TABLE OF CONTENTS As we have discussed throughout the book, the main uses of numbers and financial reports are to measure financial performance and provide a management tool to use in operating a business. The Profit and Loss (P&L) Statement is the main financial report used to measure financial performance. The Balance Sheet and Statement of Cash Flows also provide useful financial information for measuring financial performance. Forecasting mainly involves financial activity that is included in the P&L. Therefore, the P&L will be the focus of forecasting in this chapter. One exception is the importance to owners and managers of forecasting the required cash flow to maintain daily operations. Cash flow forecasting is generally performed by the accounting office.
The forecasting relationship with last year's actual results and the budget for the current year can be illustrated with the following time line:
Last year's actual results will be shown by each week.
Management will determine what are realistic improvements or achievable growth objectives for next year.
Management and accounting will prepare the formal operating budget, a detailed financial plan by day, week, month, and year outlining the financial goals for the next year.
The final operating budget will be approved for the next year containing specific monthly or accounting period financial plans including dollar amounts, percentages, and statistics. This budget is approved and distributed to all departments and will be used for the entire year.
Before the beginning of a...
