Financial Forecasting

Essay by TDMiller98University, Bachelor'sA+, January 2007

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Businesses develop budgets and business plans to ensure optimum financial performance. An important element of budgeting and planning is financial forecasting. Forecasting the finances of a business requires certain understanding of financial dynamics. This paper will examine the necessary steps for financial forecasting, important elements of projecting future growth, types and methods of financing capital requirements, the impact of changes in interest rates and dividend payouts, alternatives to capital financing and its impact on debt ration and equity, as well as the effects of outsourcing on the planning and budgeting process.

Steps Necessary for Financial Planning and Forecasting

The Executive Fruit Company is developing a new financial plan and forecast. This plan will encompass the current and future investment opportunities, projecting the results of those choices, deciding the best and most beneficial alternative, and measuring those results against the goals of the company. In developing a financial plan and forecast, it is important to consider the short and long-term benefits and outcomes.

Executive Fruit Company would begin with three potential plans. The first would include the most aggressive growth outcomes, the second a normal growth plan and the third is a plan for a negative economic turn. All these plans would address the capital expenditures, working capital and potential strategies surrounding investments. With the plans developed, the company is ready to begin analyzing the potential benefits.

Executive Fruit Company begins the process by setting up a forecasting model. The model includes data from the balance sheet including assets, liabilities, and owner's equity. Using an excel spreadsheet the data will include growth, tax, and interest rates, sales and payout ratios. Once the formulas are inputted the data can be manipulated and various potential outcomes can be determined (see spreadsheet attached at end).

Projection of future years

The actual growth rate in...