Describe about the Financial Forecast for Principles of Corporate Finance.
Financial forecast and significance
Financial forecasting is a fiscal management tool that helps in estimating relevant information based on the past, present and expected financial conditions. This helps in identification of future income and expenditure trends that might have a long-term or immediate influence on the strategic goals, government policies etc (Fields, 2011).
Successful companies rely on such financial forecasting to develop business strategies because companies doing an accurate financial forecast always advance ahead and do not lag behind. Financial forecasting is an important tool if companies are applying for a loan. It also plays a major role where the company’s operations are cyclical, so that cash shortfalls can be overcome and company can plan ahead accordingly by paying its payroll, rent and other expenses (Deegan, 2011). If a company is planning to introduce a new product into its business, then financial forecasting can allow the companies to construct a model of how its business will perform financially if specific strategies are carried out.
In the year 2007-2208, there is a fall in the revenue by 22%which amounts to INR 51,945 from the previous figure of INR 66,418 and this can be attributed due to setbacks of interim nature with the third party suppliers. The alteration in the dynamics of the market urged the company to spot the Betapharma value. Assets impairment worth $406 million was taken in the past 3 years. As per the statements, it can be commented that the revenue, as well as shares increased, the impairment of goodwill, the non-cash write-down of intangible assets is a strong reflection on the margin, as well as profitability portraying a loss of INR 9172 million in the year 2009. Revenue enhanced by 39% taking the figure to INR 70,000 million. Moreover, going by the moves of Dr Reddy it can be said that the company is banking on a positive note.
Sales forecasting can help to easily adjust the demand and supply of products by overcoming the temporary demand in the light of expected estimate. It can help in benefitting the inventory control by avoiding the weaknesses of over-stocking and under-stocking. Sales forecast also helps in the facilitation of territory allocation and reallocation (Davies & Crawford, 2012).
Sales volume can be estimated by various factors such as territory potential that includes estimating the market potential for a product line in a geographical region. It can also be estimated by the past sales experience by taking the past year’s sales for every geographical sales region, add a percentage of arbitrage and decide the sales volume. Companies also use executive judgement for estimating the sales volume when the market information is absent. The senior managers or executives apply their judgement based on the past experience to forecast the sales volume (Choi & Meek, 2011).
Pro forma (as a matter of form) is applied to the method of presenting financial projections for a particular period of time in a standardized format. These are used by businesses for decision making and control processes and for external reporting to investors, creditors and owners. It can be used as a basis of comparison and analysis so that the management, credit officers and investment analysts can be provided a feel for a specific nature of the financial structure of a business (Graham & Smart, 2012). It is a vital organ of the planning process and can also help in minimizing the risks associated with the initiation and operation of a business.
External funds are acquired from outside sources of a company. If investment having a high interest rate can be found than the secured bank loan obtained by a company, then preservation of own resources can be done and these external funds can be used for the investment purpose. External funds can also be utilized for financing growth projects that the company could not have funded itself (Brigham & Ehrhardt, 2011). Sources of external funds like shareholders and investors requires the company to give its portion of ownership in exchange of funds and in this way, companies can obtain huge influx of cash that can be invested for different purposes like launch of a new product etc (Horngren, 2013).
An organization cannot operate in isolation. It is influenced by various factors and different environment. It needs to be noted that change is inevitable and organizations has to undergo changes to adapt to the prevailing situation. The external environment influences the overall organization and it is not easy to control the external environment (Brigham & Daves, 2012). The external environment is:
Changes in the economy – the prevailing situation in the economy plays a leading role in influencing the operations of the organization. If the economy is booming it will lend support to the business and vice versa.
Competition threats – organization operates under threat from the customers. The rivals are always in the hunt to gather a leading edge and this is done through many ways.
Government rules – the rules of the government also influences the organization. If the government regulations are rigid in nature it hampers the smooth functioning while a lenient policy helps the business.
Organizational structure, as well as objectives helps in financial forecasts because a well designed structure along with firm objective helps in management and cost accounting that ultimately leads to preparation of the budgets. When the budgets are prepared in an appropriate manner, it helps in forecasting the financial aspect of the business (Horngren, 2013).
