FCMH#16

FCMH (On-line)
Sessions to be conducted by SABYASACHI SENGUPTA (XLRI)

Module Number IV
Number of Sessions in this Module ONE (1)
Title of this Module “Financial Forecasting”
Scheduled Date and Time Slot 9th December 2020 (Wednesday) 6.00 PM Slot
MODULE NUMBER IV (Session Number 16)

FINANCIAL FORECASTING TECHNIQUE
A Practical Outlook (Quoting – Brealey & Myers)

It is indeed strange that academicians the world over worry far too
much about how accurately or exactly they may zero in on the
appropriate discounting factor parameter for valuation & various
other financial modeling exercises, while concentrating much less
on cash flow estimation exercises.
In practice it rarely pays to worry as to whether the discounting

factor used is approximate or exact. Your worrying time would be
much better spent in refining forecasts of future cash flows. In real
life context what matters the most is cash flows (and cash flows
only).
In reality what actually matters is “what” you are discounting rather

than “with what” you are discounting. Thus, the aspect of
developing meaningful cash flow forecasts for future years can
hardly be overemphasized in the study of financial decision making
process.
Financial Forecasting Techniques
Financial forecasting is an integral component of financial planning process.

Forecasting techniques essentially utilizes past data to estimate the future financial
requirements. Normally, two types of standard forecasting techniques are deployed in
industries, namely, “the percentage-to-sales method” and “the proforma method” of
financial forecasting. A comparative study of these two methods is provided below for
ready reference.
THE MODEL ADVANTAGES DISADVANTAGES
Percentage-to-Sales This is essentially a simple It is less accurate as it is

Method of Financial approach to financial forecasting based on a very simple (and
Forecasting where the items of “profit & loss sometimes infeasible)
statement” and “balance sheet” assumption that all
are linked to the “turnover” financials are linear
figure of the concerned functions of sales. The
organization. Hence, it is simple financial institutions and
in concept and application and bankers who are
less volume of data and time is approached for evaluating
required for developing such such proposals usually do
financial forecasts. As it is less not find these forecasts to
time consuming and extremely be reliable or of the desired
easy to understand, acceptability quality.
(by management) may be high
especially under situations where It may please be noted (and
financial projections are appreciated) that reliability
developed under acute time and quality are regarded as
constrain pressure. sought after virtue so far
appraisers of such proposals
are concerned.
Proforma Method of The accuracy achieved under The quantum of data

Financial Forecasting this method of financial required is quite substantial.
forecasting is superior compared Moreover, it is quite tedious
to the other model as it is and time consuming for
essentially an elaborate one. obvious reasons.
A Mini Case
(Estimating Future Financing Requirements).
The Balance Sheet of Y Limited (in Rupees Lakhs) as on 31 st March 2018 is given
below.
LIABILITIES Rs Lakhs ASSETS Rs Lakhs
Share Capital 100 Fixed Assets 250

Retained Earnings 70 Inventories 150
Long Term Loans 180 Receivables 120
Accounts Payables 60 Cash 30
Provisions 40
Short Term Bank loans 100
TOTAL 550 TOTAL 550
Sales for the year ended 31st March 2018 were Rs 600 Lakhs, which is expected to
increase by 20% in the next year. The net profit margin and dividend payout ratio
are expected to be 5% and 60% respectively. You are required to determine the
external financing requirements (EFR) and to determine as to how the company
would raise its EFR with the following constraints in mind.
a) Current ratio should be at least 1.33

b) The ratio of fixed assets to long term loans should be 1.5
You need to assume that the company wishes to tap external finances in the
following order,
a) Short term bank borrowings

b) Long Term Loans
c) Issue of additional equity shares
You are also required to prepare the forecasted balance sheet of the company (as
at the end of the next year).

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FCMH (On-line)

Sessions to be conducted by SABYASACHI SENGUPTA (XLRI)

MODULE NUMBER IV (Session Number 16)

A Practical Outlook (Quoting – Brealey & Myers)

In practice it rarely pays to worry as to whether the discounting

In reality what actually matters is “what” you are discounting rather

Financial forecasting is an integral component of financial planning process.

THE MODEL ADVANTAGES DISADVANTAGES

Percentage-to-Sales This is essentially a simple It is less accurate as it is

Proforma Method of The accuracy achieved under The quantum of data

LIABILITIES Rs Lakhs ASSETS Rs Lakhs

Share Capital 100 Fixed Assets 250

TOTAL 550 TOTAL 550

a) Current ratio should be at least 1.33

a) Short term bank borrowings

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