FINANCIAL FORECASTS: EXPECTED

RETURNS, RISKS, AND

CONTINGENCIES
OBJECTIVES

• Define financial forecast,

• Identify the three financial model; and
• Appreciate the importance of knowing financial
forecast.
 WHAT IS FINANCIAL
FORECAST?
Financial forecasting is the process of estimating or
predicting how a business will perform in the future.
The most common type of financial forecast is an income
statement; however, in a complete financial model, all
three financial statements are forecasted.
 EXPECTED RETURN

The expected return is the profit or loss

that an investor anticipates on an
investment that known historical rates of
returns
RISKS

The possibility of
financial loss,
 CONTINGENCIES

something that might possibly happen in the future,

usually causing problems or making further plans and
arrangements necessary: We must prepare for all
possible contingencies
 THE THREE-STATEMENT MODEL IS A FINANCIAL
MODEL
Income Statement (Profit and Loss Statement):
The income statement outlines a company’s revenues, expenses,
and profits over a specific period (usually a year or a quarter).

It includes line items such as revenue, cost of goods sold (COGS),

gross profit, operating expenses, interest, taxes, and net income.

By forecasting future revenues and expenses, we can project the

company’s profitability.
BALANCE SHEET:

THE BALANCE SHEET PROVIDES A SNAPSHOT OF A COMPANY’S

FINANCIAL POSITION AT A SPECIFIC POINT IN TIME.

IT LISTS THE COMPANY’S ASSETS, LIABILITIES, AND EQUITY.

ASSETS INCLUDE ITEMS LIKE CASH, ACCOUNTS RECEIVABLE,

INVENTORY, AND PROPERTY, PLANT, AND EQUIPMENT.

LIABILITIES ENCOMPASS DEBT, ACCOUNTS PAYABLE, AND

OTHER OBLIGATIONS.

EQUITY REPRESENTS THE OWNERSHIP STAKE IN THE COMPANY.

CASH FLOW STATEMENT:

THE CASH FLOW STATEMENT TRACKS THE CASH INFLOWS AND

OUTFLOWS DURING A GIVEN PERIOD.

IT CATEGORIZES CASH FLOWS INTO THREE MAIN SECTIONS:

OPERATING ACTIVITIES, INVESTING ACTIVITIES, AND FINANCING
ACTIVITIES.

OPERATING ACTIVITIES INCLUDE CASH GENERATED FROM DAY-

TO-DAY OPERATIONS.

INVESTING ACTIVITIES INVOLVE CASH RELATED TO

INVESTMENTS (E.G., BUYING OR SELLING ASSETS).

FINANCING ACTIVITIES COVER CASH FLOWS FROM DEBT, EQUITY,

AND DIVIDENDS.
EXAMPLE OF CONTINGENCIES

*Supply chain shortages:

The supply chain is one of the most important business processes for this
manufacturing company. Therefore, one of the most impactful risks is a raw
material shortage which may occur if their main supplier is unable to deliver
the materials they need on time. To prepare a contingency action for this risk,
the business owners decide to reach out to other suppliers and place standing
purchase orders which give them the opportunity to ask for a certain quantity
of materials at some point in the future. If the risk of a supply chain shortage
occurs, they’ll have multiple sources of raw materials available in case their
main supplier can’t keep up with their demand levels.
MACHINERY BREAKDOWN:

ANOTHER RISK THAT MIGHT HALT PRODUCTION IS THE

MALFUNCTION OF MACHINERY. TO PREPARE FOR THIS,
BUSINESS LEADERS HIRE EXTRA MAINTENANCE
PERSONNEL AND ORDER SPARE PARTS FOR THEIR
PRODUCTION LINE MACHINERY AS PART OF THEIR
CONTINGENCY PLAN. IF THE RISK OF MACHINERY
BREAKDOWN BECOMES A REALITY, THE ORGANIZATION
WILL HAVE THE LABOR AND RESOURCES THAT ARE
NEEDED TO MITIGATE IT.
1.WHAT IS REFERRED TO A PROCESS OF ESTIMATING OR
PREDICTING HOW A BUSINESS WILL PERFORM IN THE
FUTURE?

A.FINANCIAL FORECAST
B.EXPECTED RETURNS
C.CONTINGENCIES
D.RISK
2. WHICH STATEMENT DEFINES
CONTINGENCIES?

A. The profit or loss that an investor anticipates on an investment.

B. Process of estimating or predicting how a business will perform
in the future
C. Something that might possibly happen in the future
D .The possibility of financial loss,
WHAT ARE THE 3 FINANCIAL MODEL?
GIVE AT LEAST 2 EXAPMLE OF
CONTINGINCIES
3 POINTS

What is