Question

5. Discuss the importance of sales forecasts in the financial planning process, and why managers construct pro forma financial statements.

Answer 1

The importance of sales forecasting in Financial planning process is as follows-

1. It helps in price stability as it can get rid of panic buying and panic selling.

2. It helps in continuous improvement through improvement in predicting different sales forecast related to different specific periods.

3. It helps in internal control - Sales forecasting helps in internal control abd management and evaluation of performance of employees regularly.

4. It helps in Demand forecasting through probability of expectations of demand at different levels.

5. It helps in supply chain management and avoid excess production and excess wastage.

6. It helps in inventory control and inventory management and it helps in avoidance of situation like having under inventory and over inventory.

Pro forma statement privides important expectations about different types of forecasting related to sales, earning, cash flows, balance sheet.This can be used as an estimate and an alternative to budget . It has standard figures which are compared with actuals to arrive at a deviation so it is highly important tool for managers about getting their future projections .