Forecasting, particularly on a short-term basis (one year to three years), is essential to planning for business success. This process, estimating future business performance based on the actual results from prior periods, enables the business owner/manager to modify the operation of the business on a timely basis. This allows the business to avoid losses or major financial problems should some future results from operations not conform with reasonable e pectations. Forecasts - or !ro Forma "ncome #tatements and $ash Flow #tatements as they are usually called - also provide the most persuasive management tools to apply for loans or attract investor money. %s a business e pands, there will inevitably be a need for more money than can be internally generated from profits. !rofit forecast is the amount of profit a company e pects to ma&e at the end of the period. The monthly profit and loss forecast will consist of the following' o o o o o o o #ales $ost of sales (ross !rofit )verheads Total )verheads *iscellaneous income +et !rofit
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0. %verage past general, administrative, and selling e penses necessary to generate your former sales volumes 1. Trends in the company2s need to borrow (supplier, trade credit, and ban& credit) to support various levels of inventory and trends in accounts receivable re,uired to achieve previous sales volumes 3ni,ue company data, particularly' .. !lant capacity /. $ompetition 0. Financial constraints
1. !ersonnel availability
1. 4lasticity of demand for the product or service your business provides ( -emand is said to be 5elastic5 if it decreases as prices increase, a demonstration that consumers can do without or with less of the goods or service. "f demand for something is relatively steady as prices increase, it is 5inelastic.5) 6. %vailability of raw materials )nce these factors are identified, they may be used in !ro Formas, which estimate the level of sales, e pense, and profitability that seem possible in a future period of operations.
0. !opulation growth
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6. 7.
8.
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6.
to those people responsible for the preparation of pro forma income statement7 determining the factor that restricts output7 preparation of the sales budget7 initial preparation of various budgets of pro forma income statement7 negotiation of budgets with superiors7 coordination and review of budgets of pro forma income statement7 final acceptance of pro forma income statement7 ongoing review of budgets.
this factor determines the point at which the annual profit forecasting process begins.
The budgeted or pro forma income statement is prepared after the operating budgets have been completed. The managers who are responsible for meeting the budgeted performance should prepare the budget for those areas for which they are responsible. The preparations of the budget should be a bottom-up process. This means that the budget should originate at the lowest levels of management and be refined and coordinated at higher levels. The justification for this approach is that it enables managers to participate in the preparation of their budgets and increases the probability that they will accept the budget and strive to achieve the budget targets.
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The profit forecasting should not stop when the operating budgets of pro forma income statement have been agreed, periodically, the actual results should be compared with the budgeted results. These comparisons should normally be made on a monthly basis7 so that it has the ma imum motivational impact. This will enable management to identify the items that are not proceeding according to plan and to investigate the reasons for differences
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1. motivating managers to strive to achieve the organi:ational goals7 6. controlling activities7 =. evaluating the performance of managers.
Planning
The profit forecasting process ensures that managers do plan for future operations, and that they consider how conditions in the ne t year might change and what steps they should ta&e now to respond to these changed conditions. This process encourages managers to anticipate problems before they arise, and hasty decisions that are made on the spur of the moment, based on e pediency rather than reasoned judgment will be minimi:ed.
Coo $ination
The profit forecasting serves as a vehicle through which the actions of the different parts of an organi:ation can be brought together and reconciled into a common plan. <ithout any guidance, managers may each ma&e their own decisions, believing that they are wor&ing in the best interests of the organi:ation.
Communication
Through the profit forecasting, top management communicates its e pectations to lower level management, so that all members of the organi:ation may understand these e pectations and can coordinate their activities to attain them.
Moti%ation
The profit forecasting can be a useful device for influencing managerial behavior and motivating managers to perform in line with the organi:ational objectives. !rofit forecasting provides a standard that under certain circumstances, a manager may be motivated to strive to achieve.
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Cont ol
% profit forecasting assists managers in managing and controlling the activities for which they are responsible. >y comparing the actual results with the budgeted amounts for different categories of e penses, managers can ascertain which costs do not conform to the original plan and thus re,uire their attention.
#u$geta ! Slac)
>udgetary slac& or padding the budgets can occur as managers will intentionally blow up their budget figures for fear of top management9s reprimanding them.
Regula l! ,"$ating
There is a need to revise/update the budget which at the time was based on a certain set of circumstances/best information.
3nrealistic budgets can lead managers to ma&e decisions that might be detrimental to the company. % good e ample of over-ambitious sales budget will lead to disastrous impact li&e giving steep discount to increase volume, etc.
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