Financial Forecasting and Decision Making

Chapter 5FORECASTING THE BALANCE SHEET: STATISTICAL PROCEDURES

LEARNING OBJECTIVES

This chapter will demonstrate how the basic model can be adapted to use statistical techniques such as simple linear regression. Regression is appropriate if the relationship between sales and the spontaneous accounts is more complicated than the percentage relationship. After completing this chapter, you should be able to do the following:

•     Identify the meaning and advantages of regression analysis.

•     Recall how to apply regression to the basic forecasting model.

Statistical Procedure Regression

Regression analysis is an alternative way to estimate the relation between spontaneous accounts and sales. Thus far, we have assumed that the spontaneous account maintained a constant percentage relationship with sales. Under this assumption, if sales went up by 25 percent, then all of the spontaneous accounts increased by 25 percent. This constant relationship may be relevant when the sales changes are small, but may distort the picture otherwise.

A statistical procedure called regression analysis can be utilized to eliminate this distortion. This procedure allows for each spontaneous account to maintain a fixed amount and an amount that varies with sales.

There are many statistical packages that you can purchase that will run a regression for you. In addition, some of the popular spreadsheets ...