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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...

Financial Statement Forecasting Financial Statement Forecasting The financial statement forecasting begins with  the forecasting of the future estimates that are made through preparation of statement like projected income statement, projected balance sheet, projected cash flow and fund flow statements, cash budget, preparation of projected financial statements with the help of ratios etc. Financial statement forecasting is useful in making various financial decisions like capital investment, annual production level, operational efficiency required, requirement of working capital, assessment of cash flow, raising of long term funds, estimation of funds requirement of business, estimated growth in sales etc. When we forecast the financial statement we forecast the Profit and Loss and Cash Flows. From these financial statements, we get the forecasted Balance Sheet. When we prepare the Profit and Loss, we start from the sales figures. For forecasting the sales figure...

What is Discount Rate ? The next step in the Discounted Cash Flow model is the determination of an appropriate rate to discount future cash flows. The discount rate is the aggregate of risk-free rate and risk premium to account for the riskiness of the business. Key inputs or adjustments for calculating the discount rate are discussed below: Theoretically, the risk-free rate is the rate of return on an asset with no default risk. In practice, long-term interest rates on government securities are used as a benchmark. It is quite natural to assume that the riskier investments should have a higher return. This necessitates the incorporation of an appropriate risk premium in the discount rate. There exist a number of models for determination of risk premiums, such as the capital asset pricing model, arbitrage pricing model, multi-factor model, etc. The risk premium is also adjusted to incorporate risks associated with the stage and size of the business and other compa...

cash flow projection Cash Flow Projections The first and most critical input of the Discounted Cash Flow model is the cash flow projections. As stated earlier, the Discounted Cash Flow value is as good as the assumptions used in developing the projections. These projections should reflect the best estimates of the management and take into account various macro and microeconomic factors affecting the business. Some of the important points to be kept in mind with regard to cash flow projections based on the projection of the profitability are stated below: Cash flow projections should reasonably capture the growth prospects and earnings capability of a company. The earning margins of a company should be determined based on its past performance, any envisaged savings, pressure on margins due to competition, etc. The effect of expansion schemes can present more complex problems. For these, the valuer will have to use his judgment about their profitability...

Discounted Cash Flow Model The potential earning power of a company is generally a paramount factor for valuation of share but there may be occasions, especially in valuations for compensation, where other considerations become relatively more important. In the absence of any other special motive, an investor is principally interested in a company’s ability to continue earning profits. The Income Approach indicates the value of a business based on the value of the cash flows that a business is expected to generate in future. This approach is appropriate in most going concern situations as the worth of a business is generally a function of its ability to earn income/cash flow and to provide an appropriate return on investment. The Income approach includes a number of models/ techniques, such as Discounted Cash Flow, Maintainable Profits Basis, Dividend Discount Model, and others. DISCOUNTED CASH FLOW (DCF) Discounted Cash Flow model indicates the fair mar...

Cash Flows The reporting of the cash flows during the period in the cash flow statement is classified into following categories:- Operating activities Investing activities Financing activities Categorization made based on the activity provides information that allows users to evaluate the impact of those activities on the financial position of the entity and the amount of its cash and cash equivalents. It may also be helpful to assess the relationships among those activities. When an entity enters into a single transaction, it may include a mix of cash flows that are categorized differently based on their characteristics. For example, installment for an acquisition of a fixed asset on hire purchase basis includes both the component of interest and loan, the interest element falls under financing activities and the loan element fall under investing activities. Cash flows from Operating activities In simple term Cash flows from operating activities me...

Cash Flow Statement What is Cash flow statement? The cash flow statement is an important planning tool in the hands of management. A cash flow statement is useful for short-term planning. A simple definition of a cash flow statement is a statement which discloses the changes in cash position between the two periods. For example, a balance sheet shows the balance of cash as on 31.12.2015 at $20,000, while the cash balance as per its latest balance sheet as on 31.12.2016 was $30,000. Thus, there has been an inflow of $10,000 during a year’s period. Along with changes in the cash position, the cash flow statement also outlines the reasons for such inflows or outflows of cash which in turn helps to analyze the functioning of a business. In order to meet its various obligations in the near future, a business venture needs adequate cash. The past analysis of the diverse sources and applications of cash will enable the management to make reliable cash flow project...

The venture capital financing means financing of new venture promoted by qualified entrepreneurs who lack experience and funds to materialize to their ideas. Under venture capital financing venture capitalist make the investment through purchase of the equity or debt securities from inexperienced entrepreneurs who undertake highly risky ventures with high potential for success. Some of the features of Venture Capital Financing are:- It is basically an equity finance in new companies. It can be viewed as a long-term investment in growth-oriented small/medium firms. Apart from providing funds, the investor also provides support in form of sales strategy, business networking, and management expertise, enabling the growth of the entrepreneur. venture capital financing Some common methods of venture capital financing are as follows: Equity financing The venture capital undertakings normally require funds for a long term. However, they may not be able to pr...

The terms ‘liquidity’ and ‘short-term solvency’ are interlinked. It means the ability of the business to pay its short-term Obligations. Failure to pay-off short-term obligation affects its credibility as well as its credit rating. Continuous default on the part of the business leads to business bankruptcy. Ultimately such business bankruptcy may lead to its sickness and dissolution. Short-term lenders and creditors of a business are very much concerned to know its state of liquidity because of their financial stake. Usually, two ratios are used to put emphasis on the business ‘liquidity’. These are current ratio and quick ratio. Other ratios include cash ratio, interval measure ratio, and net-working capital ratio. Firm's Liquidity Current Ratio The Current Ratio reflects the financial strength. A simple measure that estimates whether the business can pay debts due within one year from assets that it expects to turn into cash within that year. A ratio ...

What is Ratio Analysis? An analysis of the mathematical relationship between two individual figures or group of figures logically linked with each other and picked from financial statements of the concern is known as ratio analysis. The objective for financial ratios is that all stakeholders (owners, investors, lenders, employees etc.) can draw conclusions about the Performance (past, present, and future) Strengths & weaknesses of a firm And can take decisions in relation to the firm.  Ratio Analysis The ratio analysis basically puts light on the fact that a single figure data by itself may not reflect any meaningful information but when expressed as a comparative to some other figure, it may definitely provide some significant information. Ratio analysis is not just comparing different numbers from the balance sheet, income statement, and cash flow statement. It is comparing the number of previous years, other companies, the industry, or even the e...