Prospective Analysis: Guidelines for Forecasting Financial Statements

INVESTMENT MANAGEMENT: A MODERN GUIDE TO SECURITY ANALYSIS AND STOCK SELECTION, Ramanna Vishwanath, Chandrasekhar Krishnamurti, eds., 2009

78 Pages Posted: 31 Oct 2007 Last revised: 1 Apr 2009

Ignacio Velez-Pareja

Grupo Consultor CAV Capital Advisory & Valuation

Joseph Tham

Duke University - Duke Center for International Development in the Sanford School of Public Policy

Date Written: May 4, 2008

Abstract

We discuss some ideas useful when forecasting financial statements that are based on historical data.

The chapter is organized as follows: First we discuss the relevance of prospective analysis for non traded firms. In a second section we a basic reviews of subjects that will be needed for forecasting financial statements. We discuss the use of plugs for financial forecasting. We show an alternate approach to avoid such popular practice. The approach we propose follows the Double Entry Principle. This principle guarantees consistent and error free financial statements. We show with a simple example how the plug works and its limitations and problems that arise when using it.

Next, the reader will find what information is needed for the forecasting of financial statements and where and how to find it. We present the procedure to identify policies that govern the ongoing of a firm such as accounts receivable and payable, inventories, dividend payout, and identify price increases and other basic variables. We also deal with the real life problem of a firm with multiple products and/or services.

We start with historical financial statements. We include inflation rates, real increases in prices and volume and policies in order to construct intermediate tables that make very easy the construction of the pro forma financial statements. We use a detailed example to illustrate the method.

We derive the cash flows that will be used in the book to value a firm. This type of models might be used by non traded firm for a permanent assessment of the value creation. Finally we show some tools to perform sensitivity analysis for financial management and analysis.

Keywords: Financial statements forecasting, sensitivity analysis, cash flows, plug, financial statement balancing

JEL Classification: D61, G31, H43, M41, D92, E22, E31

Suggested Citation

Velez-Pareja, Ignacio and Tham, Joseph, Prospective Analysis: Guidelines for Forecasting Financial Statements (May 4, 2008). INVESTMENT MANAGEMENT: A MODERN GUIDE TO SECURITY ANALYSIS AND STOCK SELECTION, Ramanna Vishwanath, Chandrasekhar Krishnamurti, eds., 2009. Available at SSRN: https://ssrn.com/abstract=1026210

Ignacio Velez-Pareja (Contact Author)

Grupo Consultor CAV Capital Advisory & Valuation ( email )

Ave Miramar # 18-93 Apt 6A
Cartagena
Colombia
+573112333074 (Phone)

HOME PAGE: http://cashflow88.com/decisiones/decisiones.html

Joseph Tham

Duke University - Duke Center for International Development in the Sanford School of Public Policy ( email )

Box 90312
302, Towerview Dr, Rubenstein Hall, Room 272
Durham, NC 27708
United States
919-613-9234 (Phone)
919-681-0831 (Fax)

HOME PAGE: http://fds.duke.edu/db/Sanford/faculty/thamjx

Paper statistics

Downloads
6,038
Rank
797
Abstract Views
30,922