Agriculture Reference
In-Depth Information
Budgets and forecasts
What is the difference between a budget and a forecast? Though it is true that some budgets
are forecasts and some forecasts are budgets, in management a forecast generally refers to
some prediction of the future. We may have a forecast for the general economic situation, or
a sales forecast for a specifi c territory. (Sales forecasts were discussed in Chapter 8 .) As
indicated above, the budget is typically a specifi c forecast of fi nancial performance that is
used as a tool for control and to project cash infl ows and outfl ows. For example, Doug
Davies' business would have a sales forecast or a prediction of the amount of business the
organization expects to conduct during a certain period. To accompany this, Doug would
also develop a budget that is related to the advertising and promotional expenditures needed
to secure the projected sales. Because the survival of the organization depends on the capac-
ity of revenues to exceed expenses, the budget and the sales forecast are inseparable.
Pro forma fi nancial statements
Because the cash fl ow statement deals with only one account, cash, it is wise to go one step
further and prepare a pro forma balance sheet and income statement, which were discussed
in Chapter 9 . These statements really just project the best estimates of what the business will
look like in the future ( Tables 11.3 and 11.4 ) . However, that information is not only useful
for Doug Davies, but it is also useful to his lender. The pro forma fi nancial statements are
typically prepared on a quarterly basis for an operating year. Again, the more seasonal an
agribusiness, the more frequently pro forma statements should be prepared.
The pro forma fi nancial statements will provide a look into the future of the business
and will help the manager determine what the fi nancial needs of the business will be during
and at the end of the operating period. If Doug fails to use this tool, he may not recognize
problems until they actually arise, and then it may be too late to take corrective action. The
most important fi gure in the preparation of these pro forma statements is estimated sales
( Chapter 9 ). This is a situation in which as many well-informed people as possible should
Table 11.3 Pro forma monthly income statement
PRO FORMA MONTHLY INCOME STATEMENT
For the Month Ending—
Figures Based On:
Sales Revenue
Sales forecast for the month
Cost of goods sold
Sales forecast, historical data
Gross margin
Operating expenses:
Selling expenses
Budget for the month
General expenses
Sales forecast, historical data
Total operating expenses
Net operating income
Other expense:
Interest expense
Outstanding debt, expected additional debt
Net income before taxes
Income taxes Tax rate
Net income after taxes
Earnings withdrawn
Owner's intentions
Retained earnings
 
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