Financial Forecasting and Decision Making

Chapter 11INTEGRATING THE PERCENT OF SALES WITH A SHORTER-TERM FORECAST OF CASH NEEDS

LEARNING OBJECTIVES

This chapter will demonstrate how to forecast cash needs for a shorter time period and how to integrate this shorter-term model with the percent of sales forecasting model. After completing this chapter, you should be able to do the following:

•     Recall when to borrow required funds.

•     Estimate cash needs and provide projected income statements and balance sheets by using the percent of sales method of forecasting.

Shorter-Term Cash Needs

The percent of sales method, as we have seen, allows you to estimate your cash needs over a long period of time and provide projected income statements and balance sheets. These results let you plan your company's strategies and future direction.

Often, however, it is useful to be able to project your cash needs during the year. If you compute an EFN, this is the amount of outside financing that you will need at year-end. This does not show you when during the year you will need it.

To determine when during the year you will need it, you must integrate the projected financial statements with a cash budget. In the pages that follow, we will go through an integration for the Delta Company using the reconciled income statement and balance sheet from chapter 5.

Recall that in the case with a 100 percent debt-financed EFN, the EFN would be $19,560. To integrate the cash budget with the forecasted statements, you must now determine ...