Question

8. The percentage of sales method has been used to forecast the firm’s financial statements. Sup-pose one of the senior executives asked you what assumptions are implied when one uses the percentage of sales method. That is, under what circumstances would the percentage of sales method produce a valid, as opposed to an incorrect, forecast? How would you answer? 9.

9.What are some other methods that could be used to forecast the asset-and-liability balances and, thus, the forecasted financial requirements? If the senior executives asked you to incor-porate these procedures into your analysis, how would you do it, how long would it take, and what additional data would you require

Answer 1

Percentage of Sales Method is one of the most widely followed method of forcasting Financial Statements. The Assumptions behind the Correctness of this forcast:

a. Micro Economic Conditions would remain the same.

b. Political Stability and constant Economic Polcies of Government.

c.Constant growth in GDP, Inflation etc.

d. No unforeseen disasters or events affecting the business operations.

9.

Financials can be forecasted on the basis of Qualitative or Quantitative Methods.

Examples of Quantitative Methods are:

a.Causal Methods: Uunder this, one or more of the items are forcasted and it is belived that there exists a cause and effect relationship between the items such that other can also be forecasted.

b.Time Series Methods: These methods take the help of historical patterns to forecast data and give results.

Examples of Qualitative Method are:

a. Market Research: This considers the information obtained from the public or customers regarding their future purchase options.

b.Opinions of Knowledgeable Person.

c.Delphi Method involves use of various Experts to forecast the Financials.

Financial Forecasting may be a time consuming and difficult activity as it need to consider varios factors and aspects. Only learned fallows who have wide knowledge and expertise can do Financial Forecasting.

Additional Data required may include Survey of Customers, Feedback Forms, National Data such as GDP, Inflation, Consumer Price Index etc