Financial Modeling and Forecasting Financial Statements

Introduction

• Projecting the financial future
• What you should know

1. Who Uses Forecasted Financial Statements?

• Use the past to understand the future
• Keys to running a business
• Financial forecasts and loans
• Financial forecasts and investment decisions
• Use financial forecasts to understand new information

2. It All Starts with an Accurate Sales Forecast

• IBM and the famously bad sales forecast
• Combine historical trends with current plans
• Incorporate seasonal patterns and recent developments
• The costs of being wrong

3. What Causes Financial Statement Numbers to Change?

• Home Depot 1985: Three weeks to live
• The impacts of natural changes
• The impacts of long-term planning decisions
• The impacts of financing choices

4. Constructing a Forecasted Income Statement

• The Gap and predictable change
• Forecasting sales-based expenses
• Fixed costs and variable costs
• Forecasting interest and income taxes

5. Constructing a Forecasted Balance Sheet

• The power of the accounting equation
• Identifying the missing number
• Easy "plugs": Cash, investments, paid-in capital
• Realistic but challenging "plug": Loans

6. Constructing a Forecasted Statement of Cash Flows

• The Home Depot story revisited
• How to deduce cash flows
• Forecasting operating cash flow
• Forecasting investing cash flow
• Financing cash flow

Conclusion

• Dynamic modeling