Role that forecasting should play at Strident Marks

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Discuss the financial statement forecasting process and compare it to, and differentiate it from, the budgeting process.

Financial forecasting must be based on your company's vision, moderated by the experience and insight of your management team. And your forecasts must be supported by reasonable assumptions.

Here is an overview of the process:

Review your past operating results.

Analyse expected future market conditions for your various products or services.

Estimate your future sales volume, price and revenue for each product.

Estimate future costs based on forecast sales volume and expected cost relationships.

Deduct income taxes.

Make accounting adjustments, such as depreciation and amortization.

Deduct what you expect you will spend on fixed assets, working capital, and financing.

Include the proposed investments in the forecast.

source: http://strategis.ic.gc.ca/sc_mangb/stepstogrowth/engdoc/step1/ssg-1-4.php

How to Make Reliable Financial Forecasts:

Two key financial statements in the forecasting process are the cash flow forecast and the statement of changes in financial position. Here's what you do.

1. Review Past Operating Results

Determine:

past sales growth rates by product;

cost relationships to distinguish among fixed variable costs;

items of income and expenses that are unusual, non-recurring or not indicative of expected results;

income derived from assets that may not be included in the company during the forecast period (i.e. non-operating assets that may be withdrawn from the company before completion of the investment, such as excess cash balances, investment portfolios, art or excess land); and

break-even volume for the new product line. (You can use a Break-Even Analysis Tool to help with this. Check the Resources section.)

2. Make Estimations:

Estimate sales volume, price and revenue for each product, monthly for the first year and annually, thereafter, for years two, three, four and five based on an analysis of future market conditions for your various products.
Estimate costs for each future period based on forecast sales volume and expected cost relationships. Additional fixed and variable costs associated with forecast growth should be included in the estimates.

3. Make Deductions:

Deduct income taxes based on projected tax rates.

If there are significant differences between expenses recorded for accounting and for tax purposes, you may want to make these adjustments in a separate calculation. The primary adjustment would relate to the difference between depreciation recorded for accounting purposes and capital cost allowance recorded for tax purposes. Also consider the impact of tax losses carried forward.

4. Make Adjustments:

Adjust net income to cash flow from operations by adding back all non-cash charges included in the determination of net income. The main non-cash items are depreciation and amortization.
Based on your forecast ...