Financial
Forecasts
Managers and external users of financial information
are more concerned with what the future holds
for an organization than its past history because
what has happened has happened and reporting systems
are incapable of changing history. Financial forecasts
on the other had can be used for budgeting as
well as planning purposes. The forecasts offer
expected results based on historic facts. Investors
and share holders around the world base their
decisions on financial and economic forecasts.
Public companies are special under constant pressure
to perform according to budgeted expectations
and forecasts. Failure to do so results in lower
stock prices and financial difficulties. Forecasting
comes under the broad subject of predictive accounting.
The four main aspects of predictive accounting
are:
• It improves projecting financial performance
by monitoring whether processes are in control.
In-control processes are predictable; out-of-control
processes are unpredictable.
• It seeks to understand the future.
• It is based on the premise that the actions
of an organization are repeatable processes.
• It uses processes that describe the way
the organization works.
Financial forecasts assist firms in identifying
finance (external and internal) requirements as
well as asset requirements. In short financial
planning is a process by which firms identify
their goals and cost and plan how to meet them.
One of the main advantages of financial forecasting
is that it identifies interactions between various
elements of a firm, for example how inventory
changes affect finance costs. It also makes clear
which financing options are more suitable in the
long term and which ones would cause problems.
By incorporating external factors such as the
rate of inflation and interest rates in to the
forecast, the organization is able to avoid surprises.
Financial plans are of various types and vary
according organization structure, size and the
market in which it operates. A business that is
just starting out should ideally make a 2 or 3
year forecast whereas a business which is well
established can make a reliable 5 year forecast.
A magazine publisher should only forecasts its
sales for the following year since it cannot predict
changes in the market and consumer trends in the
coming years by its current state of sales. A
manufacturing company or a company which has long
lead times regarding construction of new plants,
long lead times for development, approval and
testing procedures can rely on a 10 year forecast.
The time period should be long enough to ensure
that any periodically paid material cost has not
been ignored and the time period should be short
enough so that variations in the level of activity
are not averaged out. Before any extrapolation
techniques are used the past data should be examined
to determine their appropriateness to their intended
purpose.
British Airways
Turnover for British Airways was down by 1.7%
as compared to 2003. It is this figure whish I
have used to forecast sales for the next 10 years.
The reasons are as follows:
1. Global instability and foreign affairs problems
leading to continuing decrease in passenger traffic.
2. The US economy has not yet recovered from depression.
3. The revenue form cargo and passenger operations
account for 92% of group revenue and a decrease
in trade and passenger traffic coupled by increases
in oil prices all combine to cause a decreasing
trend in turnover.
Cost of Sales has decreased by 3.5% in 2004 as
compared to 2003 whereas in 2002 this figure was
still higher. I have taken cost of sales as a
percentage of Turnover because in 2004 British
Airways have made many efficiency measures which
have reduced costs. The future size and shape
project (FSAF) made savings in manpower, capital
expenditure, asset disposals, procurements, and
distribution costs. For the year 2004 BA made
savings of 869 million pounds and by introducing
travel agents’ commission restructuring
on ba.com the company made savings of 257 million
pounds. BA has set itself a 10% operating margin
but projected decreases in turnover and increases
in oil costs can cause impediments to this plan.
The administration expenses have also been taken
of the basis of percentage of sales.
The figure share in operating profits in associates
has not been taken on the basis of percentage
of sales because the trend suggests that associates
will be adding significantly towards BA’s
profits and this trend has been projected as a
percentage of previous year figures.
The figure of 13 million pounds as other income
and charges for the year 2004 was primarily a
lease transfer payment; this figure was 4 million
pounds in 2003. It is an abnormal amount and I
have divided this figure by a factor of 3 to reflect
normal reality.
Interest expense again has not much to do with
turnover as broadly interest costs remain similar
for BA due to equity and long term loans. However,
due to decreases in the interest payable amount
of up to 55 million pounds in 2004, interest payable
can be viewed as a decreasing figure by 15% but
interest payable will remain higher or equal to
an estimated 150 million in the next ten years.
Taxes have simply been taken as a percentage of
sales as the deferred tax figure are affected
by the profit chargeable to tax figure and hence
the turnover figure. Other values have been taken
on a percentage of sales bases.
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