ESTIMATING FINANCIAL REQUIREMENTS
A forecast of financial requirements is the core of accounting and financial
decisions in a firm. There are three methods of projecting financial requirements.
1. The simple traditional method of approach to forecasting financial
requirements indicates a firm‘s needs in terms of the number of days for which
its sales are tied up in an individual balance sheet item. It is a tie-in between
forecasting sales and forecasting financial requirements.
2. The second method involves an engineering analysis, which is a
combination of technical know-how and judgement.
3. The third method involves an operation analysis which is not necessarily
technical in nature and which relies mainly on judgement and on an
understanding of the kinds of operations in which a firm is engaged.
The following factors be considered while estimating financial requirements.
1. Cost : The cost of finance is an obvious consideration. It should be the
minimum.
2. Repayment Date: Due regard should be given to the period time for which
finance is required. A scheme should be drawn up which fixes the repayment
date of the debt.
3. Liquidity : Liquidity is an important consideration, as liquidity may lead to
insolvency
