CHAPTER 3 Cash Flow and Financial Planning 109
FIGURE 3.2 Short-Term Financial Planning
The short-term (operating) financial planning process
Pro Forma
Income
Statement
Pro Forma
Balance Sheet
Current-
Period
Balance
Sheet
Cash
Budget
Production
Plans
Sales
Forecast
Long-Term
Financing
Plan
Fixed Asset
Outlay
Plan
Information Needed
Output for Analysis
Hint Electronic
spreadsheets such as Excel and
Lotus 1–2–3 are widely used to
streamline the process of
preparing and evaluating these
short-term financial planning
statements.
get, and pro forma financial statements. The entire short-term financial planning
process is outlined in Figure 3.2.
Short-term financial planning begins with the sales forecast. From it, produc-
tion plans are developed that take into account lead (preparation) times and
include estimates of the required raw materials. Using the production plans, the
firm can estimate direct labor requirements, factory overhead outlays, and oper-
ating expenses. Once these estimates have been made, the firm’s pro forma
income statement and cash budget can be prepared. With the basic inputs (pro
forma income statement, cash budget, fixed asset outlay plan, long-term financ-
ing plan, and current-period balance sheet), the pro forma balance sheet can
finally be developed.
Throughout the remainder of this chapter, we will concentrate on the key
outputs of the short-term financial planning process: the cash budget, the pro
forma income statement, and the pro forma balance sheet.
Review Questions
3–7 What is the financial planning process?Contrast long-term (strategic)
financial plans and short-term (operating) financial plans.
3–8 Which three statements result as part of the short-term (operating) finan-
cial planning process?