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# Financial forecasting

Extracts from this document...

Introduction

Financial forecasting Financial forecasting is a very important part of a businesses planning for the future. It allows the company to see how much they can spend and they can then compare that to what they need to buy or use money for. Financial forecasting has a wide range of uses. It is used by the company: * to help in decision making * as a management tool to aid control * to assess the profitability of the business * to plan strategies * to control resources * to measure the efficiency of the business * to forecast possible future trends For a business to be able to plan how to use it's finances it needs to forecast what is likely to happen in a specific amount of time e.g. the next 6 months, year or 5 years. Three tools are used to aid financial planning: * Calculation of unit cost of production This shows the company how much the average cost will be to them to produce 1 item. ...read more.

Middle

The first thing she needs to do is to work out the unit cost of production. This will help decide what price she will sell at. Unit cost of production and price Based on the following information the table below shows the cost of producing one scarf. Fixed Costs :- * Rental of the stand �150 * Overheads including electricity and water �60 Variable costs :- * Silk material for the scarves is �3.00 per meter and is 90 cm wide. Each scarf is 30 cm wide by one meter long. * Other materials including thread �15.00 * Paint 10 litres (10 different colours) @ �15.00 per litre. * Labour - Lesley allows herself a wage of �4.00 per hour and it take an average of one hour to make one scarf. UNIT COST � FIXED COSTS Rental �1.00 Overheads (electricity, water etc.) �0.40 VARIABLE COSTS Material �1.00 Thread �0.10 Paint �1.00 Labour �4.00 Total cost per scarf is: �7.50 Profit margin �2.50 selling price �10.00 This will help Lesley Jerome because she now has an insight into what her costs are going to be. ...read more.

Conclusion

800 210 488 698 102 90 900 210 549 759 141 100 1000 210 610 820 180 110 1100 210 671 881 219 120 1200 210 732 942 258 130 1300 210 793 1003 297 140 1400 210 854 1064 336 150 1500 210 915 1125 375 This is a graph showing Lesley's Break even point. On the next page is a hand drawn graph of Lesleys break even analysis. Cash flow forecasting Lesley wants to be certain that she is going to have sufficient cash to pay her bills as and when they arise. She needs to produce a cash flow forecast. Shown below is a cash flow forecast for a 6 month period. January february March April May June Recipts (cash inflow) 5,000 4,500 5,000 6,000 6,500 7,000 Payments (cash outflow) 3,300 6,000 3,500 4,400 4,300 4,500 Net Cash Flow 1,700 -1,500 1,500 1,600 2,200 2,500 Opening bank balance (+/-) 500 2,200 700 2,200 3,800 6,000 Closing bank balance (+/-) 2,200 700 2,200 3,800 6,000 8,500 1 Sarah Cowling ...read more.

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