Chapter 16 Financial Planning and Forecasting 513planned distribution capacity, a new advertising campaign, and other factors,
management expects the growth rate to increase slightly, to 10%, in 2009. There-
fore, sales should rise from $3,000 million to $3,300 million.
Of course, management likes higher sales growth, but not at any cost. For
example, sales could be increased by cutting prices, spending more on advertising,
granting easier credit, and the like. However, all of those actions would have a
cost. Also, sales growth cannot occur without a concurrent increase in capacity,
and that too is costly. So the sales growth must be balanced against the cost of
achieving that growth.
If the sales forecast is off, the consequences can be serious. First, if the market
expands by more than Allied expects, it will not be able to meet demand, its cus-
tomers will buy from competitors, and it will lose market share. On the other hand,
if its projections are overly optimistic, Allied could end up with too much plant,
equipment, and inventory, leading to low turnover ratios, high costs for deprecia-
tion and storage, and write-offs of spoiled inventory. This would result in low
pro! ts and a depressed stock price. Moreover, if Allied! nanced its expansion with
debt, high interest charges would compound the! rm’s problems.
Finally, note that the sales forecast is the most important input in the! rm’s
forecast of! nancial statements, including the projected EPS, which we will cover
in Section 16-4. The importance of the sales forecast is highlighted when we fore-
cast the! nancial statements.
Allied Food Products: 2009 Sales Projection (Millions of Dollars)
F I G U R E 1 6! 13,0002,0001,0000Net Sales
($)2004 2005 2006 2007 2008 2009ProjectedRegression LineYear Sales
2004 $2,058
2005 2,534
2006 2,472
2007 2,850
2008 3,000
2009 3,300 (Projected)SELF^ TEST Why is an accurate sales forecast critical for! nancial planning?