The key success factor for organization can be done through reputation, endurance, credibility and the operations in Wangaratta and Benalla for the period of 50 years. Moreover, the community focus also plays a pivotal role along with the quality and responsibility. The professional approach also plays a leading role in delivering success such as governance, finance, innovation, systems, etc. The factor of governance and integrated system helps in achievement of the objective and ensure success (Brealey et. al, 2011).
Through SWOT analysis we can define the organization.
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Strength · A strong brand with a strong network · Continuous performance in the long term · Financial management · Innovative management and strong capacity |
Weakness · Aging websites · Improper access to staff or trainers · Inability to adapt to strong change · Weak relation with HESG |
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Opportunities · Leading role in community projects · Online learning, enrolment and registration. · Staff development · Products driven by market |
Threats · Turnover of the staff · Remuneration · Funding of the government · Exposure to economic environment |
The centre derives income through various sources like Commonwealth and State government, statutory authorities and other fee derived from business, as well as individuals. The development of budgets every year helps in keeping a tab over income and expenses. The bottom up approach is considered in this scenario (Burke et. al, 2010). The scenario in the past three years indicates that there is a decline in the total income along with increment of the expenses. The operating profit has turned negative and event the growth income that stood at -28.8%. As per the budgeted figure the total income will enhance in the coming three years with an increment in the operating profit (Brealey et. al, 2011).
The position of the organization was affected in 2013 by non compliance and a surplus was seen in 2014. The total income enhanced from 2009 to 2012 while declined in 2013. At the same time expenses increased considerably. There was a change in the reported profit in the past three years where a decline was witnessed. The growth projects that after an increase in 2012 it slumped in 2013. This indicates a strong show but the figures are weak in 2013 and hence call for a strong attention by the management.
Moreover, the business plan clearly indicates that the external environment is an important factor that plays a leading role when it comes to the organization point of view. The external environment like customer base, competitor policy all plays a leading role and hence needs to be considered in an effective manner (Albrecht et. al, 2011).
There are various risks that come in the way of the organization. Maintenance of cash reserves is an important consideration and hence operations will be impacted. The customer and the funding base have been subjected to risk but only few contracts has accounted for over 50% of the funding base. Therefore, the risk pertains to funding agreements and the large contracts are prone to breach. Therefore, limiting such risk is not in control.
The key assumption for the purpose of forecasting is taken from the budgeted figures that is taken with the help of past year trend. The operations clearly indicate that there will be a growth in the operations. Therefore, the total income can be projected to be high in the upcoming years. Similarly with the growth in the income there will be an increment in the expenses and operating profit will scale higher. Moreover, the external environment will play a leading role. While considering the external environment utmost importance is provided to the government regulations, policies and the competition. It is assumed that the government policy will aid in prosperity of the organization and will create better opportunities. Moreover, a cut-throat competition will aid in bringing favorable result to the organization as a whole.
