MBA 207

ADVANCED FINANCIAL
MANAGEMENT
PROFESSOR:
BILLY I. BACARRA, CPA, REB, MBA,
PHD

PRESENTED BY:
DANIELLA MARIZ LAMPTEY
FINANCIAL FORECASTING,
PLANNING, AND BUDGETING
TOPIC
WHAT IS FINANCIAL FORECASTING?

Financial forecasting evaluates a company’s past performance and the market’s

current trends to predict its future financial performance. It’s a critical tool for
businesses of all sizes, as it can help them make informed decisions. Thus, they
gauge where to allocate resources and how to position the firm for growth best.
The four major components of financial forecasting
are projected income statements, cash flow, balance
sheet, and funding sources. Financial forecasting
has several methods to calculate the fundamentals
of financial indicators. Delphi, percent of sales,
moving average, etc., are some methods.
 KEY TAKEAWAYS
• Financial forecasting is the estimation of a company’s future financial performance.
It uses past performance records and present-day trends for the projection.
• It’s a crucial part of effective financial planning, as it helps make resource
allocation decisions to achieve satisfactory financial results.
• Analysts create them using various quantitative and qualitative techniques.
However, some popular methods include regression models, straight-line, market
research, etc.
• While financial forecasting predicts future outcomes and business performances,
financial planning uses that forecast to create functional and practical strategies.
•
HOW DOES FINANCIAL FORECASTING WORK?

• In financial forecasting, businesses project their financial statements to predict

the company’s future.
• Majorly, companies use the income statement for internal planning. However, they
may use all the financial statements when the aim is to bring in investors.
• Financial forecasting primarily lays a clear picture of the company’s future
position. Thus, management can use the estimation to create actionable schemes
to achieve business goals.
• For instance, firms can project and forecast their cash flow statement to
understand upcoming profits and losses.
Therefore, forecasting involves reflecting on data, numbers, and statistics. Those are
the factors that have an impact on a company’s behavior over a specific period.
Other factors, such as economic conditions and market trends, can also influence the
forecast. Thus, financial forecasting involves assumptions as well to equip such
unforeseen factors
COMPONENTS OF FINANCIAL FORECASTING
The primary financial statements and other funds are the fundamental and necessary elements of
forecasting a company’s financials.

1. Profit and Loss Statement

• The profit or loss statement, commonly known as the income statement,
is an essential forecasting component.
• It demonstrates how an organization generates profit or loss over a
period.
• The profit or loss statement projection can foresee impending expenses
and income. Budgets are also a large part of this statement’s
projection.
• Moreover, items that can be forecasted in a P&L statement include
revenue, COGS, operating expenses, depreciation, amortization,
interest income, and interest expense.
•
COMPONENTS OF FINANCIAL FORECASTING
The primary financial statements and other funds are the fundamental and necessary elements of
forecasting a company’s financials.
2. Cash Flow Statement
• Every company relies on cash to run. The cash flow statement displays the total amount of
money coming in, going out, and remaining at the end of the month.
• The company’s income statement may predict loss but not cash on hand. Thus, we project
cash flow statements to determine how the company can operate while making timely
adjustments to create profit cycles.
• A forecast of cash can help management plan on cash outflow for wages, debt payments, tax,
etc. They can also use it to plan future investment strategies.
• Items that can be forecasted in a Cash Flow statement include cash flow from operating
activities, cash flow from financing activities, cash flow from investing activities, and
cash in hand.
COMPONENTS OF FINANCIAL FORECASTING
The primary financial statements and other funds are the fundamental and necessary elements of
forecasting a company’s financials.

3. Balance Sheet
• The balance sheet provides a summary of the company’s financial position. It
consists of assets like cash on hand, money in the bank, etc.
• It also includes shares, investor stocks, and shareholders’ equity.
• Within liabilities, it contains unpaid bills, loan fees, credit card balances, and other
obligations.
• It uses various financial inputs like profit, investment, financial plans, and cash and
capital expenditure budgets.
• Items forecasted in a Balance Sheet include long-term debt, retained earnings, Net
PP&E, other liabilities, and much more.
COMPONENTS OF FINANCIAL FORECASTING
The primary financial statements and other funds are the fundamental and necessary elements of
forecasting a company’s financials.

4. Working Capital
• We project the additional funds using the projected balance sheet, income statement,
and initial balance sheet. These funds used during the planning period are known as
working capital.
• Firms use this projection to evaluate operating expenses like tax and dividend
payments.
• Items forecasted in a Working Capital Schedule include accounts receivable,
accounts payable, prepaid expenses, other current liabilities, etc.
HOW TO CREATE A FINANCIAL FORECAST?

