## TECHNIQUES OF FINANCIAL FORECASTING

1. Use of Cash Budgets

A cash budget is a financial statement indicating:

a) Sources of revenue and capital cash inflows

b) How the inflows are expended to meets revenue and capital expenditure of the firm.

c) Any anticipated cash deficit/surplus at any point during forecasting period.

2. Regression Analysis

This is a statistical method which involves identification of dependant and independent variable to form a regression equation *y = a + bx) on which forecasting will be based.

3. Percentage of Sales Method

This method involves expressing various balance sheet items that are directly related to sales as a percentage of sales. It involves the following steps:

i) Identify various balance sheet items that are directly with sales this items include:

a) Net fixed asset – If the current production capacity of the firm is full an increase in sales will require acquisition of new assets e.g. machinery to increase production.

b) Current Asset – An increase in sales due to increased production will lead to increase in stock of raw materials, finished goods and work in progress. Increased credit sales will increase debtors while more cash will be required to buy more raw materials in cash.

c) Current liabilities – Increased sales will lead to purchase of more raw materials

d) Retained earnings – This will increase with sales if and only if, the firm is operating profitability and all net profits are not paid out as dividend.