Financial Forecasting: To determine potential future financial needs, one must g

Question

Financial Forecasting:

To determine potential future financial needs, one must generate a plan based not only on past relationships, but also on reasonable future projections. Using ratios to help formulate a forecast where sales drives results is an important step in the planning process.

The financial planning models generated by forecasting activities help synthesize the financial manager's thinking about financial, as well as operational, relationships. To generate an estimate of future funding needs, financial planning models use the traditional financial statements you know and love: the balance sheet, the income statement, and the statement of cash flows. There are some slight differences, however, between an accounting approach and a financial approach to planning. Specifically, from a current assets and current liabilities perspective, the focus is on firm operations, and not the financial instruments that represent short-term balance entries.

For example, accounts receivable and inventories are used from the current assets section, but cash and marketable securities are not. Accounts payable, taxes payable, and wages payable are used from the current liabilities section, but short-term debt and current portion of long-term debt are not used in the planning process. Remember the focus... Generating a financial plan helps determine future financing needs, incorporates operational plans into financial plans, and provides bases for firm valuation. All those factors should be driven by operations, and not access to short-term financial instruments. Although the outcome of a plan may be a need or estimated need for access for "what-to-do," e.g. how much short-term borrowing should we do in the short-term, the starting point excludes those factors.

Required:

When planning an acquisition, financial forecasts often provide guidance for future activities.

1. How long in the future do you think is an appropriate length of time to formulate a financial plan? Write 50 words.

2. What financial forecasting experience do you have? Write 100 words.

3. Why do you think financial forecasting might be problematic? Write 100 words.

Please write in your own words. Please don't copy from anywhere and give the link which is used for writing.

Explanation / Answer

TIME FRAME- The longer the time frame, the more difficult it will be to accurately forecast the financial results. it is less difficult to forecast the next year's financial results than anticipate numbers for the upcoming decade. Any estimation is on the basis of past data and management's future expectations whiich is deeply affected by the market forces which are not under our control. future is uncertain and difficult to predict.

As a professional student, i needed sufficient fund to raise my studies after 12th classes. To focus better on my studies , i decided to raise money on credit and developed a list of banks and oraganizations who provide students with scholarships and bursaries. I finally decided to opt for education loan provided by State Bank Of India. It involved no processing fee, a repayment schedule for upto 15 years, tax benefit u/s 80E at a interest rate of 9.15%p.a. Now the installments and interest are paid as per the schedule specified by bank .

problems with financial forecasting

1.Forecasts are done on basis of past data which can be missing if a comapny is a start-up and if company's results are erratic from year to year, historical averages may not provide good indications for the future.

2. external market conditions can affect financial results in a way that would not be captured by analyzing past data.

3. Forecasts reliability can be hampered if mistake is made in collecting or interpreting the data or human errors in entering data into forecasting model.

4.Unforseeable events are impossible to predict, it carries a massive impact, and its shock value is stunning because people could never conceive of an event occuring.

5.Materiality aspect is non decisive in financial forcasting. sometimes the forecaster places too much emphasis on less relevant data items or less importance to much important facts.

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