I. DETERMINE THE PURPOSE

II.GATHER INFORMATION
III. CHOOSE A METHOD
IV.PROJECT THE INFORMATION
V.MONITOR & FORECAST
VI.
Example:
Let us see an example using the percent of sales method.
Company ABC produces stationery items. As notebooks are their prominent product, they want to forecast
the next year’s sales. The given data is,

Sales for year 2020 = $300,000;

Sales for year 2021 = $390,000;
Forecast the next year’s sales for the notebook.
Given:

First, we need to calculate the growth rate for Sales.

Formula: Growth Rate = (Sales for 2021 / Sales for 2020) – 1

 Next, we calculate the future sales forecast.

Therefore, we determine next year’s sales forecast using the

percent of sales method.

Sales for 2022 = $507,000

 PERCENT OF SALES FINANCIAL
FORECASTING METHOD

• The percentage of sales method is a forecasting model that

makes financial predictions based on sales. Financial
statement items like the cost of goods sold and accounts
receivable appear as a percentage of sales. Companies then
use this data to assess their financial future.
•
• The percentage of sales method links sales data to company
balance sheets and income accounts. It's one of the most
efficient methods a business can use to create a detailed
financial outlook statement. While a business can't get
precise numbers this way, it's still an effective way to learn
about an organization's short-term financial future.
 PERCENTAGE OF SALES METHOD EXAMPLE

Step 1
Liz looks through her records for the month and calculates her total sales at $60,000. It’s
been a decent month and she’ll break even, but she wants to know what the following
month might look like if sales increase by 10 percent.
Step 2
To forecast her sales, Liz needs to decide what accounts she wants to look at. We’ll dig into
the accounts we listed above:
•Cash
•Accounts receivable
•Accounts payable
•Fixed assets
•Cost of goods sold
•Net income
STEP 3
NEXT TO EACH ACCOUNT, LIZ WRITES DOWN THE
BALANCE:
Cash: $5,000
Accounts receivable: $6,000
Accounts payable: $8,000
Fixed assets (rent, etc): $10,000
Cost of goods sold: $11,000
Inventory: $15,000
Net income: $20,000 (this also includes credit sales)
Next, Liz needs to calculate the percentage of each
account in reference to her revenue by dividing by the
total sales.

Cash: $5,000 → 8.3%

Accounts receivable: $6,000 → 10%
Accounts payable: $8,000 → 13.3%
Fixed assets (rent, etc): $10,000 → 16.6%
Cost of goods sold: $11,000 → 18.3%
Inventory: $15,000 → 30%
Net income: $20,000 (this also includes credit sales) → 33.3%
Just as we showed earlier, Liz uses the forecast sales equation to
determine what a 10 percent increase in sales would mean:

If Liz’s current sales are at $60,000 and she expects a 10 percent increase,
her formula would look like this:

$60,000 (1+10/100) = $60,000 (1.1) = $66,000

If her sales increase by 10 percent, she can expect your total sales value in
the upcoming month to be $66,000.
THE BUDGET, OR FINANCIAL
PLAN
WHAT IS A FINANCIAL PLAN?

• A financial plan documents an individual’s short- and long-term financial

goals and includes a strategy to achieve them.
• The plan should be comprehensive and highly customized.
• It should reflect an individual’s personal and family financial needs,
investment risk tolerance, and plan for saving and investing.
• Planning in finance starts with a calculation of one’s current net worth
and cash flow.
• A solid financial plan provides guidance over time and serves as a way to
track progress toward your goals.
FINANCIAL PLANS: BUDGETS
• Pro forma financial statements provide a look at the potential results of
financial decisions. They can also be used as a tool to plan for certain results.
When projected in the form of a budget, figures become not only an
estimated result but also an actual strategy or plan, a map illustrating a path
to achieve a goal. Later, when you compare actual results to the original plan,
you can see how shortfalls or successes can point to future strategies.
• Budgets are usually created with a specific goal in mind: to cut living expenses,
to increase savings, or to save for a specific purpose such as education or
retirement. While the need to do such things may be brought into sharper
focus by the financial statements, the budget provides an actual plan for
doing so. It is more a document of action than of reflection.
• As an action statement, a budget is meant to be dynamic, a reconciliation of
“facts on the ground” and “castles in the air.” While financial statements are
summaries of historical reality, that is, of all that has already happened and is
“sunk,” budgets reflect the current realities that define the next choices. A
budget should never be merely followed but should constantly be revised to
reflect new information.
THE BUDGET PROCESS
KEY TAKEAWAYS
• A budget is a process that mirrors the financial planning process.
• The process of creating a budget can suggest goals, behaviors, and
limitations.
• For the budget to succeed, goals and behaviors must be reconciled.
• Budgets should be prepared conservatively:
• Overestimate costs.
• Underestimate earnings.
• The appropriate time period is one that is
• short enough to limit the amount of data,
• long enough to capture meaningful data.
•
THE STRUCTURE OF THE BUDGET

