Financial Strategies

Lesson Objectives

Explain the importance of a personal budget

Describe how budgeting helps businesses manage their finances

Display understanding of how forecasting helps businesses manage their finances

Key Vocabulary Terms

Budgeting Cash Budgeting External Factors Extrapolation Forecasting Irregular Expenses Manage Measure

Operating Budget Qualitative Analysis Quantitative

Analysis Resource Allocation

Budgeting

What is a budget? What is the purpose of a budget?

› A budget is a detailed plan of income and expenses over a period of time. Point out that individuals and families as well as businesses use budgets to help them manage their finances

Budgeting: True or False

Every business—no matter how big or small—must use budgets.

A budget is basically a plan for future business spending and revenue.

A budget only keeps track of money going out.

If you check your ATM balance regularly, you don’t really need to balance your checkbook.

Some of the work of developing an operating budget involves making guesses.

Budgeting Basics

Download- Reading: Budgeting Basics› Just as an individual or family must keep

track of its own spending practices, businesses must create budgets as well.

› Whether an individual, family, business or government, creating a budget is just one strategy that is important for financial success.

Forecasting

“Businesses don’t plan to fail, they fail to plan.”› What does this mean?

What is a forecast? Why might businesses use forecasts?

Forecasting

Forecasting: predicting current and future market trends using existing data and facts. Forecasting is a process that assists in the preparation of a balanced budget.

Inadequate financial planning is the principal reason businesses fail.

In fact, 80% of businesses fail because of poor financial planning.

Forecasting Overview

Download- Assignment: Forecasting› First analyze the historical data and survey

data that are presented and then use the data to make a forecast about the growth of the ECPak Company

› The example does not include everything that is needed make sure to elaborate and make it better

What is Forecasting?

Download- Diagram: Forecasting Follow along during the lecture to fill in

your diagram

Forecasting basics

The process of making extrapolations about the future based on past data is known as forecasting.

Forecasting is used by businesses so that they can make forward-thinking decisions in the present and develop strategic plans for the future.

Pros of Forecasting

Forecasting can inform decision-making.

Quality of data is vital to quality of forecasting.

Forecasting enables businesses to plan resource allocation.

Cons of Forecasting

It is impossible to predict the future with any certainty, so predictions must be recognized as fallible.

The past is not a guide to the future. Numerical trends can be helpful but are not always definitive.

Qualitative influences—human factors, peer pressure, etc.—reduce the reliability of business forecasting.

Changes in business objectives can make forecasts superfluous.

External factors—major world events, acts of nature, and so on—cannot be predicted with any certainty.

Quantitative Forecasting

Quantitative methods are used when statistical data are available.

Quantitative analysis involves tracking “moving averages” and looking for trends, cyclical variations, seasonal variations, etc.

Quantitative analysis involves extrapolation: taking data from the past and projecting it into the future.

Qualitative Forecasting

Qualitative methods assess opinion. Consumer panels, focus groups, and in-

house judgments are common methods of gathering data for qualitative analysis.

Using Data to Make Forecasts

Download- Assignment: Forecasting› Looking at the historical data, how would

you describe the ECPak sales from 2003–2007?

› What about the industry sales?› How would you describe ECPak’s profits

over the last five years?› What types of things can you forecast based

on the survey data? (For example, almost every consumer expects the MP3 technology to improve.)

Group Forecasts

How did your summary of ECPak’s future profits compare with your partner’s?

List one similarity and one difference in your analysis of the data.

Measuring and Managing Finances

Discuss three tools that businesses use to measure and manage their finances.

Explain two reasons why creating a budget is important.

List one benefit of forecasting.