FINANCIAL STATEMENT

 INCOME STATEMENT
 BALANCE SHEET
 CASH FLOW STATEMENT

INCOME STATEMENT

REVENUE – EXPENSES = PROFIT(LOSS)

BALANCE SHEET

ASSET= LIABILITIES + OWNER’S EQUITY

CASH FLOW STATEMENT

OPERATING, INVESTING, AND FINANCING ACTIVITIES

financial projection is a prospective financial statement presenting the expected financial position,
results of operations, and cash flows of your business, to the best knowledge of the person or people
responsible for preparing it. A financial projection will include one or more hypothetical assumptions
which might be less likely to happen.

Projected Financial Statements- is summary of various component projections of revenues and expenses
for the budget period. They indicate the expected net income for the period. Are important tools in
determining the overall performance of a company. They include the balance sheet, income statement
and cash flow statements to indicate the company performance.

Balance Sheet shows your assets, liabilities and equity at a particular point in time. It is basically a
snapshot of your financial position. The basic accounting formula is assets equal liabilities plus owner's
equity. The asset section of the balance sheet should be presented in order of liquidity starting with the
most liquid assets such as cash, accounts receivable and inventory. The liabilities section should be
presented in order of maturity starting with liabilities that are payable over the next year such as a
demand note payable and accounts payable.

Income Statement captures profit performance, demonstrates immediate capability to service debt for
banks or real potential for growth in returns for venture capital. This is often expressed in terms of sales
volume, or compared to industry benchmarks. Income statement provides significant information about
the financial and operational health of a business. It provides details about revenue, expenses and
profits and the margins associated with these. The margins allow the owners, lenders or investors to
compare the company's performance to others in its industry. Projected income statements allow
companies to forecast their performance in the future based on the assumptions they make about what
will happen.

Financial forecasting is a crucial business process for meeting that challenge.

Business Financial Forecasting

Financial forecasting is a vital part of business planning that uses past financial performance and current
conditions or trends to predict future company performance. In other words, financial forecasts are a
tool by which businesses can set and meet goals.

Forecasts can be made on a weekly, monthly, quarterly or yearly basis, depending on the numbers that
are being tracked—and they can address metrics such as sales, expenses, cost of goods sold, and profits.

Benefits of Financial Forecasting

Some of the benefits of financial forecasting include:

− Assess the success of your efforts to determine the long-term viability or value of an activity

− Take control of your cash flow and purposefully direct your company

− Develop benchmarks for use in future forecasts

− Perform contingency planning during challenging financial times

− Anticipate the impact of new expenses

− Identify financial problem areas and their causes

− Reduce financial risk

− Create an environment of certainty and stability

− Make future budgeting much easier

Financial forecasts and financial projections have similar and overlapping functions, but different
purposes. While some financial projections cover a year, most try to describe conditions expected to
develop over the long term.

One of the key differences between a financial forecast and a financial projection lies in scope. A
financial forecast aims to predict likely events during a given period. Financial projections, however,
expand from this to include any number of hypothetical scenarios, which can enhance a company’s
ability to plan for the future.

Financial projections come in two forms:

Short-term financial projection covers the first year of business and chart expectations month to
month.

Mid-term projections cover three years and are broken down by year.
Financial projections also serve another essential purpose. They require the people involved to stand
back and take a look at the business’s performance from an objective point of view. Financial projections
also give the chance to creatively explore the potential opportunities and consequences of pursuing or
ignoring certain decisions.

Benefits of preparing Financial Projection

Financial projection works to ensure that the company has a thorough, organized, and easily
communicated report on its current state.

A new business can use a projection to get the best possible assessment of initial performance. The
owner or leadership team will get a better picture of what went right, what went wrong, and what
needs improvement.

Established businesses can use them to attract investors or other stakeholders to offer support.

They also serve as a benchmark and a record for the future. Their accuracy or lack thereof can serve as a
tool to guide better recordkeeping, decision making, and other processes going forward.

If projections consistently fall behind, they serve as prime indicator that the business needs to adopt
structural or other changes. Businesses consistently outperforming expectations indicate that they may
need to hire more people, expand production, or engage in some other type of growth.

Forecasting isn’t easy. But when done right, it can offer tremendous advantages to companies. And in
today’s ultra-competitive business landscape, any advantage over the competition is positive. That said,
there are a few disadvantages that are worth exploring. While we don’t believe they are obstacles to
implementing a forecasting process, they should be weighed when considering which forecasting
process is right for you.

Advantages of financial forecasting

1. Gain valuable insight

Forecasting gets you into the habit of looking at past and real-time data to predict future demand. And
in doing so, you’ll be able to anticipate demand fluctuations more effectively. But more than that, it will
give insight into the company’s health and provide opportunity to course-correct or make adjustments.

2. Learn from past mistakes

You don’t start from scratch after each forecast. Even if the prediction was nowhere close to what
ended up coming to pass, it gives a starting point. It’s common to review where and why things didn’t
happen the way it was predicted. Forecasts should eventually improve. But more than that, it will
become a habit of reflecting upon past performance as a whole. And self-reflection can be a powerful
driver of company growth.

3. It can decrease costs

When done right, anticipating demand will help in tweaking the processes to increase efficiency all along
the supply chain. Because of being able to predict what customers will want and when they will want it,
it may be able to decrease excess inventory levels, thus increasing overall profitability.

Disadvantages of forecasting

1. Forecasts are never 100% accurate

It is hard to predict the future. Even if a great process is in place and forecasting experts are present,
forecasts will never be spot on. Some products and markets simply have a high level of volatility. And in
general, there is just an endless number of factors that influence demand.

2. It can be time-consuming and resource-intensive

Forecasting involves a lot of data gathering, data organizing, and coordination. Companies typically
employ a team of demand planners who are responsible for coming up with the forecast. But in order to
do this well, demand planners need substantial input from the sales and marketing teams. In addition,
it’s not uncommon for processes to be manual and labor-intensive, thus taking up a lot of time.
Fortunately, if the right technology is in place, this is much less of an issue.

3. It can also be costly

Hiring a team of demand planners is a significant investment. When added to that the cost of using good
quality tools, upfront costs can add up. But investing in advanced software, highquality talent and solid
forecasting processes is just that: an investment. Good returns can be expected when all of these is
done right.

Forecasting is a business practice that every company engages in to one extent or another. And it can be
hugely valuable, providing those companies who have implemented a solid forecasting process with a
leg up on their competition. What’s more, even the disadvantages can be overcome with the right
people, technology and processes.

Factors considered when preparing projected financial statements:

1. Market conditions- these include inflation, competitiveness of specific industries, growth (or
slowdown) of the economy, global markets, consumer demand, and spending patterns of specific
market segments.

2. Economy -this is taken into account if the economy is thriving, plateauing, or slowing down.

3. Investment climate- investors in securities and other financial or investment products always try to
see whether the economy is bullish or bearish. Investors may consider the market to be a bull market
(bullish) when there is an increase in the level of investor confidence, the volume of trading is high, and
the number of investors is increasing. On the other hand, the market can be considered a bear market
(bearish) when trading slows down, which is an indication of the low level of investor confidence. Prices
are either stagnant or too low. Sometimes, analysts or investors consider a bear as a “tentative bull” or a
bull that is hibernating.

4. Competitive position of the firm in the industry- whether a company is a market leader, a nicher (a
firm whose marketing strategy is to focus on a smaller market segment), or a challenger.

Prerequisites in making financial forecasts and budgets