Budget structures define a framework in which individual budgets

are established, maintained, tracked, and controlled. Each budget
structure is composed of budget levels that define the budget
hierarchy of the structure.

The budget has two parts:

Receipts and Expenditures.
Receipts
The receipts of the government show the different sources from which the
government raises revenue. These receipts are of two kinds:
1. Revenue receipts are current income receipts from all sources such as
taxes, profits of public enterprises, grants, etc. Revenue receipts neither
create any liability nor cause any reduction in the assets of the
government.
2. Capital receipts are the receipts of the government that either create
liability or cause any reduction in the assets of the government. e.g.
borrowings, recovery of loan and disinvestment, etc.
 REVENUE RECEIPTS
Tax Revenue
Direct Taxes -are the liability of payment, and the burden of the
A tax is a legal compulsory payment tax falls on the same person.
Example of Direct Taxes
by the people and firms to the
• Income tax: the tax on incomes of individuals
government of a country without • Corporation tax: the tax on corporate profits
• Wealth tax: the tax on wealth of individuals
reference to any direct benefit in • Gift tax: the tax on gifts given
return. It is imposed on the people by •
the government. A government Indirect Taxes - taxes on production are indirect taxes because
producers recover these taxes from buyers by increasing the
price of the product.
collects revenue from various taxes • Example of Indirect Taxes
like income tax, sales tax, service • Value added tax
• Excise duty: the tax on goods manufactured in factories
tax, excise duty, custom duty, etc. • Customs duty: the tax on imports and exports
• Service tax: the tax on the services provided
 REVENUE RECEIPTS
Non-Tax Revenue
1. Commercial Revenue: It is received by the
The incomes accruing to the government in the form of prices paid by people
for goods and services that the government
provides e.g. people pay for electricity and
government from sources services of Railways, postal stamps, tolls, etc.
2. Administrative Revenue: It arises on account of the
other than taxes are non- administrative services of the government. They
are:
a. fees in the form of passport fees,
tax revenues. The major government hospital fees,
education fees, court fees, etc.
b. fine and penalties charged by the
sources of non-tax revenues government on law-breakers for
disobeying rules and
of the central government c.
regulations.
License fee and permit
d. Income that the government gets by
of India are: taking possession of
property which has no legal
claimant or legal heir.
e. interest receipts.
f. profits of public sector undertakings.
 CAPITAL RECEIPTS
Borrowings
There are two sources from which the central government borrows. They are:

1.Domestic Borrowings: 2. External Borrowings:

The government borrows from the
In addition to domestic borrowings
the government also borrows from
domestic financial market by issuing foreign governments and
securities and treasury bills. It also international bodies like International
borrows from people through various deposit Monetary Fund (IMF), and World
Bank. Foreign borrowings by the
schemes such as the Public Provident Fund, government bring in foreign exchange
Small Savings Schemes, and National into the domestic economy.
Savings Scheme. These are borrowings of
the government within the country.
 CAPITAL RECEIPTS
Recovery of Loans
Quite often state and local governments borrow
from the central government. The loans recovered
by the central government from state and local
governments are capital receipts in the budget
because the recovery of loans reduces debtors
(assets).
 CAPITAL RECEIPTS
Disinvestment
This is a very recent source of capital receipts by which the central
government has been mobilizing financial resources since 1991.
Before 1991, the central government-owned 100 percent of the
shares of public sector undertakings. In 1991, the government
adopted the policy of privatization of public sector undertakings.
Consequently, it started selling its shares to the general public and
financial institutions. This selling of shares of public
sector undertakings by the government is known as disinvestment of
public sector undertakings.
 EXPENDITURE
CAPITAL EXPENDITURE AND PLAN EXPENDITURE AND NON-
REVENUE EXPENDITURE PLAN EXPENDITURE
When government incurs expenditure to After independence, India adopted the path of
create assets such as school and planning to achieve economic development.
hospital buildings, roads bridges, canals, Under planning, provisions were made in the
railway lines, etc. or reduce its liability such government budget for expenditure that was to
as repayment of loan, etc., such expenditure be incurred every year according to the
is known as capital expenditure. But when priorities laid down in the five-year plans.
government incurs expenditure that neither Such expenditure is known as plan
creates any asset nor reduces any liability, expenditure. Beside plan expenditure,
such expenditure is known as revenue government also incurs routine expenditure
expenditure. For Example, payment of such as expenditure on police, judiciary, water
salaries to government employees, supply, sanitation and health,
maintenance of public property, providing legislatures, defence, various government
free education and health services to people, departments, etc. Such routine expenditure
etc constitute revenue expenditure. These is termed as non-plan expenditure.
do not create any public asset.
 Depending on the people involved, the
A SHORTCUT systems available, and the flexibility to plan
APPROACH TO and propose the budget, organizations can use
FORMULATING a top-down or bottom-up budgeting approach.
THE BUDGET A top-down budget is known as an imposed
budget. It’s set without any participation by
1. Top-down or the ultimate budget holder.

