Forecasting Financial Statements Using Risk Management Associates Industry Data

Abstract

Finance professionals must frequently forecast financial statements. The common practice for forecasting financial statements is to apply the percentage of sales method. In this paper, we develop a new method for forecasting financial statements based data available from The Risk Management Association. This method offers three advantages over the percentage of sales method. First, it specifies the appropriate percentages for each account using industry average data. Second, it allows the developer to use any figure in the income statement or balance sheet as a starting point. For example, an investor who knows only that they have $100,000 available to start a company can forecast a balance sheet and income statement. Third, the percentage of sales method applies only to the income statement, while the method developed here allows estimation of both the income statement and balance sheet. Statements produced using the technique presented here are easily defendable to skeptical bankers.

Keywords: Financial Statements, RMA, Forecasting, Banking, Entrepreneurship

JEL Classification: A22, A23, C52, C53, C58