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A cash forecast is a presentation of cashresults based upon assumptions aboutconditions and events expected to exist oroccur during the forecast period.
Accurate forecasting of cash flows ensuresthat a firm has sufficient cash to satisfy its
obligations at any point of time.
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for more than a year for one month to one
year
for one day to one monthMost of the forecasting efforts are concerned
with the preparation of medium termcategory such as three month forecast (coz
close enough to current business position toallow most of the variables to be predictedwith reasonable accuracy.
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Mathematical Model can be used to preparecash flow projections and project short termfinancing requirements for a business.
Computer based model can be constructedusing spreadsheet or can be acquired as aready made package.
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Management is compelled to anticipate theproblems likely to arise in the course ofachieving forecasted targets and thereforeit is well prepared to meet them.
Enables control of income and expenditure Acts as a tool for monitoring and periodic
evaluation of managerial policies anddecisions.
Facilitates optimal allocation of resourcesfor maximization of profit.
Sense of direction to the organization.
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Over estimation of sales forecast, Under estimation of costs and delays likely to
be encountered.
Ignoring past trends or performances bydebtors
Unduly optimistic assumptions about theavailability of bank loans, credit, grants, etc.
Using financial forecasting as a substitute ofbusiness planning.
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Projected receipts and disbursementsapproach
Percent of sales approach
Projected Balance Sheet Statistical Techniques.
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It follows a simple process of constructing atimeline depicting known and estimated cashinflows and outflows (Using Ms-Excel)
Time line may be a week, month or a year
Receipts and disbursements forecastingtechnique offers users the ability to projectcash balances on a daily basis.
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The Percentage of Sales Method is a FinancialForecasting approach which is based on thepremise that most Balance Sheet and IncomeStatement Accounts vary with sales.
In this method, the basic assumption is thatthere is no change in business, its policies etc.
All ratios to sales in future will be similar to theprevious ones. For example if the coast of sales
to sales was 80% in the previous year, the ratiowill remain same in the current year.
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2004 2005Sales 1,000 1,100
COGS 750 900
The average percent is calculated as under:Sales 100
COGS 78.5
(750+900 / 1000+1100) x 100
2 2
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Based on the fundamental accounting Principal
A pro forma balance sheet is prepared usingknowledge of past balance sheet items e.g.
inventory, accounts receivables, accountspayable, etc. and future expectations.
All items in the pro forma balance are populatedexcept cash item.
The cash figure is used to bring the equation intobalance (i.e. Assets= Liabilities + ShareholdersFunds)
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Percent of sales method may be applied for allassets except investment and miscellaneous
expenses and losses. For investment and miscellaneous expenses the
information available is to be followed Percent of sales may be employed for all the current
liabilities Reserves and surpluses may be projected by adding
projected reserve and surplus to previous yearsamount
Generally the value of equity and preference capitalis not changed
Loans tec. Also remain same in the Profromabalance sheet
Is assets side exceeds liability side, the balancingitem will be shown as surplus funds required. Ifliabilities side exceed assets, the balancing item willwould be Surplus
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: long term trend, cyclicaleffect, seasonality and random variable
: compute a meanaverage of a defined number of historical dataelements in a time series.
is a forecasting techniquethat allows the analyst to apply a smoothing factorto determine how much importance to place onpast forecast versus actual results, in determiningthe next forecast value. (June data to May, Maydata to April etc.)
are available to helpdefine the relationship between independentvariables and dependent variable i.e. cash. Thesetechniques range from basic linear regressionmodels to multiple regression models.
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Is a financial plan Provide a plan of action or a set of guidelines
Budgets allocate resources to variousactivities and influence the process ofstrategy formulation.
Provide basis for measurement ofperformance.
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1. Forecasting involves estimating futureevents and analyzing their implications onthe budget. Budgeting, involves preparingbudgets and using them as the basis for
control.2. Budget is a financial Plan, but forecasts is
not a financial plan but prediction of futureenvironments.
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To anticipate the obstacles likely to arise inthe course of achieving budgeted targets
Control of income and expenditure
Optimal allocation of resources formaximization of profit.
Sense of direction to organizational activities.
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Based on forecasting Overlooking industry performance norms,
competitors response and avoiding generallyaccepted financial ratios and guidelinesmakes budget useless
Successful cooperation and coordinationamong the different functional managers.
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Prepare Proforma Balance Sheet for 2008from the following information
Sales 60,00,000 80,00,000
Equity Share capital 50,00,000 50,00,000
Fixed assets 60,00,000 72,00,000
Reserves and surplus 10,00,000 12,00,000
Investments 10,00,000 10,00,000
Long term loans 30,00,000 30,00,000
Current Assets 30,00,000 21,00,000
Current Liabilities 10,00,000 11,00,000
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No additions to be made in reserves andsurplus for the next year
Rs.1,00,000 to be invested in securitiesduring the year 2008
Sales for 2008 are expected to beRs.85,00,000
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Sales 60,00,000 80,00,000 100 85,00,00
Fixed assets 60,00,000 72,00,000 Av. Percent of sales94.28%
80,13,000
Investment 10,00,000 10,00,000 As per additionalinformation
11,00,000
CurrentAssets
30,00,000 21,00,000 Percent of sales36.43%
30,96,550
Total assets 1,00,00,000 1,03,00,000 1,22,10,350
Equity ShareCapital
50,00,000 50,00,000 No Change 50,00,000
Reserves andsurplus
10,00,000 12,00,000 No addition 12,00,000
Long term
loans
30,00,000 30,00,000 No Change 30,00,000
CurrentLiabilities
10,00,000 11,00,000 Av. Percentage ofsales 15%
12,75,000
TotalLiabilities
1,00,00,000 1,03,00,000 1,04,75,000
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Fixed Assets = Av. Of fixed assets x 100Av. Of Sales
(60,00,000 +72,00,00 / 60,00,000 +80,00,000) x 100
2 2
=94.28% Current Assets (30,00,000+21,00,0 00/ 60,00,000 +80,00,000)
2 2