Financial Management Principles - Essay Example

International Affairs The whole forecasting process starts with forecasting sales. Since the growth in sales drives all the functional areas of an organization therefore sales forecasting is the first thing to be done in financial forecasting. Sales forecast is done through the determination of average growth rate and then the same growth rate is applied to find out the forecast for next years. Or regression can also be applied to forecast sales. Since regression smoothens out the ups and downs in the past years data that were faced by the organizationFinancial Statement ForecastingConstant Ratio Method The constant ratio method is performed by finding out a ration in which the sales is growing.

Then the same ration is applied to all the elements in an income statement. Incase of balance sheets higher sales will lead to increase in assets in the form of higher receivables as well as high inventory. New plants and equipment will also be needed to supplement the increased sales. Some of the increase in the assets will be financed by spontaneous increase in accounts payable and any shortfall will be financed by external resources such as debt, stocks or a combination of both. Raising the additional finds needed The amount of funds needed can be raised using the means depending the “..current capital structure, conditions in debt and equity market and the restrictions imposed by existing debt agreements (Brigham. 2005)”.Forecasting FeedbacksThe amount of additional funds raised increases the interest payments and/or dividend payments whatever was forecasted earlier.

Additional interest payments or dividends are calculated and adjustments are made in the previously forecasted income statement. This adjustment lowers the earnings that were forecasted in the previous statement. Then a second pass of balance sheet is made and again a new change in interest and dividend payment comes up before managers. Then again adjustments are done in income statements. So in the end it becomes a hit and trial like method to come up with forecasted financial statements which are approximately accurate.

“A capital expenditure is and outlay of cash for a project that is expected to produce a cash inflow over a period of time exceeding one year (netmba, 2007)”. Capital Budgeting is a process that requires decisions regarding the investments in financial assets while forecasting of financial statements involves approximation of future financial statements. Hence capital budgeting is a whole p[process of analyzing the projects their cash inflows and outflows and deciding which one is to included in the capital budget and which one is to be rejected.

Financial forecasting gives the assessment of how much of assets will be required to carry out operations in future. It also gives an idea of how much of those assets will be current and how much of those will be fixed. Capital budgeting analyzes the various options to fill in this need of fixed assets and decides upon the capital projects which will be the part of organization’s fixed assets in future. Financial forecasting, hence, ensures its place in organization’s decision making. Since assets are the main resource for an organization to carry out its operations and a true estimate of assets required and the availability of those assets at the right time will ensure the smooth running of organizations and avoid problems in future regarding cash management.

Marginal cost of capital is the cost that is to be borne by an organization to rise funding for its capital projects. When an organization needs to raise extra capital, it can do it through its retained earning first and the amount needed over and above the capacity of retained earning will be finance through raising debt and/or stock. But this will change the Marginal cost of capital that will be required to rise this extra funding. The organization accepts the projects which have rate of returns higher than the marginal cost of capital and rejects all the others (Bearly & Myres, 2006).

BibliographyBrigham E.(2005). “Financial Forecasting”. Financial Managmement: theory and Practice by Eugene F. Brigham. Eighth Edition. ISBN: 0-03-017789-8 Netmba (2007). “Capital Buidgeting”. Retrieved on April 23, 2007: http://www.netmba.com/finance/capital/budgeting/Bearly and Myres (2006). Marginal Cost of Capital. Corporate Finance by Bearly and Myres. 10th Edition.