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Financial planning process can be defined as an act of developing long-term strategic financial plans that helps in preparation of the short term budgets and plans. Financial planning is one of most important aspects of business operations since it provides guidance to the firm in meeting its objectives (Kamis, 2010). In every organization, the sales forecasts are very vital in the process of long-term financial planning. Leach and Melicher observed that long-term financial planning begins with a forecast of sales.
One of the main reasons for Sales in long term financial planning is that if sales fall below the predicted levels, the company may be unable to meet its financial obligations. It is therefore very important to have accurate sales forecasts to avoid future inconveniences. This is demonstrated by the cases described below.
The importance of forecast of sales can be clearly demonstrated in the case of Picnic Corp. In this case the Securities and Exchange Commission had ordered Picnic Corp Plc to amend its first quarter financial statements because it did not set aside for provision for doubtful accounts (Thai Press Reports, 2006). The firm had not established a reserve for Bt432 million in outstanding receivables. The firm did not make correct forecasts. Poor forecasts led the firm into difficulties. It is also observed that the firm made a net loss of Bt 381.77 million.
Another case that can demonstrate the importance of forecast of sales in an organization is the case of Boston Chicken Inc. This firm was one of the most successful firms in 1990s (LTFPG, 2010, 1). However, the organization later went under bankruptcy due to unexpected high rate of growth. The firm had added its restaurants in 1993 due to an increase in sales from $42.5 million in 1993 to 462.4 million in 1997 (LTFPG, 2010, 1). The organization had not managed to predict this increase in sales earlier enough. Therefore, this high rate of growth turned into a menace. The firm started building additional stores to meet the demand. However, these expenses led the firm into bankruptcy (LTFPG, 2010, 1). This story indicates one of the importances of sales-forecast on financial planning.
In conclusion, the above discussion has confirmed that sales-forecasts are very important in the financial planning. The ability of an organization to meet its objectives will largely be determined by its financial planning. It is therefore very important to have accurate sales forecast in order to meet organizational goals and objectives easily.