WHAT IS FORECASTING & CASE STUDY ILLUSTRATED

Forecasting is the process of predicting future activities of an existing or proposed business venture. As part of your business plan, you will be required to forecast various financial statements & analysis; namely, the forecasted cash flow statement, forecasted income statement, forecasted balance sheet, forecasted break-even analysis, forecasted sensitivity analysis, forecasted ratios, and notes to the forecasted financial statements.

The purpose of forecasting financial statements is twofold. Firstly, the forecasted financial statements & analysis assist the ENTREPRENEUR in determining whether or not their proposed business venture or planned expansion is feasible. Secondly, the forecasted financial statements assist a potential INVESTOR in determining whether or not they will or should invest into the business.

Generally speaking, investors (banks, government organizations, individuals, etc) request the entrepreneur develop three (3) years of forecasted financial statements & analysis. That is, a forecasted cash flow statement, a forecasted income statement, a forecasted balance sheet, a forecasted break-even analysis, a forecasted sensitivity analysis, and forecasted ratios for years 1, 2, and 3 into the future. Remember to always complete the forecasted financial statements & analysis one year at a time. In other words, NEVER begin forecasting year two's financial statements until all year one's forecasted financial statements are completed.

Many business owners and aspiring entrepreneurs will call on an accountant to construct their forecasted financial statements & analysis. This section, however, has been written to enable you to develop your own forecasted financial statements & analysis; thus, saving you hundreds and even thousands of dollars.

Below simply lists the steps needed to develop your forecasted financial statements. These steps will be discussed in greater detail later on. Following the list of steps, you will find a "Case Study" that we will use to explain the entire process of forecasting (important).

CASE STUDY - "SCHOLARSHIP INFORMATION SERVICES"
Murray Wilson, a recent university graduate, has been thinking of a establishing a business for quite some time. Like many aspiring entrepreneurs, Murray lacked a business idea. One evening, however, while thinking back on his university years, it finally came to him - MONEY. He thought: "something I never had while in university was money. If only I had money during this period, I would have been able to focus more on studying". Murray identified a major "need", but still didn't have a business idea or product to satisfy the need.

Weeks went by and Murray still didn't have an business idea. Finally, it came to him. "I will develop a listing of organizations who provide university students with scholarships and bursaries ( a scholarship or bursary is "free" money students receive from profit and non-profit organizations to assist them in financing their university education). He thought, if students knew of these organizations, then their chances of receiving a scholarship or bursary would greatly increase.

Murray conducted some basis research and discovered thousands and thousands of organizations provide students with scholarships and bursaries each year. He was shocked and amazed at this discovery. "During my university years, I didn't apply for any scholarships or bursaries because I didn't think any existed that met my situation or qualifications; - but now I know differently", through Murray.

Murray dwelled on the idea for quite some time and decided to develop a business plan to determine the feasibility of the project. His initial thoughts of the business were as follows;

my business name will be "Scholarship Information Services"
I will register his business name as a sole-proprietorship;
the product will be a listing of organizations who provide scholarships & bursaries to university students;
I will advertising the product in general newspapers and in university newspapers;
the location of the business will be at my home;
two (2) individuals will be hired to develop and sell the product;
I will also sell the product through direct mail initiatives;
I will invest my second car into the business, along with my computer and other computer accessories;
I think I can afford to personally invest $7,500 cash into my company;
Other assumptions will be provided throughout the forecasting process (when needed).

The above Case Study will be used throughout our entire discussion on forecasting financial statements & analysis. The first step in forecasting is to develop financial budgets (14 budgets in all). Step 2 through step 8 involves creating the forecasted financial statements and analysis. These steps MUST be completed in chronological order. Therefore, in order for Murray to complete the forecasting process, he must first create his Financial Budgets (14 budgets in all). After the financial budgets have been completed, Murray will use them to develop his forecasted financial statements and analysis (step 2 through step 8). Below, once again, summaries each step required in the forecasting process;

Step 1 Creating Your Forecasted Financial Budgets

Step 2 Creating Your Forecasted Cash Flow Statement

Step 3 Creating Your Forecasted Income Statement

Step 4 Creating Your Forecasted Balance Sheet

Step 5 Creating Your Forecasted Ratio Analysis

Step 6 Creating Your Forecasted Break-even Point

Step 7 Creating Your Forecasted Sensitivity Analysis

Step 8 Creating Your Forecasted Notes to Financial Statements

This concludes the "Introduction to Forecasting Financial Statements" & "The Case Study Illustrated".