Question

Why construct financial forecasts? From a planning perspective, is it necessary to forecast the future as it relates to the organization as well as the industry as a whole? If you were President and CEO of Apple Corporation, would you want to know what the forecast for iPhones would be in the next year, 5 years, and 10 years? Why would this information be important? Explain.

Answer 1

Why construct financial forecasts? From a planning perspective, is it necessary to forecast the future as it relates to the organization as well as the industry as a whole?

Answer :
Forecasts are important because they give an essence of what the company's performance would like in the years to come. It is imperative to forecast the growth of the company and all the relevant financial statements i.e. Profit and Loss, Balance Sheets, Cash Flow statements because it gives an idea of how the company would grow in the years to come. This is particularly helpful for the company to prepare for manufacturing beforehand and prepare for the supply/sales as is envisaged by the company. It is however not necessary that the given forecast would be reached. It may either be lagged or it may either be breached. However what is important is the the corporation would already have a sense of what the future would look like and would prepare for the same.

With increased competition these financial forecasting methods have developed in complex ways. There is also a sensitivity analysis that is done on the financials. This helps the company gauge beforehand the different scenarios ranging from the worst to the best that may occur in future. This helps the company to plan corrective actions that they may have to take in the event of a worse scenario or how to cope up with increased demand and the best scenario.

The complete financial forecast is in a gist dependent on the Sales/Revenue Forecast. All the other forecasts i.e. Net Profit, Costs, etc. are basically derived from the Sales forecast as ratios that are extrapolated into the future. Thus this gives the company an opprtunity to gauge how the costs would look like etc.. The company's debt position can also be forecasted which would help the company predetermine any loans or funding requirements that may arise and any preparations for the same. Cash flow analysis helps the company to determine the future cash flows which when discounted would give the value of the company in present.

Thus financial forecastsare important as also industry forecast. The industry forecast tells us where the industry as a whole would progress to. Industry forecast would ultimately affect the company forecast as the growth rate of the industry as a whole would determine how the company itself would grow. In a laggard industry even if the company is good, the company's growth may get hindered. Similar for a leading industry scenario.

If you were President and CEO of Apple Corporation, would you want to know what the forecast for iPhones would be in the next year, 5 years, and 10 years? Why would this information be important?

Answer

As the President and CEO of Apple Corporation, i would definitely want to know the forecast for iPhones for the next 5 years, 10 years as i would get a gist of how many iPhones to manufacture. This would help me determine an estimate of the the Sales that i would be having. This would help me deteremine the raw material costs that i would have to incur. I would understand how much fund to deploy for the said production and from where to source the same i.e. either from my cash reserves, or from bank loan funding or through public issues. I would also get to know how my cash flows i.e. Cash Flows from operations, Cash flows from Investing, cash flows from financing would look like. All these are just estimated but then when done correctly and the assumptions taken to arrive at these taken perfectly it can be very rewarding for Apple as a company. Sales forecast is something which if it hits the bulls eye in terms of the actual results, it can thwart away competition. Thus i would also get to know whether to develop a new version of the iPhone as i would know how my sales of the current iPhone version woudl fare. I would get micro level details of which geography is likely to contribute how much to the sale. I would get an estimate and can work toward pushing my marketing strategy toward favorable geographies.

I woudl get to know from the industry forecast how the Tech industry would shape uo in terms of new disruptions and i can plan my product launches and subsequent sales related to the same. The industry growth would give me a sense of how my company would grow. Also geographically i would get to know how i would likely fare in these uncertain times in different geographies and what strategy to use for each of them to increase my sales.

Thus all in all the information related to financial forecast would help my company decide the strategy that would be needed to be adopted in the years to come so that the company stays where it is i.e. On the Numero Uno Position.