Financial Forecasting, Planning and Control

Atty. Prackie Jay T. Acaylar, CPA, JD, MPA, PhD-BM, FRILL, PD-TQM

A financial forecast is a fiscal management tool that presents estimated

information based on past, current, and projected financial conditions. The importance
of financial forecasting to businesses is that it allows establishing the goals that are
both realistic and feasible. Once the organization got the result of the forecast it gives
them confidence in making a decision because they already have the basis for the
planning; as we know planning is a systematic approach of making decisions today that
will affect the future while forecasting is a systematic attempt to probe the future by
presenting facts. The main goal of forecasting is not to predict the future but to tell you
the full range of possibilities, not a limited set of deceptive certainties.

Here are the objectives of financial forecasting, first, this is to reduce the cost of
responding anticipating the future occurrences. Of course, if we were able to get the
result of forecasting based on the facts using the past and current data the organization
may identify and decide what’s to exclude in the decision making. Second, reduce the
cost of responding to emergencies by Prepare to take advantage of future opportunities.
While excluding the things that won’t work anymore in the organization, we would want
to strengthen and take advantage of what may work best for the organization. Third,
prepare contingency and emergency plans. Lastly, prepare to deal with the possible
outcomes.

Identifying the procedures in financial forecasting, (1) decide what needs to be

forecast, (2) evaluate and analyze appropriate data, (3) select and test the forecasting
model, (4) generate the forecast, and (5) monitor forecast accuracy over time.

There are two general categories of forecasting: qualitative and quantitative.

Qualitative is opinions from experts, decision-makers, or customers. While the
Quantitative is the historical data from time series or correlation information. To easily
identify and recall the difference between the two we can say that qualitative is
nonmathematical and the quantitative is mathematical.

The characteristics of the Qualitative are based on human judgment, opinion;

subjective, and nonmathematical. The strength of this category is - it can incorporate
the latest changes in the environment and “inside” information, though its weakness is
that it can bias the forecast and reduce forecast accuracy. On the other hand, the
characteristics of the Quantitative is that it’s based on mathematics; quantitative in
nature. The good thing about this category is that it is consistent and objective; able to
consider much information and data at one time, though often quantifiable data are not
available. Only as good as data on which they are based.

The two general categories of forecasting were already defined, the Qualitative
has three sub-categories: executive opinion, market research, and Delphi method. The
executive opinion is composed of a group of managers meeting and coming up with a
forecast, this type of method is good for strategic or new-product forecasting though,
one person’s opinion can dominate the forecast. The next method under Qualitative is
market research; it uses surveys and interviews to identify customer preferences. It is a
good determinant of customer preferences however it can be difficult to develop a good
questionnaire. Lastly, the Delphi method seeks to develop consensus among a group of
experts. It is excellent for forecasting long term, product demand, and technology, on
the other side it may take time to develop.

The Quantitative also has sub-categories: time series models and causal models.
The time series models assume information needed to generate a forecast is contained
in a time series of data and the future will follow the same patterns as the past. While
the casual models explore the cause-and-effect relationships, uses leading indicators to
predict the future.

The common practices under time series models are straight line method and
moving average. The straight-line method is one of the simplest and easy-to-follow
forecasting methods. A financial analyst uses historical figures and trends to predict
future revenue growth. Moving averages are a smoothing technique that looks at the
underlying pattern of a set of data to establish an estimate of future values. The most
common types are the 3-month and 5-month moving averages.

Causal models are used in establishing a cause-and-effect relationship between

independent and dependent variables. One of its common practices is regression
analysis; the latter is a widely used tool for analyzing the relationship between variables
for prediction purposes.

NATURE, SCOPE AND CONCEPT OF FINANCIAL PLANNING

Financial Planning is that the process of estimating the capital required and
determining its competition. it's the method of framing financial policies in reference to
procurement, investment and administration of funds of an enterprise.
 The objectives of financial planning are, (1) determining capital requirements, (2)
determining capital structure, (3) framing financial policies, and lastly scarce financial
resources.

In determining capital requirements it will rely on the factors like cost of current
and fixed assets, promotional expenses and long- range planning. Capital requirements
must be checked out with both aspects: short- term and long- term requirements. Next
to that is determining capital structure: it is the composition of capital, i.e., the relative
kind and proportion of capital required within the business. This includes decisions of
debt- equity ratio- both short-term and long- term. While the framing financial policies
with regards to cash control, lending, borrowings, etc. And lastly a finance manager
ensures that the scarce financial resources are maximally utilized within the absolute
best manner a minimum of cost so as to induce maximum returns on investment.

