Question

You are the CFO of a company: What are the important assumptions that underlie your projections? These assumptions may be associated with both external or internal factors.

Answer 1

The following are the important assumptions that underlie the projections in a business :

Internal

1) Productivity of the company : Production capacity means the capacity of the company to produce a given quantity of products in a year. The production capacity of the company plays an important role in revenue generation of the company. It is a major assumption when projecting future finance.

2) Cost of Capital : Cost of capital means the cost that the company has to incur for holding its capital. Capital can be in form of Equity Shares, Preference Shares, Loans, Debentures,etc. Cost of capital is an important factor as it denotes the cost that the company has to incur.

3) Cash Flows : Cash Flow denotes the future expected cash inflow and outflow with regards to a project. It is a cash income /loss which is used to arrive at the profit/loss. It is a crucial factor in deciding the viability of a business project.

4) Project Financing : Project financing means the avenues by which the company will be arranging the finance for the business project. One of the important roles of a CFO includes decision of cheap and efficient project financing.

External

1) Market Interest Rate : Market Interest Rate means the rate at which money can be borrowed/invested in the market. This will be used in discounting the future cash flows.

2) Inflation Rate : Inflation rate means the percentage rise in prices of commodities per year. This is an important assumption while deciding on future costs to be incurred.

3) Government Policies : Government policies are the laws and regulations a company has to follow while operating in a country. Current and Future expected government policies plays a significant role in the projections.

4) Market Competition : Market Competition means the competition a company has to face in its similar line of business. Market competition impacts the profit making capacity of the company.