Harvard Business School
Rev. April 18, 1983
Note on Financial Forecasting
An important task of the manager or analyst is that of financial forecasting. In simplest terms, this is a systematic projection of the expected actions of management in the form of schedules, budgets, and financial statements. In this process, past physical statistics, financial ratios, relationships and funds flows, as well as expected economic conditions, policy decisions, and future activities are combined and arranged into a working plan for the desired period. The usefulness of such planning is best seen when one considers the several areas where it is helpful: Forecasting becomes the basis of coordinated thinking about the future and reduces…show more content… Next, the manager tackles the cost-of-goods-sold (cost-of-sales) section of the statement. Here, the manager may use a simple analysis of past operating data to obtain a percentage of sales reasonably accurate to reflect current operating efficiency, cost expectations, and price trends. Thus, he or she may use a figure such as 65%, or 75%, or any magnitude which may arise from an analysis of the past and future.
A more detailed approach would be to consider independently what each component of the cost-of-goods-sold section might be in relation to the sales total. In the case of a merchandising firm, this question is answered relatively quickly by an examination of the prices and markups of the various goods handled. In an industrial firm, production cost accounting renders the analysis more complex. The basic objective here is that of taking the cost of expected production operations in the period (based on operating schedules and budgets) in terms of materials used, labor cost, and overhead cost, and then determining how much of this production, if any, was used to build up inventories of finished goods, or whether less was produced than sold, which would mean a reduction in inventories of finished goods. In other words, if operating plans call for a buildup or reduction in finished goods inventories, the costs charged to the sales of the period must be less or more than the costs of production incurred in the period.