Financial forecasting is the process of predicting what future financial statements will look like in order to determine what outside funds are needed to support the firm’s operations. The forecasting process allows a firm to express, and examine the consequences of, its goals and priorities. Proforma financial statements (i.e., projected future statements) are often required by banks as a prerequisite to consideration for a loan. They also provide a simple, yet highly effective way, to monitor performance in order to exercise effective financial control.
The principal driver in creating proforma statements is the sales forecast. A projected increase in sales will require additional assets. Those assets (i.e., increase in accounts on the left hand side of the balance sheet) must be paid for with corresponding increases in liabilities and equity (i.e., increases in accounts on the right hand side of the balance sheet). The percent of sales method is most often used to forecast future asset, liability accounts and equity. For this process, the direct financing accounts on the right hand side of the balance sheet (in particular, notes payable, long-term debt, preferred stock, and common equity are kept constant. The resulting difference between projected total assets and projected total liabilities and equity is the company’s future need for external funding. The growth rate in sales that results in the future need being zero is called the firm’s sustainable growth rate.
This mid-term assignment has three related parts:
Create proforma statements for your chosen company for next year.
Estimate the sustainable growth rate for your company.
Perform a SWOT analysis on your company, using lessons you have learned in weeks one through four concerning microeconomics, macroeconomic, financial analysis and financial forecasting.
Be sure your assignment includes the following details:
Estimate the sales growth rate for the company for the next annual accounting period. Explain each step of your estimation process, similar to the process described in Higgins (2015).
Create proforma income statements and proforma balance sheets for your company for the next annual accounting period using the percent of sales method. Assume that all income accounts increase as a percent of sales, all asset accounts increase as a percent of sales, spontaneous liabilities increase as a percent of sales, and all financing accounts remain constant. The statements you create will be the initial round in order to determine external funding needed. Clearly identify what your statements indicate is the need for external funds for the next annual accounting period.
Estimate the sustainable growth rate for your firm. Assume that all income accounts increase as a percent of sales, all asset accounts increase as a percent of sales, spontaneous liabilities increase as a percent of sales, and all financing accounts remain constant. Also assume that the company will pay the exact same dollar amount in dividends in the next annual accounting period that it paid during the most recent period. Be sure to describe all steps in the process and clearly indicate the growth rate (as a percentage) that you find.
Compare the sustainable growth rate you determined to the average annual growth rate in sales the company has had over the past 2 years. Is the average annual growth rate greater than or less than the sustainable growth rate? Assess this relationship.
Conduct a SWOT analysis of your company. Use one of the many templates (tables) for SWOT that you can find online. Your SWOT analysis should include at least three entries for each element in the table. The entries should be some combination of microeconomic (related to demand for the product, cost functions, competition, etc.), macroeconomic (related to projected growth in the overall economy, inflation, unemployment, etc.), financial past (based on your analysis in week three), and projected financial future (based on your analysis in Week 4).
Write a one-paragraph description of each element in your SWOT table. Specifically indicate why you believe the chosen element is a Strength, Weakness, Opportunity or Threat.
Length: 8-10 pages, excluding title page and references
References: Include a minimum of three scholarly peer-reviewed resources.
Your report should demonstrate thoughtful consideration of the ideas and concepts presented in the course by providing new thoughts and insights relating directly to this topic