Answer to Question #6535 in Economics of Enterprise for LaMarcus Streeter

Question

Analyze the process of forecasting financial statements and make at least one recommendation for improving the accuracy of forecasts. Provide specific examples to support your response.

Answer 1

The most basic method of forecasting financial statements (income statements and balance sheets) is the percent of sales method. This method assumes that certain expenses, assets, and liabilities maintain a constant relationship to the level of sales. There are two inputs to this method: sales forecast (exogenous) and the percentages which are assumed to be constant.
The process involves the following stages. The first step in forecasting is to develop financial budgets (14 budgets in all):
1)& Determining Your Selling Price & Product Cost (per unit)
2) Developing Your Sales Budget
3) Developing Your Purchase Budget
4) Developing Your Direct Manufacturing Labor Budget
5) Developing Your Manufacturing Factory Overhead Budget
6) Developing Your Ending Inventory Budget
7) Developing Your Cost of Goods Sold Budget
8) Developing Your Fixed Asset Budget
9) Developing Your Operating Expenses Budget
10) Developing Your Drawings or Dividend Budget
11) Determining All Cash Investments Into Your Company
12) Developing Your Opening Balance Sheet
13) Developing Your Interest Expense Budget
14) Developing Your Income Tax Rate and Budget

After conducting all of the previous steps,
1) Creating Your Forecasted Cash Flow Statement
2) Creating Forecasted Income Statement
3) Creating Forecasted Balance Sheet
4) Creating Forecasted Ratio Analysis
5) Creating Forecasted Break-even Point
6) Creating Forecasted Sensitivity Analysis
7) Creating Notes to Forecasted Financial Statement

One way of increasing accuracy while forecasting financial statements is to encapsulate as more time periods as possible. Acting this way would minimize the probability of receiving irrelevant figures.&