Cash flow statement forecast
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Financial forecast for the next year |
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|
Statement of cash flows |
|||
|
For the financial year ended 31st December 2015 |
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|
2015 |
2014 |
2013 |
|
|
Operating Activities |
|||
|
Subscription & entrance fees |
157,92,304.85 |
137,32,439.00 |
104,74,318.00 |
|
Training, examination & Assessment fees |
239,11,574.00 |
224,11,574.00 |
209,41,063.00 |
|
Sponsorship and donations |
30,26,000.00 |
27,76,000.00 |
25,29,068.00 |
|
Conference registrations |
35,47,798.00 |
31,97,798.00 |
20,77,466.00 |
|
Property rental & recoveries |
13,50,753.00 |
10,50,753.00 |
7,83,782.00 |
|
Project income and associated fees |
203,35,142.30 |
184,86,493.00 |
162,52,001.00 |
|
Interest income |
25,342.00 |
34,342.00 |
43,453.00 |
|
Other income |
1,80,000.00 |
2,18,451.00 |
6,20,779.00 |
|
Payments to suppliers and employees |
(628,62,810.00) |
(566,62,810.00) |
(469,44,296.00) |
|
Net cash flows from operating activities |
53,06,104.15 |
52,45,040.00 |
67,77,634.00 |
|
Investing activities |
|||
|
Net movement from investment securities |
(31,42,835.00) |
(31,12,835.00) |
(30,81,431.00) |
|
Payments for property, plant and equipment |
(6,15,044.00) |
(18,15,044.00) |
(14,86,950.00) |
|
Net proceeds from sale – property |
6,56,655.00 |
5,06,655.00 |
19,53,755.00 |
|
Net cash flows used in investing activities |
(31,01,224.00) |
(44,21,224.00) |
(26,14,626.00) |
|
Financing activities |
– |
– |
– |
|
Net cash flows used in financing activities |
– |
– |
– |
|
|
|||
|
Net increase in cash and short term deposits |
22,04,880.15 |
8,23,816.00 |
41,63,008.00 |
|
|
|||
|
Cash and short term deposits at 1 January 2015 |
163,66,097.00 |
155,42,281.00 |
113,79,273.00 |
|
|
|||
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Cash and short term deposits at 31 December 2015 |
185,70,977.15 |
163,66,097.00 |
155,42,281.00 |
|
Sales forecast |
||
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Training Based sales due to change in the demographic |
1500000 |
|
|
admission for new community programme |
15% |
|
|
Revenue increase |
20% |
|
|
Particulars |
2015 |
2014 |
|
Subscription & entrance fees |
157,92,304.00 |
137,32,439.00 |
|
Training, examination & Assessment fees |
239,11,574.00 |
224,11,574.00 |
|
Sponsorship and donations |
30,26,000.00 |
27,76,000.00 |
|
college operation |
284,12,884.80 |
236,77,404.00 |
|
sales forecast |
711,42,762.80 |
625,97,417.00 |
|
Particulars |
2015 |
2014 |
2013 |
|
Continuing Operations |
|||
|
Revenue from operating activities |
711,42,762.80 |
625,97,417.00 |
553,37,919.00 |
|
Net surplus on sale of property |
5,56,500.00 |
4,96,190.00 |
10,81,605.00 |
|
Other income – from investments |
35,56,981.00 |
38,56,961.00 |
86,06,362.00 |
|
Revenue |
752,56,243.80 |
669,50,568.00 |
650,25,886.00 |
|
Expenditure |
|||
|
Personnel costs |
323,45,706.00 |
203,45,706.00 |
191,08,694.00 |
|
Consultants fees – clinical |
9,76,667.00 |
8,76,667.00 |
7,65,866.00 |
|
Consultants fees – management |
19,44,968.00 |
16,44,968.00 |
13,17,342.00 |
|
Telephone, teleconference and audio visual costs |
9,28,941.00 |
8,58,941.00 |
9,30,701.00 |
|
Printing, stationery and photocopying |
16,02,664.00 |
15,75,664.00 |
15,48,950.00 |
|
Postage and courier costs |
7,04,417.00 |
6,64,417.00 |
7,03,837.00 |
|
Information system costs |
12,66,824.00 |
11,76,824.00 |
12,66,163.00 |
|
Travel and accommodation |
60,85,893.00 |
55,35,893.00 |
49,92,152.00 |
|
Associations and library publications |
9,97,334.00 |
7,72,334.00 |
5,49,193.00 |
|
Audit, legal and professional fees |
1,50,000.00 |
1,34,504.00 |
3,60,535.00 |
|
Bank fees and merchant charges |
6,70,000.00 |
6,61,952.00 |
5,63,839.00 |
|
Rent, rates, power, repairs and other property cost |
24,46,909.00 |
23,16,909.00 |
21,96,683.00 |
|
Insurance |
2,18,817.00 |
3,38,817.00 |
3,51,303.00 |
|
Project equipment purchases, hire and repairs |
9,97,244.00 |
8,97,244.00 |
7,20,356.00 |
|
Training manuals and consumables used in education and |
|||
|
field projects |
7,20,579.00 |
6,75,579.00 |
6,30,711.00 |
|
Scholarships, fellowships and research grants |
11,50,883.00 |
11,10,883.00 |
12,71,300.00 |
|
Awards, other grants, gifts and prizes |
8,60,443.00 |
5,60,443.00 |
5,38,980.00 |
|
Grants – funded from external sources |
5,39,144.00 |
91,82,180.00 |
63,11,364.00 |
|
Facilities hire and catering costs |
54,91,793.00 |
41,91,793.00 |
28,29,648.00 |
|
Foreign exchange loss |
18,000.00 |
21,070.00 |
2,02,086.00 |
|
Depreciation expense |
15,23,498.70 |
23,02,257.00 |
27,45,787.00 |
