Techniques of Financial Statement Forecasting

Techniques of Financial Statement Forecasting

Major techniques that are employed in financial statement forecasting are discussed below:

Percentage of Sales Method:

It is another commonly used method for estimating financial requirements of the firm based on a forecast of sales. Any change in sales is likely to have an impact on various individual items of assets and liabilities of the balance sheet of a firm.

Days Sales Method:

It is a traditional technique used to forecast the sales by calculating the number of days and establishing its relationship with the balance sheet items to arrive at the forecasted balance sheet. For forecasting funds requirement of a firm, it is the most useful technique.

Simple Linear Regression Method:

It is concerned with the distribution of two variables. Simple regression analysis provides estimates of values of the dependent variable from values of the independent variable. The device used to accomplish this estimation procedure is the regression line. For financial forecasting purpose, sales are taken as an independent variable and the values of each item of the asset (dependent on sales) are forecasted. Under this method, every time only one item of asset level can be determined. Then all the forecasted figures are then put on the projected balance sheet to know the financial needs of the firm in future.

Multiple Regression Method:

It is the further application and extension of the simple regression method for multiple variables. This method is applied when the behavior of one variable is dependent on more than one factor. In this method of financial forecasting, it is assumed that sales are a function of several variables.The method used in forecasting depends on the requirements and accuracy needed in forecasting.

Projected Funds Flow Statement:

Fund flow statement presents the details of financial resources that are available during the accounting period and the ways in which those resources are applied in the business. It is a statement of resources and application of funds analyzing the changes taking place between two balance sheet dates. A projected funds flow statement will present the data relating to procurement of further funds from various sources and their possible application in fixed assets or repayment of debts or increase in current assets or decrease in current liabilities etc. The funds flow statement establishes a relationship between sources and application of funds and its impact on working capital. It is a powerful tool extensively used in financial forecasting.

Projected Cash flow Statement:

It is a detailed projected statement of income realized in cash and cash expenditure incorporating both revenue and capital items. Projected cash flow statement focus on the cash inflow and outflow of various items represented in the income statement and balance sheet. It is used in forecasting the financial requirements of the firm.

Projected Income Statement and Balance Sheet:

On the basis of a forecast of sales and anticipated expenses for the period under estimation, the projected income statement is prepared. The projected balance sheet is also drawn based on the future estimation of raising or repayment of long-term funds and acquisition or disposal of fixed assets and estimation of working capital items with reference to the estimated sales.