Purpose of Financial Forecasting

Do we know why we need to prepare financial forecast?

Well,there are a few simple reasons:

• To obtain Banking facilities by preparing projected financial statements like the Income Statement,Balance Sheet and Cash Flow Forecast.

With the forecasts,both the banker and company is able to determine whether sufficient profits is generated to pay financial interest and also how much and when to repay the banking facilities borrowed.

• To restructure Outstanding debts with banks

By preparing the financial forecast,we can see whether the business can generate enough cash to repay the restructured financial commitments. Obviously,if bankers see that even after the proposed financial restructuring,the company is still not able to pay the financial commitments then they might prefer to go for liquidation or receivership.

• To prepare for IPO ( initial public listing)

The preparation of detailed financial forecasts profit,balance sheet and cash flow forecasts) and submission to Securities Commission is a must for listing purpose.

• To assess the Value of a company

Basing on the earning basis,the quality of the profit forecast is extremely important. The fair market value of such a company relies very much on the profit forecast and its expected P/E ratio vis-à-vis the industry standard.

• To estimate Tax Payable

This is particularly important if the Inland Revenue of a country is based on current year assessment and self assessment. The company therefore need to properly forecast its profit and estimate tax liabilities and start paying the relevant tax installments.

• To monitor Cash Flow of the Company

As cash is the “blood’ of the business,it’s vital for well-managed companies to seriously prepare cash flow forecasts on a monthly basis to avert/manage any cash flow deficit/crisis

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