Financial planning is vital in any organizations, this is often to confirm the

effective and adequate financial and investment policies of the latter. The importance
may be outlined as: Adequate funds must be ensured, Helps in ensuring an inexpensive
balance between outflow and inflow of funds so stability is maintained, Ensures that the
suppliers of funds are easily investing in companies which exercise financial planning,
Helps in making growth and expansion programmes which helps in long-run survival of
the corporate, Reduces uncertainties with regards to changing market trends which may
be faced easily through enough funds and Helps in reducing the uncertainties which
might be a hindrance to growth of the corporate. This helps in ensuring stability and
profitability in concern.

PROCEDURES USED IN FINANCIAL PLANNING

Financial procedures are a set of instructions that any stakeholder, including

new members of the committee or staff, can use to find out exactly: what tasks need to
be done; who will do these tasks; and who will ensure the tasks are done properly.

Here are some procedures to consider in financial planning: Setting up a

business bank account, Creating a budget, Establishing an accounting system and
Reviewing your accounts.

In Setting up a business bank account, companies are advised to set up a bank

account for his or her business, keeping it separate from personal finances. This may
enable them to observe their income and expenses, and permit them to simply extract
business records for taxation purposes. For Creating a budget, setting a realistic
budget for the business will help them to meet financial goals. A budget allows
businesses to know their current situation and make projections. Compare forecasts to
actual financial results to to work out if they're overspending or have created additional
income. Establishing an accounting system, accounting (or bookkeeping) can be a
process of recording the financial transactions of a business. Keeping good records for
your business can assist you to use for finance, review your business activities, manage
effectively and suit tax requirements. There are two sorts of accounting methods; cash
and accrual. A cash-based system records transaction at the time the cash was paid or
received, no matter when the sale transaction occurred. This method suits businesses
that mainly depend upon cash transactions. An accrual-based system records
transactions after they occur, no matter whether payment is received at the time or at a
later stage. An accrual system is that the one most ordinarily used. And lastly,
Reviewing your accounts, there are two basic financial statements of relevance to small
businesses: profit loss and balance sheet. A balance sheet reports on assets,
liabilities and net equity of a business at a given point in time.It is good practice to
review your financial statements a minimum of once a month. this may enable you to
spot problems and put strategies in situ to repair them.

CONCEPT OF FINANCIAL CONTROL

Financial controls are the procedures, policies, and means by which an

organization monitors and controls the direction, allocation, and usage of its financial
resources. It is the very core of resource management and operational efficiency in any
organization.

IMPORTANCE OF FINANCIAL CONTROL

1. Cash flow maintenance
Efficient financial control measures contribute significantly to the cash flow
maintenance of an organization. When an effective control mechanism is in place, the
overall cash inflows and outflows are monitored and planned, which results in efficient
operations.

2. Resource management
The financial resources of an organization are at the very core of any
organization’s operational efficiency. Financial resources make available all other
resources needed for operating a business.

3. Operational efficiency
An effective financial control mechanism ensures overall operational efficiency in
an organization.

4. Profitability
Ensuring an organization’s overall operational efficiency leads to the smooth
functioning of every organizational department. It, in turn, increases productivity. which
comes with a direct, positive relationship with profitability. Set up effective financial
control measures ensures improved profitability of any business.

5. Fraud prevention
 Financial control serves as a preventative measure against fraudulent activities
in an organization. It can help prevent any undesirable activities such as employee fraud,
online theft, and many others by monitoring the inflow and outflow of financial
resources.

