Glossary of Chapter 6: Forecasting and Pro Forma Financial Statements
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- A quantifiable estimate of future demand.
- In business, this is the process of estimating the future demand for your products and services.
- The Six Steps of Forecasting...
- 1.) Determine the type of forecasting model to be used. 2.) Determine the forecast horizon. 3.) Select one or more forecasting models. 4.) Evaluate the models. 5.) Apply the chosen model. 6.) Monitor and control the model.
- The three basic categories of forecasting...
- 1.) Judgemental, 2.) Time series models, 3.) Causal models
- Qualitative and use estimates based on expert opinion.
- Judgemental forecast
- Conducted by managers to determine future sales within the company's sales territories.
- Surveys of sales forces
- Effective for virtually all firms, but particularly for the company that has a few large customers.
- Surveys of customers
- Used when a new product is introduced that has characteristics similar to those of previous products or in planning for a new business or for business expansion.
- Historical analogy
- Includes surveys, tests, and observations.
- Market research
- Uses a panel of experts to obtain a consensus of opinion.
- Delphi method
- Normally uses historical records that are readily available within a firm or industry to predict future sales.
- Time series forecasting models
- Assumes that actual sales for some recent previous time periods are the best predictors of future sales and that each time period taken in succession has an equal influence on the prediction of future sales.
- Moving average model
- The measure of the overall forecast error and represents the average difference between our forecast and actual sales data.
- Mean Absolute Deviation
- Absolute Deviation
- sum of |Actual sales - Forecast sales| / n = ?
- Mean Absolute Deviation
- Assumes that the closest time period is a more accurate predictor of future sales than preious time periods, although previous time periods have some influence on future sales.
- Weighted moving average model
- Uses a smoothing constant, alpha, as an adjustment in determining the forecast.
- Exponential Smoothing Model
- A value assigned by the forecaster to adjust the forecast based on the forecaster's assumption of the relationship between sales in one time period and slaes in the next time period.
- Smoothing Constant
- Relies on other variables for its value.
- Dependent variable
- Does not depend on other variables for its value.
- Independent variable
- Rise over run.
- Take into account variables in the general economy that affect the revenue obtained by a company; also known as external or exogenous models.
- Causal models
- A projected statement based on the forecast.
- Pro forma financial statement
- Preparing estimated financial statements for the future.
- Pro forma financial analysis
- Projects future receipts and expenditures and determines how much financing is needed on a monthly basis to correct any shortfalls in cash flow.
- Pro forma cash budget
- Projected balance sheet for a future time period.
- Pro forma balance sheet
- Based on the fact that assets and liabilities historically vary with sales.
- Percentage of sales
- Shows all tasks that must be performed and the time that it takes to accomplish these tasks.
- Gantt chart
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