|
Amortisation expense – lease incentive |
64,846.00 |
64,846.00 |
64,846.00 |
|
Specialist societies funding costs |
38,94,707.00 |
41,40,769.00 |
43,86,831.00 |
|
Committee and office bearers costs |
1,57,010.00 |
82,800.00 |
8,590.00 |
|
Doubtful debts expense |
1,11,404.00 |
91,404.00 |
9,734.00 |
|
QSEC write-off – development and legal costs – |
– |
– |
4,180.00 |
|
Other expenses from operating activities |
4,52,560.00 |
4,02,560.00 |
4,56,606.00 |
|
Expenditure |
663,21,251.70 |
606,27,424.00 |
548,36,277.00 |
|
|
|||
|
Surplus for the period |
89,34,992.10 |
63,23,144.00 |
101,89,609.00 |
|
Other Comprehensive Income |
|||
|
Foreign currency translation |
(3,680.00) |
(1,198.00) |
(15,536.00) |
|
TOTAL SURPLUS |
89,31,312.10 |
63,21,946.00 |
101,74,073.00 |
The company has decided to increase the sales in the year 2015. The young generation people want to go abroad and do further studies. They are interested to join this college because this college is providing a better education. Even the student who are staying here are keen to join this college. This college is improving their way of teaching every year. At present it is thinking to introduce a new community programs which will make the company sales to be increase by 15 percent. Even they are changing its strategy so that the revenue will increase by 20 percent (Horngren, 2013). The planning of the new programs and various new activities to be launched in the coming year will make the sales increase to $ 71,142,762.
Even in today’s era company are requiring different type of qualities in the young generation people. This college is giving this type of training to the students so that after leaving this company they get their job immediately because of this quality of the college the sales are being increased. Due to the new strategy operating profit will increase by $ 8,913,312.10 compare to the previous year in which the profit was $ 6,312,946. The college is member of the Australian council for international development (ACFID). This ACFID will build trust among the stakeholders and will also lead to international development of the colleges. Though there are some of the external factors that lead to a positive impact on the environment. Some of the college programs are now available online because of that student can do abroad studies by sitting at their native place. For having a new style of studies young generation are approaching abroad colleges.
The present scenario is that young minds are going abroad for pursuing their higher studies which lead to an n increase in revenue. In order to improve their career opportunities young student are going abroad. The company has also forecast that they will give awards to students like scholarship which will help more and more students to participate in any project (Libby et. al, 2011). It leads to increase in expenses of awards, gifts prizes to $ 860,433. The picture for emerging market and developing economies is diverse but in many cases challenging. The continuous trend of new development, new community programs for youth will continue to weigh on the growth prospectus in coming years. Even the company wants to invest in new location for that it wants to spend S 12, 00,000 in the following project. It will lead to increase in the land acquired by them & with the help of this they will recruit more & more students for giving education. Even it in the coming year they will recruit more employees so that the work of the college are done quite easily. The current asset of the college is $ 92,259,439 which shows that the college is very much flexible & they will run smoothly even in the adverse situation.
External environment affect a lot on the economy. The college is now focusing on the new development and even them giving training programs. The colleges are now scanning and monitoring so that they have huge development in the coming year. The external environment is divided into market, industry and macro environment. The colleges are even changing their way of studies according to the market trends such as online classes have been started for students. The market environment focuses on the students, faculty and colleges in abroad. The macro environment aim in the word (STEEP) social, technology, economic, environment and political. They are interrelated to each other. If any of the factors are being affected then it will affect the whole economy. The following factor should be stable so that the college trends of increase in economy remain stable. A sense of positive approach should be there and more and more students should come from outside for having higher education (Melville, 2013).
