Some Frequent Mistakes and Solutions When Forecasting Financial Statements
14 Pages Posted: 20 Oct 2008 Last revised: 14 Dec 2008
Date Written: November 20, 2008
When forecasting financial statements care has to be taken to construct a consistent and correct model. This is not an easy task. Even the most experienced expert in modeling makes mistakes. This is especially relevant when we construct a financial model without plugs and without circularity.
In this work we list some common mistakes made while constructing financial models. This list comes from our experience teaching and coaching students in the process of constructing the model and from the professional practice and consulting in finance, especially in firm valuation.
The purpose of this work is to help future students and practitioners when doing the job of forecasting financial statements. After the mistakes have been detected and corrected, they might look like silly mistakes, however, everybody knows that it is easy to be very smart after things have happened. When the mismatching appeared they were real huge problems. After many headaches and lots of work they were found and corrected. Today even after we have worked hard in finding out where the mistakes were, we might consider them as ridiculous or even silly mistakes.
An additional thought is to consider that the exercise to forecast the financial statements of a firm from the outside is a futile one. A fruitful forecasting work is done when the analyst is an insider or is a consultant with full access to the relevant information.
We expect that these thoughts be useful to our students and colleagues and that they avoid mistakes in their academic and professional work.
Keywords: Accounting, Forecasting Financial Statements, Decision Making, plugs, Planning and control, double entry principle, unbalancing problem
JEL Classification: G31, G29, M41
Suggested Citation: Suggested Citation
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A Step by Step Guide to Construct a Financial Model Without Plugs and Without Circularity for Valuation Purposes (Guia Paso a Paso Para Construir Estados Financieros Sin Cuentas De Cuadre 'Plugs' Y Sin Circularidad Para Efectos De Valoracion De La Empresa)