Forecasting Financial Statements

Below is a Case Study that we will use to explain the entire process of business forecasting.  A further discussion on business forecasting appears at the end of this article.

CASE STUDY EXAMPLE - "SCHOLARSHIP INFORMATION SERVICES"

Murray Wilson, a recent university graduate, has been thinking of a establishing a business for quite some time. Like many aspiring entrepreneurs, Murray lacked a business idea. One evening, however, while thinking back on his university years, it finally came to him - MONEY. He thought: "something I never had while in university was money. If only I had money during this period, I would have been able to focus more on studying". Murray identified a major "need", but still didn't have a business idea or product to satisfy the need.

Weeks went by and Murray still didn't have an business idea. Finally, it came to him. "I will develop a listing of organizations who provide university students with scholarships and bursaries ( a scholarship or bursary is "free" money students receive from profit and non-profit organizations to assist them in financing their university education). He thought, if students knew of these organizations, then their chances of receiving a scholarship or bursary would greatly increase.

Murray conducted some basis research and discovered thousands and thousands of organizations provide students with scholarships and bursaries each year. He was shocked and amazed at this discovery. "During my university years, I didn't apply for any scholarships or bursaries because I didn't think any existed that met my situation or qualifications; - but now I know differently", through Murray.

Murray dwelled on the idea for quite some time and decided to develop a business plan to determine the feasibility of the project. His initial thoughts of the business were as follows;

• my business name will be "Scholarship Information Services"
  
• I will register his business name as a sole-proprietorship;
  
• the product will be a listing of organizations who provide scholarships & bursaries to university students;
  
• I will advertising the product in general newspapers and in university newspapers;
• the location of the business will be at my home;
  
• two (2) individuals will be hired to develop and sell the product;
  
• I will also sell the product through direct mail initiatives;
  
• I will invest my second car into the business, along with my computer and other computer accessories;
  
• I think I can afford to personally invest $7,500 cash into my company;
  
• Other assumptions will be provided throughout the forecasting process (when needed).

The above Case Study will be used throughout our entire discussion on forecasting financial statements & analysis.  The first step in forecasting is to develop financial budgets (14 budgets in all). Step 2 through step 8 involves creating the forecasted financial statements and analysis. These steps MUST be completed in chronological order. Therefore, in order for Murray to complete the forecasting process, he must first create his Financial Budgets (14 budgets in all). After the financial budgets have been completed, Murray will use them to develop his forecasted financial statements and analysis (step 2 through step 8). Below, once again, summaries each step required in the forecasting process;

Budget 1     Determining Your Selling Price & Product Cost (per unit)
Budget 2     Developing Your Sales Budget
Budget 3     Developing Your Purchase Budget
Budget 4     Developing Your Direct Manufacturing Labor Budget
Budget 5     Developing Your Manufacturing Factory Overhead Budget
Budget 6     Developing Your Ending Inventory Budget
Budget 7     Developing Your Cost of Goods Sold Budget
Budget 8     Developing Your Fixed Asset Budget
Budget 9     Developing Your Operating Expenses Budget
Budget 10   Developing Your Drawings or Dividend Budget
Budget 11   Determining All Cash Investments Into Your Company
Budget 12   Developing Your Opening Balance Sheet
Budget 13   Developing Your Interest Expense Budget
Budget 14   Developing Your Income Tax Rate and Budget

After the above 14 Financial Budgets have been developed, the next steps include the following:

STEP 1        Creating Your 14 Forecasted Financial Budgets (above)
STEP 2        Creating Your Forecasted Cash Flow Statement
STEP 3        Creating Your Forecasted Income Statement
STEP 4        Creating Your Forecasted Balance Sheet
STEP 5        Creating Your Forecasted Ratio Analysis
STEP 6        Creating Your Forecasted Break-even Point
STEP 7        Creating Your Forecasted Sensitivity Analysis
STEP 8        Creating Notes to Your Forecasted Financial Statement