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As we mentioned in the earlier lessons, business planning and financial forecasting refer to the set of activities where business operations are planned for advancing the business strategy, and what results may occur from executing those strategies in the next year.
Firms need to take great care in this process because these statements are reviewed by many stakeholders, including creditors, vendors, and regulatory agencies.
Forecasting financial statements start with the estimation of several values, the first of these being sales, and then the cost of goods sold and anticipated expenses. Since actual business activities are planned in relation to these estimates, it is very important that realistic expectations and estimates are used.
With this in mind, it is important to remember to address these specific points:
Businesses often manage and address these key issues by closely measuring the impacts of modifying the inputs to operations.
Accounts receivable is the money owed to a business by its customers and it is shown on the balance sheet as an asset. To forecast this, a business not only has to anticipate the level of sales that will be made on credit, but it also has to anticipate when payments on these accounts will occur and account for the fact that some of these credit accounts will default and become bad debt.
Accounts receivable has a great impact on a firm’s expected cash inflows, so modifying this in the forecast will affect how much cash a company decides to have on hand.
Inventory is another key input. It primarily deals with the goods on hand that are required at different locations. The issues of inventory management concern:
Accounts payable is money owed by a business to its suppliers and is shown on its balance sheet as a liability. Usually, a supplier will ship a product, bill the company, and collect payment later. This is all part of the cash conversion cycle. This is the period of time when the supplier has already paid for all materials but hasn’t been paid in return by the final customer. These accounts payable influence the current liabilities of the business, which in turn impact the liquidity of the business.
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