Financial Forecasting

Strident Marks will benefit in many ways from the use of forecasting. Forecasting is "to calculate or estimate something in advance; predict the future" ("Forecast," 2004). Forecasting uses past data in order to predict or forecast the future of the company in a given time period, one year. Forecasting should be taken seriously, now more than ever, because Strident Marks is a publicly traded company and is being scrutinized already. This scrutiny will increase if the company forecasts wrong, even if it is good for the company because it shows that the company does not have enough knowledge of their business model and shows lack of care to Strident Mark's investors (CTU Online, 2007). Therefore it is imperative that Strident Marks understand how to accurately and effectively complete financial forecasting.

In order for Strident Marks to complete both forecasting and budgeting, the company must have a proper understanding of the three key financial reports: balance sheet, income statement, and statement of cash flows (CTU Online, 2007). The balance sheet is a summary of the company's financial status at a certain place in time (Gitman, 2006, p. 49). The balance sheet compares what the company owns, which are assets, to what the company owes, which is liabilities and stockholder's equity (Gitman, 2006, p. 50). The assets include cash, inventories, land, buildings, equipment, automobiles, and many other assets (Gitman, 2006, p. 50). The net assets are then subtracted by the depreciation of all the assets (Gitman, 2006, p. 50). Depreciation is "a decrease or loss in value, as because of age, wear, or market conditions" ("Depreciation," 2004). Liabilities include all the company's debts (Gitman, 2006, p. 50).

The income statement is a review of the company's income at a given time (Gitman, 2006, p. 47). An income statement is normally completed once a year for a one year period and once every month for management purposes (Gitman, 2006, p. 47). The income statement includes the company's sales income minus the cost of merchandise sold, which gives us gross profits; different expenses, net profits before and after taxes, earnings available for common stockholders, more precise stock information, and other data (Gitman, 2006, p. 47-49).

Statement of cash flows is a summation of the corporation's various cash flows over a given instance (Gitman, 2006, p. 51). The statement of cash flows includes cash flows from operation, investment, and financing activities (Gitman, 2006, p. 52). The statement of cash flows is developed using the income statement and balance sheets at the beginning and ending of the term (Gitman, 2006, p. 109). The statement of cash flows indicates net increase or decrease in the cash and saleable securities for a given period, normally one year (Gitman, 2006, p. 109).

Forecasts are kept accurate by updating the data of key metrics, which include sales volume, expenses, average sale price, customer combination, and many other ratios that identify performance (CTU Online, 2007). The forecast is updated once a month, but the figures that are used to update the forecast are taken daily (CTU Online, 2007). The predictions evolve constantly (CTU online, 2007).

The key differences between the financial budget and the financial forecast are significant. The forecast has been explained thoroughly already. The budget is only produced yearly (CTU Online, 2007). The budget is a forecast of the company's monetary intakes and outflows for the following year (CTU Online, 2007). The budget's purpose is for the company to foresee what additional monetary means are necessary for the upcoming year (CTU Online, 2007). The budget is also an opportunity for the departments within the company to plan out the upcoming period in terms of monetary expense (CTU Online, 2007).

The financial forecasting process is the actual route companies use to forecast the next year. The attached chart is the short-term financial forecasting process. In order to do this they use pro forma statements (Gitman, 2006, p. 125). First the sales forecast is completed, which can be done by an analysis of external, internal or a blend of the two forms of data (Gitman, 2006, p. 117). In order to prepare the pro forma income statement, we use the percent-of-sales method. The percent-of-sales method predicts sales by expressing the income statement objects as a ratio or percentage of the projected sales, such as Cost of Goods Sold/Sales = $60,000/$200,000; which equals 30% (Gitman, 2006, p. 127). To prepare the pro forma balance sheet we apply the judgmental approach (Gitman, 2006, p. 130). The judgmental approach is a simple way to prepare the pro forma balance sheet in which data is estimated by either management assumptions, or percentage of sales and plugged into the forms (Gitman, 2006, p. 130).

References

CTU Online. (2007). Phase two: Organizational financial statements. [multimedia presentation]. Colorado Springs, CO: CTU Online. Retrieved March 9, 2007, from CTU Online, Virtual Campus, FIN310 Financial Management Principles: 0701B. https://campus.ctuonline.edu

Depreciation. (2004). In American Heritage Dictionary of the English Language, 4^th ed [CD-ROM]. Boston: Houghton Mifflin Company.

Forecast. (2004). In American Heritage Dictionary of the English Language, 4^th ed [CD-ROM]. Boston: Houghton Mifflin Company.

Gitman, L.J. (2006). Principles of managerial finance (11^th ed). Boston, Massachusetts: Pearson Addison Wesley