Sales Forecast 411
It should be noted that large, multidivisional companies such as General Electric
break down their operating plans by divisions. Thus, each division has its own goals,
mission, and plan for meeting its objectives, and these plans are then consolidated to
form the corporate plan.
The Financial Plan
The financial planning process can be broken down into these steps:
- Project financial statements and use these projections to analyze the effects of the
operating plan on projected profits and financial ratios. The projections can also be
used to monitor operations after the plan has been finalized and put into effect.
Rapid awareness of deviations from the plan is essential in a good control system,
which, in turn, is essential to corporate success in a changing world.
- Determine the funds needed to support the five-year plan. This includes funds for
plant and equipment as well as for inventories and receivables, R&D programs, and
major advertising campaigns.
- Forecast funds availability over the next five years. This involves estimating the
funds to be generated internally as well as those to be obtained from external
sources. Any constraints on operating plans imposed by financial restrictions must
be incorporated into the plan. Constraints include restrictions on the debt ratio,
the current ratio, and the coverage ratios.
- Establish a performance-based management compensation system. It is critically
important that firms reward managers for doing what stockholders want them to
do—maximize share prices.
In the remainder of this chapter, we explain how to create a financial plan, includ-
ing its three key components: (1) the sales forecast, (2) pro forma financial statements,
and (3) the external financing plan. We discuss compensation in Chapter 12.
What are four ways that managers use pro forma statements?
Briefly explain the following terms: (1) corporate purpose, (2) corporate scope,
(3) corporate objectives, and (4) corporate strategies.
Briefly describe the contents of an operating plan.
What are the four steps of the financial planning process?
Sales Forecast
The sales forecastgenerally starts with a review of sales during the past five to ten
years, expressed in a graph such as that in Figure 11-1. The first part of the graph
shows five years of historical sales for MicroDrive. The graph could have contained 10
years of sales data, but MicroDrive typically focuses on sales figures for the latest five
years because the firm’s studies have shown that its future growth is more closely re-
lated to recent events than to the distant past.
Entire courses are devoted to forecasting sales, so we can only touch on the basic
elements here. However, forecasting the future sales growth rate always begins with a
look at past growth. Techniques for estimating the past growth rate range from the
very simple to the quite complex. For example, the average of MicroDrive’s recent an-
nual growth rates is 10.3 percent. However, the compound growth rate from 1998 to
2002 is the solution value for g in the equation
$2,058 (1 g)^4 $3,000,
See Ch 11 Tool Kit.xls
for details.
408 Financial Planning and Forecasting Financial Statements
