Question

List and discuss the major applications of forecasted financial statements?

Answer 1

Forecasted statements are the projected financial statements (Income statement, balance sheet, Cash flow statement), which are created by taking certain assumptions and analyzing the company by certain professional financial analysts. Let’s Discuss the uses and application of financial forecasting.

1. The first and foremost is Valuing the company. Most of the analysts, use financial modeling/ forecasting to get certain values of future sales, expenses etc. by taking certain assumptions and analyzing the past earning trends and then discounts those cash flows at the present to get the present intrinsic value of the stock, which helps them to take buy/sell decisions or give recommendation to their clients.

The best example of this is the DCF Model, where you project the financial statements and then use the free cash flows to discount them back at the present to get the intrinsic value.

2. Very often the projected financial statements of a startup or even a mature company are presented to venture capitalists and investors to get a fair picture of the company’s value and business, to secure a funding.

3. The forecasted financial statements allow us to measure the actual financial operation of the business against the forecast financial plan and make adjustments where necessary.

4. Provides an estimate of future cash needs and whether additional private equity or borrowing is necessary. Ensures proper financial management within the organisation.

5. A company can easily analyze and predict the impact of any future events which it expects to happen, and therefore can manage risk by making decisions and preparing beforehand. This can be done through ratio analysis. Projecting future cash flows and then calculating and comparing those ratios with the actual ratios to make decisions.

6. Budgeting decisions of big companies are mostly used by projecting the cash flows of a project and then discounting them to the current period to get a proper picture of the profitability of the project.