bottom-up A bottom-up budget is known as a

participative budget. All budget holders can
budgeting contribute.
 Points to consider about imposed/top-
bottom budgeting style:

A SHORTCUT •It’s time-efficient because decisions are

made by a limited number of senior
APPROACH TO managers.
•
FORMULATIN •Junior managers might not have the
G THE skills to fully participate in the budgeting
decision-making process.
BUDGET •
•Senior managers have a better view of
strategic objectives and the resources
available.
2. Top-down •
•Senior managers are closer to the
budgeting strategic objectives and have a long-term
view of the organization.
•
•Junior managers could build slack into
the budget to make it easier to achieve.
 Points to consider about
A SHORTCUT participative/bottom-up
budgeting style:
APPROACH TO •Management’s morale is
FORMULATIN improved.
•
G THE •Managers are more likely to

BUDGET achieve the plans in the budget.

•
•Lower-level managers are
closer to the business and have
3. Bottom-up better knowledge of unique
issues/challenges and
opportunities.
budgeting
 Businesses often build on past budgets. The incremental
budgeting process starts with the previous budget and adds
A SHORTCUT (or subtracts) an incremental amount to cover inflation and
APPROACH TO other known changes.

FORMULATINGAdvantages:
THE BUDGET ••It’s quick and easy to maintain.
It suits stable organizations with acceptable historical
figures.
•
4. Incremental Disadvantages:
•It embeds earlier issues and inefficiencies.
budgeting •Economically inefficient activities can continue.
•It encourages artificial behavior (i.e. spending the whole
budget so the same amount is included in the following
year).
 Zero-based budgeting requires all costs to be justified by the
expected benefits. It’s an alternative to incremental budgeting –
A SHORTCUT the budget is based on the previous period’s budget or actual
results, plus extra for inflation and other known changes.
APPROACH TO
Advantages:
FORMULATING •Inefficient and obsolete operations can be discontinued.
•There’s an increase in staff involvement because it requires a
THE BUDGET lot more information and engagement.
•It responds to changes in the business environment.
•There is efficient and effective resource allocation.
•
5. Zero-based Disadvantages:
•It focuses on short-term benefits to the detriment of long-term

budgeting advantages.
•The rigid budget process leads to lost opportunities.
•Management skills might be lacking.
•Staff might be demotivated by the need for significant time and
effort.
 A rolling budget is continuously updated by adding an
A SHORTCUT accounting period when the earliest accounting period
expires.
APPROACH TO
Advantages:
FORMULATING•Planning and control are based on an accurate budget.
THE BUDGET •The budget extends into the future.
•It reduces uncertainty.

•It encourages managers to reassess the budget regularly and

more frequently.

