Financial Forecasting

Lesson 1. Financial Planning,

Forecasting and Budgeting
Lesson 2. Financial Statement
Analysis
Lesson 3. Fund Flow Analysis
  Lesson 1….
Financial Planning, Forecasting and
Budgeting
 Financial forecasting
qIt is a process
qCompany’s management positions
the firm’s future activities
qbased upon the expected external
environment
qExternal environment – economic,
technical and social
 Three main techniques for
future forecasting
qProforma financial statement
üProjected future statement of a
company
üBased upon a set of assumption about
future performance relative to the
market conditions
qCash budget
üPrepare periodically usually a month
üDetails of expected cash receipts &
cash payments
qOperation budget
ü
 Sales forecasting
methods
qSubjective method
üJury of executive opinion
üSales force estimates
qObjective method
üTrend analysis via Extrapolation
üRegression analysis
  Lesson 2…..
Financial Statement Analysis
Financial statement analysis :-
It consist of the application of
analytical tools and techniques to the
data in the financial statement in order
to derive from them measurements and
relationships that are significant use for
decision making
Sources of financial information
qPrimary sources from annual report
and required
disclosures
qMarket price
§
 The principle tools of
analysis
q Ratio analysis
ü Liquidity ratios
ü Profitability ratios
ü Ownership ratios
ü Capital structure ratios
ü Coverage ratios
ü Dividend ratios
q Comparative analysis
ü Cross-sectional analysis
ü Time-series analysis
ü Common-size analysis
q Du Pont analysis
q Fund flow analysis
 Ratio analysis
q Liquidity ratio
ü Current ratio = current asset / current liabilities
ü Quick ratio = current asset – inventories / current
liabilities
ü Account s receivable turnover ratio = Net credit
sales/Avg.


accounts receivable
ü Average collection period = 360/Account receivables
ü Inventory turnover = Cost of good sold / Average
Inventory
ü
q Profitability ratio
ü Gross profit margin ratio = Gross profit / Sales
ü Net profit margin ratio = Net profit / Net Sales
q
q Ownership ratio
ü Earning per share = Net income/Number of
outstanding shares
ü Price-earning ratio = Market price/ Earning per share


q Capital structure ratio

ü Debt-equity ratio = Debt/Equity
ü Debt-asset ratio = Debt/Asset


q Leverage ratio
ü Interest coverage ratio = EBIT/Interest expenses
ü Debt service coverage ratio = PAT + Dep + other non
cash charges+ interest on loan
 / interest on loan +
repayment of loan
ü Dividend yield = Dividend per share / Market price
 Comparative analysis
q Cross-sectional analysis
 To assess whether the financial ratios are
with in the limits, they are compared with
industry averages or with a good player in
normal business conditions


q Time-series analysis

Year-to-Year change : A comparison of
financial statement over two or three years
can be undertaken by computing the Year-
to-Year change in absolute amount or in
term of percentage change


q Common size analysis

 In this analysis of financial statement, it is
 DU PONT analysis
qThe Du Pont company of the US
developed a system of financial
analysis
qAnalysis return ratio in term of profit
margin and turnover ratio

Problems encounter in
financial statement
analysis
qDevelopment of Benchmarks
qWindow –dressing
qPrice level changes
qDifference in accounting policies
qInterpretation of results
qCorrelation among ratios
q
 Lesson 3…..

Fund Flow Analysis

 Fund Flow Statement
qIt is a statement which explains
üThe source from which funds
were raised
üThe uses these funds were put
on
qIncrease in liabilities & decrease in
assets – Application of Funds
qDecrease in liabilities & increase in
assets – Source of Funds
 Preparation of Fund
Flow Statement
qTotal Resource Basis
ü Compare the Balance Sheet over the period of time
ü Increase & decrease in assets and liabilities
ü Inflow through the issue of equity or preference
capital

qCash Basis
ü Increase & decrease of cash in Balance Sheet
ü Increase & decrease of cash in Income Statement
ü Information from the source & use of funds format

qWorking Capital Basis

ü Similar to the preparation of the Fund Flow
Statement on cash basis
ü Components of current assets & current liabilities are
omitted
 Significance of Fund
Flow statement
qDetection of imbalance and
appropriate action
qDivisional performance appraisal
qEvaluation of firm’s financing
qPlanning of future financing
  Thank you


 Efforts by:
 Meenakshi
Bisht


Tushank Neeraj Garg