Projected (Pro-Forma) Income Statement and Balance Sheet

Introduction

Forecast is a predict or estimate a future event or trend. In other words, it is the prediction of future data based on past data and/or human judgment.

Financial forecasting describes the process by which firms think about and prepare for the future. The forecasting process provides the means for a firm to express its goals and priorities and to ensure that they are internally consistent. It also assists the firm in identifying the assets requirements and needs for external financing.

The financial forecasting is the major part of the financial planning under Financial Management. The financial planning includes major three types of planning are listed as below:

1. Strategic Planning: It defines, how the firms plans to make money in the future. It is the process of formulating, implementing and evaluating and controlling the implementing strategies.
   

2. Long-term Financial Planning: Generally, it prepares three to five years projected income statements and balance sheet. It is highly collaborated process that considers future uncertainty in a detail way.
   

3. Short-term Financial Planning: It prepares one year or less very detailed of firms anticipated cash flows under cash budget. It is generally prepared to meet short-term financial need of the company.
   

Techniques or Methods

There are number of technique to forecast the major uncertain data such as Sales revenue, Tax rate, Dividend Payout Rate, Interest rate etc. by using the flowing techniques of forecast as:

1. Qualitative (Human Judgment) Method: It involves collecting and analyzing non-numeric data to understand concept, opinion and experiences.
   

• Opinion Survey Method: It is an public opinion poll from a particular sample.
  

• Market Trail Method: It is a form of marketing conducted in the form of research to check and predict the current status of the product or services.
  

• Market Research Method: It is a process of determining viability of new product or services through research conducted directly with potential customers.
  

• Delphi Techniques: It is a process framework based on the result of multiple rounds of questionnaire sent to a panel of experts.
  

2. Quantitative (Time Series) Method: It involves collecting and analyzing numeric data to understand patterns, averages and statistics of the particular things.

• Past Average Method: It is an average of historical data that is used for the current period.
  

• Simple Moving Average Method: It is an arithmetic moving average calculated by adding prices over the number of periods and dividing the sum of number of period.
  

• Weighted Moving Average Method: It is a kind of moving average that can be calculated by putting more weight to recent data and less for old data and multiplying the price with weight factor.
  

• Exponential Smoothing Method: This method is generally used for short-term period and time series data. In this method, most recent observation gets higher smoothing weight while older gets lower smoothing weight.
  

Conclusion

Financial forecasting describes the process by which firms think about and prepare for the future. It also assists the firm in identifying the assets requirements and needs for external financing. The financial forecasting is the major part of the financial planning under Financial Management. There are number of technique to forecast the major uncertain data such as Sales revenue, Tax rate, Dividend Payout Rate, Interest rate etc. by using the two techniques of forecast include qualitative and quantitative.

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