Question

You are the CEO of a newly formed company that provides computer maintenance services to Fortune 1000 companies. Before she considers the company’s business loan application, your banker requests pro forma income statements and balance statements for the next two years from you. Describe the process that you will use to conduct your forecasts. Do you see any problems with the forecasting process that you describe?

Answer 1

Budgeted Income statement and Balance sheet- Budgeted financial statements are made to know the future earnings and financial position of the company. It is helpful for business as well as for stakeholders of the company, if company has given loan application then bank will need the forecasted statements of company so that loan can be sanctioned.

How to conduct the forecast-

Firstly the previous year data is estimated, for example; previous year's sales, cost of sales, expenditures and net profit to know the budgeted sales and net profit. Same with the balance sheet items, based on previous years' data, budgeted numbers are estimated.

Example: If Sales are $10000 and are expected to increase 10% per year till 2 years then the sales figures for the two years will be:

10000 + (10000*10%) = $11000 (first year)

11000 + (11000*10%) = $12100 (second year)

Problems in forecasting process- Are as following:

1. Managers mostly do not use quantitative analysis in the forecast and there is lack of forecasting methodology.
2. Outcomes may be inaccurate and not reliable.
3. A bad forecast will create many problems.