates the gauging of actual financial operation of the firm against the financial forecast (Epstein and Lee, 2010).
Proforma financial statement describes a financial statement prepared on the basis of some assumed events and transactions that have not yet occurred (Gitman, 2007). Past financial statements are utilized in gauging a company’s historical financial performance and its current condition. In the absence of past financial statements, financial scrutiny and assessment is not feasible and the firm’s management, directors, shareholders, and clientele would not know whether the company is doing well or poorly (Besley and Brigham, 2008).
Proforma financial statements focus on the future instead of the past and are based upon hypotheses rather than real facts. Proforma statements permit managers to apply definite quantities of resourcefulness and elasticity. Proforma statements reveal a vibrant setting in which variation is probable and the range of choices that can be selected is diverse (Hofstede, 2003). They take the structure of the statement of adjustments in financial position, the income statement and the balance sheet.
Proforma statements are utilized for financial scrutiny and ought to be created at the start of every financial planning cycle or every time a firm is evaluating a move that could have a considerable financial effect (Megginson and Smart, 2008). They are frequently scrutinized when a firm is considering an acquisition, external financing, capital investment in fixed assets, expansion of production, launching a new product line, or any other business operation with significant financial raminifications.
Budgets typically include proforma income statements and balance sheets to review financial performance for specific time periods and financial conditions for specific dates (Hofstede, 2003). Proforma income statements are typically dynamic planning documents. Should the scrutiny of a company’s proforma show that financial trouble looms, there ought to be enough time to make changes that will enhance the company’s financial performance (Besley and Brigham, 2008). References Besley, S. and Brigham, F. E. (2008)
Essentials of managerial finance, 14th (Ed), Cengage Learning, Pp 34-39 Epstein M. , Lee Y. J. (2010). Advances in Management Accounting, Volume 18, Emerald Group Publishing, Pp 26-30 Gitman J. L. (2007) Principles of Managerial Finance, Addison Wesley; 12th (Ed) Pp 42-49 Hofstede, H. G. (2003). The Game of Budget Control, Routledge, Pp 89-91 Megginson, L. W. , Smart B. S. , (2008) Introduction to Corporate Finance, 2nd (Ed), Cengage Learning, Pp 46-48