6. Rolling •
Disadvantages:
•It’s costly and time-consuming.
budgeting •Staff might be demotivated by the time spent on budgeting.
•It can lead to less controlled results due to the effort
required.
•Version control can be an issue because numbers are always
changing.
 This budget is based on activities. Cost-driver
A SHORTCUT data is used to set budgets and variance
analysis.
APPROACH TO
FORMULATING Advantages:
•This system draws attention to overhead costs,
THE BUDGET which make up a large proportion of total
operating costs.
•It recognizes the activities that drive costs.
7. Activity-based •It provides useful information for Total
budgeting (ABB) Quality Management (TQM).
•
Disadvantages:
•It takes time to identify activities.
•It’s difficult to identify responsibility for
individual activities.
TYPES OF BUDGETS
Master budget
• The master budget is a compilation of all the budgets. It’s similar to published financial accounts.
It consolidates all subsidiary budgets and usually comprises the budgeted profit and loss
account, balance sheet, and cash-flow statement.
Cash budget
• A cash budget is a detailed estimate of the organization’s cash inflows and outflows.
Capital budget
• A capital budget facilitates decision-making on specific investment project choices. It guides the
total amount of capital expenditure to commit.
Operating budget
• An operating budget captures the revenues income, and expenses expected in the forthcoming
period.
• Budgeting has now evolved beyond traditional budgeting to include techniques such as better
budgeting, advanced budgeting, and beyond budgeting.
COMPUTER-BASED MODELS
FOR FINANCIAL PLANNING
AND BUDGETING.
 Computer-based models for financial planning and budgeting
are essential tools for individuals, businesses, and organizations
to manage their finances effectively. These models use software
applications to analyze financial data, forecast future trends, and
create budgets based on various assumptions and scenarios.
Here are some common types of computer-based models used
for financial planning and budgeting:
 SPREADSHEET SOFTWARE

Programs like Microsoft Excel or Google Sheets are widely

used for financial modeling. Users can create custom
spreadsheets to track income, expenses, investments, and
other financial metrics. Excel, in particular, offers powerful
features such as formulas, macros, and data visualization
tools for building complex financial models.
 FINANCIAL PLANNING SOFTWARE

Dedicated financial planning software provides

comprehensive tools for creating budgets, managing
investments, and planning for long-term financial goals.
These platforms often include features like retirement
planning calculators, investment portfolio analysis, and
scenario modeling capabilities to help users make informed
financial decisions.
ENTERPRISE RESOURCE PLANNING (ERP)
SYSTEMS

ERP systems integrate various business processes, including

finance, accounting, and budgeting, into a single software
platform. These systems offer robust financial planning and
budgeting modules that allow organizations to streamline
their budgeting processes, allocate resources efficiently, and
track financial performance in real-time.
 FORECASTING MODELS

Forecasting models use historical financial data to predict

future trends and outcomes. Time series analysis, regression
analysis, and other statistical techniques are commonly
employed to develop forecasting models for revenue,
expenses, cash flow, and other financial variables. These
models help organizations anticipate potential financial risks
and opportunities.
 SIMULATION AND SCENARIO ANALYSIS
TOOLS

Simulation tools enable users to simulate different

scenarios and assess their potential impact on financial
outcomes. By adjusting various parameters and
assumptions, users can evaluate the sensitivity of their
financial plans to changes in market conditions, business
strategies, or external factors.
 BUDGETING AND PLANNING SOFTWARE

Dedicated budgeting and planning software streamlines the

budgeting process by providing templates, automated
workflows, and collaboration features for financial planning
activities. These tools often integrate with accounting
systems and offer advanced reporting capabilities to monitor
budget performance and variance analysis.
 THERE ARE TWO MAIN CATEGORIES OF BUDGETING
SOFTWARE: BUSINESS AND PERSONAL.
BUSINESS BUDGETING SOFTWARE Personal Software
IS TYPICALLY SIGNIFICANTLY MORE COMPLEX AND MORE EXPENSIVE AND
OFTEN REQUIRES A HIGH DEGREE OF CUSTOMIZATION. on the other hand, can be much simpler and more affordable.
LIST OF BUSINESS BUDGETING SOFTWARE SOLUTIONS:
Below is a non-exhaustive list of personal budgeting
software:

• ABILA MIP FUND ACCOUNTING • Acorns

• ACCOUNTEDGE
• ACCUFUND ACCOUNTING SUITE • CountAbout
• ACUMATICA ERP • LearnVest
• ADAPTIVE INSIGHTS • Mint
• BOARD • Money Dance
• BUDGET MAESTRO
• BUDGETPAK BY XLERANT • Money Dance
• DESKERA ERP • Mvelopes
• FINANCIAL EDGE BY BLACKBAUD • Personal Capital
• MULTIVIEW
• NETSUITE • Quicken
• QUICKBOOKS ENTERPRISE • You Need a Budget (YNAB)
• SAGE INTACCT
• SAP ANYWHERE
• SAP ERP CORE FINANCE
• VERSACCOUNTS SMALL BUSINESS CLOUD ERP
• XLEDGER
§
 BUSINESS INTELLIGENCE (BI) TOOLS

BI tools enable users to analyze and visualize financial

data from multiple sources, helping them gain insights
into their financial performance and trends. These tools
offer interactive dashboards, ad-hoc reporting, and data
discovery features that facilitate data-driven decision-
making in financial planning and budgeting processes.