Chapter 16 Financial Planning and Forecasting 52316-5 USING REGRESSION TO IMPROVE FORECASTS
9
In! nancial statement forecasts, it is often appropriate to assume that most of the
assets increase at the same rate as sales. However, that is often not the case. We
noted in our discussion of the AFN equation that excess capacity might exist, in
which case assets would increase less rapidly than sales. Similarly, economies of
scale might exist, and this too could enable sales to increase less rapidly than assets.
We can use regression techniques to investigate the existence of such situations
and thus improve the! nancial forecasts.
To illustrate regression analysis, consider Figure 16-2, which shows Allied’s
sales, inventories, and receivables during the last 5 years and scatter diagrams of
inventories and receivables versus sales. Estimated regression equations, found
with a! nancial calculator or spreadsheet, can be developed. For example, here is
the estimated relationship between inventories and sales (in millions of dollars):
Inventories! #$35.7 $ 0.186(Sales)
We can use the regression equation to estimate the 2009 inventory level. Since 2009
sales are projected at $3,300 million, according to the regression, 2009 inventories
should be $578 million:
Inventories! #$35.7 $ 0.186($3,300)! $578 million
Regression Analysis
A statistical technique that
fits a line to observed data
points so that the resulting
equation can be used to
forecast other data points.Regression Analysis
A statistical technique that
fits a line to observed data
points so that the resulting
equation can be used to
forecast other data points.(^9) This section is relatively technical, but it can be omitted without loss of continuity.
Allied Food Products: Regression Models (Millions of Dollars)
F I G U R E 1 6! 2
400
500
600
700
300
Inventories
($)
0 2,000 2,250 2,500 2,750 3,000 Sales ($)
Inventories = –35.7 + 0.186 (Sales)
R^2 = 0.51
R^2 = 0.81
250
300
350
400
200
Receivables
($)
0 2,000 2,250 2,500 2,750 3,000 Sales ($)
Receivables = 62 + 0.097 (Sales)
Year Sales Inventories Accounts Receivable
2004 $2,058 $387 $268
2005 2,534 398 297
2006 2,472 409 304
2007 2,850 415 315
2008 3,000 615 375
2009 3,300 (Projected)