Financial Forecasting Essay

1213 words - 5 pages

Businesses develop budgets and business plans to ensure optimum financial performance. An important element of budgeting and planning is financial forecasting. Forecasting the finances of a business requires certain understanding of financial dynamics. This paper will examine the necessary steps for financial forecasting, important elements of projecting future growth, types and methods of financing capital requirements, the impact of changes in interest rates and dividend payouts, alternatives to capital financing and its impact on debt ration and equity, as well as the effects of outsourcing on the planning and budgeting process.Steps Necessary for Financial Planning and ForecastingThe Executive Fruit Company is developing a new financial plan and forecast. This plan will encompass the current and future investment opportunities, projecting the results of those choices, deciding the best and most beneficial alternative, and measuring those results against the goals of the company. In developing a financial plan and forecast, it is important to consider the short and long-term benefits and outcomes. Executive Fruit Company would begin with three potential plans. The first would include the most aggressive growth outcomes, the second a normal growth plan and the third is a plan for a negative economic turn. All these plans would address the capital expenditures, working capital and potential strategies surrounding investments. With the plans developed, the company is ready to begin analyzing the potential benefits.Executive Fruit Company begins the process by setting up a forecasting model. The model includes data from the balance sheet including assets, liabilities, and owner's equity. Using an excel spreadsheet the data will include growth, tax, and interest rates, sales and payout ratios. Once the formulas are inputted the data can be manipulated and various potential outcomes can be determined (see spreadsheet attached at end).Projection of future yearsThe actual growth rate in the years to come for Executive Fruit Co., determines much of what will happen with the companies financial situation. A low growth rate will allow the company to simply reinvest profits to cover additional expenditures and resort to little or no external financing. A large growth rate may force the company to issue new debt to cover the growth costs. Given that the company will face growth rates of 10% annually, 2005, 2006 and 2007 all show growth in Net Income of 9.2%. At the company's base year of 2002, Executive Fruit can use Figure 1 Excel sheet to properly prepare for the future of the company in forming different planning models. Obviously Figure 1 merely shows projections and not actuality, but using this model can help Executive Fruit in planning for the future of the company whether its growth rate is up or down. At a 10% growth rate, the external financing needed is significantly less than at a 15% growth rate; nearly half in 2007. As company growth...

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