Podcast
Questions and Answers
What is the main purpose of creating a sales budget?
What is the main purpose of creating a sales budget?
Which of the following is NOT typically included in a short-term financial plan?
Which of the following is NOT typically included in a short-term financial plan?
Which of the following budgets is used to forecast the company's future cash inflows and outflows?
Which of the following budgets is used to forecast the company's future cash inflows and outflows?
What is the primary purpose of preparing pro forma financial statements?
What is the primary purpose of preparing pro forma financial statements?
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Which of the following is the most important factor in forecasting a company's sales?
Which of the following is the most important factor in forecasting a company's sales?
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What is the purpose of Projected Financial Statements?
What is the purpose of Projected Financial Statements?
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How are sales projections typically calculated?
How are sales projections typically calculated?
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What is a key step in projecting the cost of sales and operating expenses?
What is a key step in projecting the cost of sales and operating expenses?
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Which financial statement may be included in projected financial statements?
Which financial statement may be included in projected financial statements?
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How can one project the cost of sales using a ratio?
How can one project the cost of sales using a ratio?
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What helps determine the growth assumption for forecasting sales?
What helps determine the growth assumption for forecasting sales?
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Which of the following is NOT an external factor that should be considered in forecasting sales?
Which of the following is NOT an external factor that should be considered in forecasting sales?
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Which of the following is an internal factor that should be considered in forecasting sales?
Which of the following is an internal factor that should be considered in forecasting sales?
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What is the formula for calculating the required production in units?
What is the formula for calculating the required production in units?
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According to the example, what is Bethany Company's beginning inventory at the start of January?
According to the example, what is Bethany Company's beginning inventory at the start of January?
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What is the target ending inventory that Bethany Company would like to maintain at the end of each month?
What is the target ending inventory that Bethany Company would like to maintain at the end of each month?
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How many units should Bethany Company produce in order to fulfill the expected sales?
How many units should Bethany Company produce in order to fulfill the expected sales?
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Study Notes
Financial Planning and Budgeting
- Financial planning involves considering proposed outlays for fixed assets, research and development activities, marketing and product development actions, capital structure, and major sources of financing.
- It also includes termination of existing projects, product lines, or lines of business, repayment or retirement of outstanding debts, and any planned acquisitions.
Short-term Financial Plans
- Short-term financial plans include setting sales forecasts and other forms of operating and financial data.
- This translates into operating budgets, cash budgets, and pro forma financial statements.
Budget Preparation
- Budget preparation involves:
- Sales budget
- Production budget
- Operating budget
- Cash budget
Sales Budget
- The sales budget is the most important account in making a forecast, as most expenses are correlated with sales.
- The financial manager must support the sales forecast with reasonable assumptions.
Projected Financial Statements
- Projected financial statements are a tool for setting an overall goal of what the company's performance and position will be for and as of the end of the year.
- They set targets to control and monitor the activities of the company.
- Projected financial statements include:
- Projected Income Statement
- Projected Statement of Financial Position
- Projected Statement of Cash Flows
Steps on Financial Statement Projection (Projected Income Statement)
- Forecast sales based on the assessment of external and internal factors related to the company and historical growth.
- Forecast cost of sales and operating expenses by identifying variable and fixed costs.
Forecasting Cost of Sales and Operating Expenses
- Cost of sales are direct costs associated with the generation of sales.
- Operating costs are a mix of variable and fixed costs.
- External and internal factors should be considered in forecasting sales, including:
- GDP growth rate
- Interest rate
- Foreign exchange rate
- Income tax rates
- Inflation
- Competition
- Economic crisis
- Regulatory environment
- Political crisis
- Internal factors such as pricing, promotion activities, distribution, area/outlet coverage, production capacity, human resources, management style, reputation, and network of the controlling stockholders and financial resources.
Production Budget
- A production budget provides information regarding the number of units that should be produced over a given accounting period based on expected sales and targeted level of ending inventories.
- It is computed as: Required production in units = Expected Sales + Target Ending Inventories - Beginning Inventories.
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Description
Learn about the external and internal factors that need to be considered in sales forecasting, including GDP growth rate, interest rate, pricing, promotion activities, production capacity, and more.
