Fin200_Financial_Forcasting

Financial Forecasting Financial forecasting allows managers to plan for the unexpected. There are two methods to financial forecasting, pro forma and percent-of-sales. Although these methods differ, the information is used by all kinds of businesses. The use of forecasting can differ from one company to the next and we will discuss its use for a new company, a family based company, and a long standing company in the following paragraphs. The purpose of financial accounting is to prepare the company for unforeseen events. For a new company, the unforeseen events are hard to determine while others are quite clear. The basis of forecasting is establishing a sales projection. Without a sale projection, all other information is inaccurate. A new company will not have the prior year’s information as a large standing company will have therefore their forecasting will not be as exact. Exact or not, the use of forecasting will help the new company figure out where their profits need to be allocated in order to raise more profits. When forecasting, it is important to remember that the profit will not be adequate to cover all expenses and therefore deciding on how to fund the future sales must also be determined. This is important for a family based business if they have fewer funds to utilize and fewer inventories kept on hand. The new company must use the forecasting to set sales projections and goals for staff while using the forecasting results to stay on target that first year. It will help managers to adjust as needed when the sales drop or rise. Family based companies are quite different. Their funding options can be different and how they run the business can be different. Since most family run businesses need to keep a low overhead to make a greater profit, generating a forecasting will help give the business owner an overall look at the company. If they experience specific times when sales are low and other times when they are generally high, that needs figured into the forecasting. A family based business will not be able to store the quantity of inventory that a large companies therefore their inventory numbers will differ. Utilizing the forecasting report will help business owners to determine when to increase or decrease stock, what times of year do better in sales, and what their projected target profit can be. A large based company will use forecasting to set sales projections and profit projections. These types of companies can use this information to see what funds will be needed to generate more inventory to drive up sales. Larger companies tend to weather bad areas better because they have more funds to allocate and more inventories to sell. This does not make them immune to problems or more educated in handling them; however they simply have a large base of ways to handle these tougher times. For example, when sales drop they have the ability to push more inventories whereas a small family based company cannot. This is why forecasting is important. It keeps all of the company on track of what the projection is and helps to recognize problems as they arise. The problem with forecasting for a large company is the many employees that fall in different divisions or departments. If all managers are not informed or prepared then the forecasting is not as useful. No matter what the business is or what method they utilize, forecasting can help tremendously. The purpose of forecasting is to set projections, find low and high spots, and then adjust the business accordingly. It is a useful tool to determine inventory levels and costs during these times as well. A smart manger would use this information to help all areas of the business to be success even during times of low sales. References Block, B.B., Hirt, G.A., & Danielsen, B.R. (2009). Foundations of financial management (13th ed.). New York, NY: McGraw Hill/Irwin