Forecasting a balance sheet

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Permalink Reply by ramani iyer on May 22, 2009 at 4:49am

ten year is too long a time....we have to take into account the major factors like inflation, petrol pricing and its impact.

if u hv got last ten yr data, one can extrapolate with some gut feel.

the forex fluctuations of the past can also help

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Permalink Reply by Ignacio Vélez Pareja on May 25, 2009 at 9:11am

Dear Joseph

I have several papers on this and an Excel file (in fact, several versions) where I show how to do it without circularity and without closing accounts (plugs). An xls file that illustrates the procedure can be downloaded from http://cashflow88.com/decisiones/cige-II-2008.xls. This file has titles in Spanish and in English.
1. To Plug or Not to Plug, that is the Question: No Plugs, No Circularity: A Better Way to Forecast Financial Statements (http://papers.ssrn.com/abstract=1031735)
2. A Step by Step Guide to Construct a Financial Model Without Plugs and Without Circularity for Valuation Purposes (http://papers.ssrn.com/abstract=1138428)
3. Some Frequent Mistakes and Solutions When Forecasting Financial Statements (http://papers.ssrn.com/abstract=1286782)
4. A Quick & Dirty Method for Estimating Growth and Price Changes for Forecasting Financial Statements (http://papers.ssrn.com/abstract=1374104)

A golden rule is not to average data nor forecast data using regression techniques with time as independent variable, that have inflation inside such as actual sales revenues and expenses. Use extensively the Fisher equation to disaggregate nominal growth into inflation, real increase in prices and real growth (of units). You can average things like real growth and real increase in prices. You will need to forecast inflation (not you really, but look for forecasts done by Central Bank, or other governmental and private institutions).

Let me know if this is of any help for you.

Regards

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Permalink Reply by Dmitry Ryabykh on May 25, 2009 at 9:34am

We develop professional models for long term forecast. We use information on company's projects as main drivers. You can download our demo to see details: http://www.d-ria.com/ai6-demo.zip

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Permalink Reply by Arunkumar O.N. on May 25, 2009 at 11:15am

As faras in general considerations, the life of a project is considered is only for 5 years. The economic conditions will change after 5 years, so that, it will be meaning less to compare the first year and 6th year. So iot will be good to project up to 5 years. As long as the years are going, the accuracy in projection will come down.
For projecting the balance sheet, considerning the manufacturing firms, the following factors will be more useful
* The projection in capacity utilization
* The sales growth (i.e. the turnover growth which will ultimately affect the companies profit)
* The projectred demend for the product.(As an eg., if we consider the cement industry, its sales growth can be depent on real estae market, infrasturcture policies of govt. etc)

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Permalink Reply by David Kitchnoge on May 25, 2009 at 10:21pm

Hi Joseph.

You will need to construct a 3 way integrated financial model in excel to extract the forecast balance sheet. The balance sheet can not be forecast independently of the P&L and Statement of Cash Flows because of the overlap in a number of elements of the financial statements.

For example, you can not get the cash balance in your BS unless you do your Statement of Cash Flows and you need your P&L to calculate your cash position. But to calculate your operating cash flows, you need to estimate your working capital cash flows which is usually the movements in your opening and closing debtors and creditors balances in your BS.

The attached model I built for a hypothetical coffee growing business here in Papua New Guinea might help.

All the best.

Cheers
David

Attachments:

• Green Gold_v3.xls, 336 KB

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Permalink Reply by Joseph on May 25, 2009 at 11:53pm

Thanks guys,

Your help was much appreciated.

Cheers.

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Permalink Reply by Joseph on May 26, 2009 at 12:31am

Hi David,

Thanks for your model, it is very useful - it is concise and straight forward.

Cheers,

Joseph

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Permalink Reply by Ramakrishna Allada on May 26, 2009 at 8:05am

Hi David,

That's a wonderful resource. Thank you very much.

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Permalink Reply by David Kitchnoge on May 26, 2009 at 3:07am

My pleasure Joseph.

Cheers
David

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Permalink Reply by Irfan Mansoor on May 26, 2009 at 4:41am

Hello David,

Good one

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Permalink Reply by Erik Saenz on May 26, 2009 at 9:33am

A ten BS is too long to forecast. I agree with my colleague's previous answer. There are too many factors that will affect your bottom line (e.g. forex, geopolitical) are just two just to name a few.

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Permalink Reply by Michael on May 30, 2009 at 2:07pm

Please find attached a McKinsey Model where it provides much more than a simple Balance sheet. You must imput historical data and the model estimates the financial statements based on a plethora of forecast drivers. It also provides a DCF valuation....

Hope that I helped.

Michael

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