Financial Modeling and Forecasting Financial Statements

Introduction

• Projecting the financial future

1. Financial Forecasting for Strategic Decision-Making

• Deduce the connection between past and future business performance
• Analyze potential business with a financial forecast
• Evaluate how banks use a financial forecast to make loans
• Use financial forecasts to make investment decisions
• Reflect new information in financial forecasts
• Use AI effectively in financial statement forecasting
• Excel: Growth extrapolation and loan candidate evaluation

2. Start with an Accurate Sales Forecast

• IBM and the famously bad sales forecast
• Combine historical trends with current plans to forecast
• Incorporate seasonal patterns into your forecast
• Use sensitivity analysis to minimize the costs of being wrong
• Use AI to increase the reliability of data used in forecasting sales
• Excel: Build a multifactor sales forecast

3. What Causes Financial Statement Numbers to Change?

• Home Depot in 1985: Three weeks to live
• Monitor financial statements to keep forecasts accurate
• Incorporate long-term planning into forecasts
• Revise financial forecasts based on financing options
• Use AI to conduct sensitivity analysis
• Excel: Forecast assets and sensitivity analysis

4. Construct a Forecasted Income Statement

• The Gap: How change affects the forecasting process
• Forecast sales-based expenses
• Forecast fixed costs and variable costs
• Forecast interest and income taxes
• Use AI to revise financial statement forecasts
• Excel: Forecast net income and sensitivity analysis

5. Construct a Forecasted Balance Sheet

• Use the power of the accounting equation
• Identify the missing numbers in forecasts
• Assess the use of "plugs": Cash, investments, and paid-in capital
• Use the realistic but challenging "plug": Loans
• Use AI models to incorporate granular data
• Excel: Assess different financing "plug" options

6. Construct a Forecasted Statement of Cash Flows

• Home Depot: The importance of cash flow
• Compute cash flows by analyzing other financial statements
• Forecast operating cash flow
• Forecast investing cash flow
• Forecast financing cash flow
• Use AI to incorporate qualitative data into forecasting
• Excel: Fix Home Depot's operating cash flow

Conclusion

• Create processes for dynamic modeling