KINDS OF FINANCIAL CONTROL

1. Overall financial management and implementation

● Placing certain qualification restrictions and employing only certified,

qualified financial managers and staff working with the formulation and
implementation of financial management policies
● Establishing an efficient, direct chain of communication among the
accounting staff, financial managers, and senior-level managers, including
the Chief Financial Officer (CFO)
● Periodic training sessions and information sessions among accounting
staff, etc. to ensure being updated with the changing laws and evolving
business environment concerning business finance
● Periodic, thorough financial analysis and evaluation of financial ratios and
statements wherever fluctuations are significant
● Delegation of financial duties in a segregated and hierarchical fashion in
order to establish a chain of operation and efficiency via specialization.
★ Example is the Balance Sheet and Income Profit/Loss Statement

2. Cash Inflows

○ Stringent credit reporting policy for all customers before entering into a
creditor-debtor relationship with them
○ Periodic reconciliation of bank statements to the general ledger in addition
to annual reporting for more efficient financial control
○ Establishing a periodic review policy with all existing customers that the
business establishes a creditor-debtor relationship with. It ensures the
ongoing creditworthiness of customers and eliminates the probability of
bad debts
○ Support files and backups for all financial data in a separate secured
database with access only permitted to senior management staff.

3. Cash Outflow

○ Automatic/subscription payments to be monitored and requiring proper

authorization in order to control extravagant business expenditure
○ Maintaining a vendor database with detailed purchase records with
restricted access in order to monitor cash outflow efficiently
 ○ Periodic reconciliation of bank statements to the general ledger
○ Clear and precise expense reimbursement policy to be maintained,
including detailed expense reports and receipt verifications in order to
curb extravagant business expenses and employee fraud
★ Example is Cash Flow Statement

PROCEDURE USED IN FINANCIAL CONTROL

The implementation of effective financial control policies should be done after a

thorough analysis of the existing policies and future outlook of a company. It is vital to
ensure the following four processes are completed before implementing financial
control in a business:

1. Detecting overlaps and anomalies

Financial budgets, financial reports, profit & loss statements, balance sheets, etc.
present the overall performance and/or operational picture of a business. Thus, while
formulating financial control policies, it is very important to detect any overlaps and/or
anomalies arising out of the data available. It helps in detecting any existing loopholes
in the current management framework and eliminating them.

2. Timely updating
Financial control is the essence of resource management and, hence, the overall
operational efficiency and profitability of a business. Timely updates of all available
data are very important. In addition, updating all management practices and policies
concerning the existing financial control methods is also equally important.

3. Analyzing all possible operational scenarios

Before implementing a fixed financial control strategy in an organization, it is
important to thoroughly evaluate all possible operational scenarios. Viewing the policies
from the perspectives of different operational scenarios – such as profitability,
expenditures, safety, and scale of production or volume – can provide the necessary
information. It also helps establish an effective financial control policy that covers all
operational aspects of the organization.

4. Forecasting and making projections

They provide an insight into the future goals and objectives of the business. It
helps establish a financial control policy in accordance with the business objectives and
act as a catalyst in achieving such goals

Concept of Financial Forecasting Strategic Growth

Financial Forecasting is a process of projecting future financial requirements of

a firm.The process of financial forecasting involves using historical data of sales,
revenue, and factors of influence to make future projections.
 The reason is that ultimately sales are the driving force behind any business. A
firm’s assets, employees, and in fact just about every aspect of operations and
financing exist to directly or indirectly support sales. Put differently, a firm’s future need
for things like capital assets,employees, inventory, and financing are determined by its
future sales level. Financial Forecasting is used to make financial and management
decisions to support strategic goals.

Efficient financial forecasting should consist of the following: First Financial

Forecasting should set up a first projected income statement and balance sheet so that
the effect of the operating plan on the firm’s future profit and other indicators of
financial performance can be analyzed. Next is to determine the need for financial
support of the firms or company to grow in sales and make more money, and have
more investments opportunities to come.

Benefits of using Financial Forecasting is to help the company with the arrangement
of funds as a result of the financial projection of funds that is needed to come up for
potential revenue. Second it helps to set the standard of performances and act as a
base to evaluate the results.
Importance of Financial Forecasting Strategic Growth
Goal and direction and perhaps are the most important lifeblood of the
business. A financial forecast gives a business access to uniform and cohesive reports.
This allows us to establish business goals that are both realistic and feasible. It also
gives valuable insights into the way your business performed in the past and the way it
will compare in the future. Forecasting provides relevant and reliable information about
the past and present events and likely the future events, it is also gives confidence to
the managers for making a important decisions, financial forecasting is the basis for
making planning premise, as a future managers financial forecasting can make us more
active and alert to face the challenges of the future events and the changes in
environment.
Many of the business owners or managers may skip financial forecasting
because it feels unclear to predict the future when sometimes you don't even know
what’s happening in your business next week. The reason why forecasting is needed is
to create paths to achieve firms goals and also creates trust and confidence in raising
funds and it also tells what resources are needed.

