INSTRUCTOR MANUAL
Instructor’s Manual for Principles of Finance
03/21/22 1
, Instructor’s Manual for Principles of Finance
Chapter 18
Financial Forecasti ng
Chapter Summary
Though the future may be uncertain and unpredictable, firms must plan ahead if they are to
realize their objectives and if they are to come to optimal operational decisions.
Lecture Outline
18.1 The Importance of Forecasting
Stakeholders and Forecasts
Different stakeholders track how a firm is doing by reading and analyzing their financial
statements. Internally, a firm’s management and owners want to make better operational and
strategic decisions. External stakeholders consisting of creditors, investors, employees,
government agencies, and the community in which it operates have different objectives.
Projections of a firm’s financial health into the future allow these stakeholders to make good
decisions.
Planning Horizons
A firm’s management and owners typically have two forecasting horizons. The longer
forecasting horizon is tackled by a strategic plan that encompasses future several years. An
annual budget or operating plan represents a shorter-term plan.
Projecting Balance Sheets
A balance sheet reflects a firm’s financial standing at a point in time, whereas an income
statement measures a firm’s activity over a period of time. A historical balance sheet is usually
extended into the future using analysis techniques. Trend analysis, ratio analysis, and common-
size analysis methods are the most used.
Projecting an Income Statement
Projecting an income statement consists of projecting two principal elements: revenues and
expenses. Trend analysis, ratio analysis, and common-size income statement analysis methods
are the most used.
18.2 Forecasting Sales
A sales forecast is the first step in creating a projection. Sales are tied to a firm’s level of activity,
and therefore establishing this up front is essential.
Expenses that are directly variable to sales will necessarily rise when sales rise.
Working capital elements such as receivables, inventory, and accounts payable are also
related to sales activity.
Longer-term, new fixed-asset investments may be necessary to meet expansion plans
but have to be projected independently.
03/21/2 2
Instructor’s Manual for Principles of Finance
03/21/22 1
, Instructor’s Manual for Principles of Finance
Chapter 18
Financial Forecasti ng
Chapter Summary
Though the future may be uncertain and unpredictable, firms must plan ahead if they are to
realize their objectives and if they are to come to optimal operational decisions.
Lecture Outline
18.1 The Importance of Forecasting
Stakeholders and Forecasts
Different stakeholders track how a firm is doing by reading and analyzing their financial
statements. Internally, a firm’s management and owners want to make better operational and
strategic decisions. External stakeholders consisting of creditors, investors, employees,
government agencies, and the community in which it operates have different objectives.
Projections of a firm’s financial health into the future allow these stakeholders to make good
decisions.
Planning Horizons
A firm’s management and owners typically have two forecasting horizons. The longer
forecasting horizon is tackled by a strategic plan that encompasses future several years. An
annual budget or operating plan represents a shorter-term plan.
Projecting Balance Sheets
A balance sheet reflects a firm’s financial standing at a point in time, whereas an income
statement measures a firm’s activity over a period of time. A historical balance sheet is usually
extended into the future using analysis techniques. Trend analysis, ratio analysis, and common-
size analysis methods are the most used.
Projecting an Income Statement
Projecting an income statement consists of projecting two principal elements: revenues and
expenses. Trend analysis, ratio analysis, and common-size income statement analysis methods
are the most used.
18.2 Forecasting Sales
A sales forecast is the first step in creating a projection. Sales are tied to a firm’s level of activity,
and therefore establishing this up front is essential.
Expenses that are directly variable to sales will necessarily rise when sales rise.
Working capital elements such as receivables, inventory, and accounts payable are also
related to sales activity.
Longer-term, new fixed-asset investments may be necessary to meet expansion plans
but have to be projected independently.
03/21/2 2
