From the course: Financial Modeling and Forecasting Financial Statements
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The impacts of natural changes
From the course: Financial Modeling and Forecasting Financial Statements
The impacts of natural changes
- Using the historical financial statements as a starting point, we can systematically create a forecast of next year's financial statements. First, let's consider the balance sheet. Not all balance sheet accounts change according to the same process. Some items increase naturally as sales volume increases. Others increase only in response to specific long-term expansion plans, and other balance sheet items change only in response to specific financing choices made by management. Let's first talk about those items that increase naturally with an increase in sales volume. By the way, this highlights the importance of starting the whole forecasting process with a reliable sales forecast. For year two, a careful analysis of historical trends, economic conditions, and company plans, has led the financial planers of Derrald Company to agree that sales are expected to increase a whopping 50% in year two. Here are the balance…
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