Forecasting Short term Financial Requirement

Pro forma financial statements are financial reports issued by an entity, using
assumptions or hypothetical conditions about events that may have occurred in the
past or which may occur in the future.

These statements can help you make a business plan, create a financial forecast, and
even get funding from potential investors or lenders.

There are three major pro forma statements:

● Pro forma income statements

➢ Shows the projected financial results of the operations of a firm over a
specific period
● Pro forma balance sheets
➢ Shows a projected snapchat of a company’s assets, liability and owner’s
equity at a specific point in time
● Pro forma cash flow statements
➢ Shows the projected flow of cash into and out of a company for specific
time.

1. Purpose of pro forma financial statements (describe the purpose and need for
financial forecasting)

1. The future profitability based on projected sales level

2. How much and what type financing will be needed.

3. Whether the firm will have adequate cash flows.

2. Forecasting Profitability (use to develop a pro forma income statement to forecast

new venture’s profitability)

● Amount of Sales= Price x Number units sold

❏ Much that we project about a company's financial future is driven by the

assumptions we make regarding future sales
● Cost of Good Sold= cost producing the firm's products (fixed or variable)

● Operating Expenses= expenses relate to marketing and distributing the product.

● Interest expense= interest on loan principal

● Taxes= figured as a percentage of taxable income

3.Forecasting Asset and Financing Requirements (find assets/financial needs using a

pro forma balance sheet)

● Working capital- cash, accounts receivable and inventory required in day to day
operations.
● Net working capital- current assets less current liabilities
● Limited amount of working capital makes forecasting more important due to less
 room for error
● Must also consider owners personal financial situation

Determining Asset Requirements

Asset needs tend to increase as sales increase, therefore firms asset requirements are
often estimated as percentage of sales.
● Percentage-of-sales technique- method of forecasting asset and financing
requirements
● Important to understand the asset portion of balance sheet

Determining Financing Requirements

1. The more assets a firm's needs, the greater the firms financial requirements
2. A Firm should finance its growth in such a way as to maintain adequate liquidity
3. The amount of total debt that can be used in financing a business is limited by
the amount of funds provided by the owner
4. Some types of short term debt maintain a relatively constant relationship with
sales
5. Equity ownership in a business

4. Forecasting Cash Flows

● Profits and cash flows are not the same thing

Can be accomplished in one of 2 ways

1. Information from the pro forma income statement and balance sheets to develop
a pro forma cash flows or
2. Prepare a cash budget

Pro Forma Statement of Cash Flows

● Change from working with historical numbers to projections of numbers

Cash Budget

● A listing of cash receipts and cash disbursements usually for a relatively short
time period, such as weekly or monthly

5. Use Good Judgement when forecasting

- Provide some suggestions for effective financial forecasting

Financial Forecast suggestion
 ● Develop realistic sales projections

● Build projections from clear assumptions about marketing and pricing plans

● Do not use unrealistic profit margins

● Don't limit your projections to an income statement

● Provide monthly data for upcoming year and annual data for succeeding years

● Avoid providing too much financial information

● Be certain that the numbers reconcile and not by simply plugging in a figure

● Follow the plan

References:

https://bench.co/blog/accounting/pro-forma-financial-statements/

https://prezi.com/xelm5jvbytjz/forecasting-financial-requirements/

https://strategicadvisor.liveplan.com/financial-forecasting-the-foundation-of-strategic-advising

https://www.accountingnotes.net/financial-management/financial-forecasting-meaning-elements-and-
applications/648
https://onstrategyhq.com/resources/how-to-perform-financial-forecasting/

https://corporatefinanceinstitute.com/resources/knowledge/finance/financial-controls/

https://www.smallbusiness.wa.gov.au/business-advice/financial-management/developing-
financial-processes-and-procedures

https://www.managementstudyguide.com/financial-planning.htm

https://resources.smartbizloans.com/blog/business-finances/5-most-important-financial-policies-and-
procedures-for-small-business/

Eugene Brigham and Joel Houston, “Fundamentals of Financial Management: Concide Edition,”
Cengage Learning, 2017.

R. Dan Reid & Nada R. Sanders, “Operations Management”, 4th Edition © Wiley 2010