The college must also focus on the following to have growth in the economy such as change with requirement of the market, social values. The proper analysis is the first priority with regard to development strategy. Even the government is funding grants to the college so that they give education to the young generation. Thus they are also getting help from the government in education related purposes. The audit fees have also been increase a little bit according to the forecast because of which profit have increase (Needles & Powers, 2013). Even the college is providing a proper diet food in the college which will lead to catering cost being increase to $ 5,491,793. For this type of forecast a very experienced batch of faculty are needed who will do a proper forecast. Due to this forecast only they will go in the right path in the coming year.
The overall assignment is based on the concept of financial forecasting and methods. Dr Reddy has been studied for the purpose of financial reporting. From the assessment it has come to the forefront that financial forecasting plays a dominant role in the strategic growth of the company. The performance of Dr Reddy in the past year has been formidable except the previous year where there has been a downfall. Further, the importance of pro forma statement has been discussed and the need of external funds has been correctly chalked out. The performance of a company depends upon various factors and financial forecasting is an important tool because the future course of action needs to be pre determined so that proper action can be taken in this regard (Northington, 2011).
The Centre for continuing Education has been discussed in Assessment 2. In this scenario, the business plan has been reviewed and the external environment in which the organization operates is studied. Moreover, the success factor of the organization has been brought to the forefront. A SWOT analysis has been to analyse the performance. A business functions under internal, as well as external environment and both play a major role in shaping the destiny of the business. External environment should not be strict else it might lead to a pause in the business.
The Assessment 3 has been done to shed light on the financial forecast and budget. The financial forecast has been done with the help of excel features. Therefore, the cash flow forecast, sales forecast, profit and loss forecast. Various parameters have been undertaken and the business plan was designed with the following trends (Williams, 2012). Further with the help of various assessment criteria, the study has been done. Proper analysis is the need of the hour and this has been highly advocated. It also emphasizes that the process of forecasting involves a number of parameters for the business. According to the parameter it becomes easy to forecast. Further with the help of forecasting proper answers has been delivered about the functioning and future growth.
References
Albrecht, W., Stice, E. and Stice, J 2011, Financial accounting, Mason, OH: Thomson/South-Western.
Brealey, R., Myers, S. and Allen, F 2011, Principles of corporate finance, New York: McGraw-Hill/Irwin.
Brigham, E. & Daves, P 2012, Intermediate Financial Management , USA: Cengage
Brigham, E.F. & Ehrhardt, M.C 2011, Financial Management: Theory and Practice, USA: Cengage Learning.
Burke, A., Van, S. A., & Thurik, R 2010, ‘Blue ocean vs. five forces’, Harvard Business Review, vol. 88, no. 5, pp. 28-29.
Choi, R.D. and Meek, G.K 2011, International accounting, Pearson .
Davies, T. and Crawford, I 2012, Financial accounting, Harlow, England: Pearson.
Deegan, C. M 2011, In Financial accounting theory, North Ryde, N.S.W: McGraw-Hill.
Fields, E 2011, The essentials of finance and accounting for nonfinancial managers, New York: American Management Association.
Graham, J. and Smart, S 2012, Introduction to corporate finance, Australia: South-Western
Cengage Learning.
Horngren, C 2013, Financial accounting, Frenchs Forest, N.S.W: Pearson Australia Group.
Libby, R., Libby, P. and Short, D 2011, Financial accounting, New York: McGraw-Hill/Irwin.
Melville, A 2013, International Financial Reporting – A Practical Guide, 4th edition, Pearson, Education Limited, UK
Needles, B.E. & Powers, M 2013, Principles of Financial Accounting, Financial Accounting Series: Cengage Learning.
Northington, S 2011, Finance, New York, NY: Ferguson’s.
Williams, J 2012, Financial accounting, New York: McGraw-Hill/Irwin.
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