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.
Projected Financial Statements are an important tool in determining the overall performance of a company. They include the balance sheet, income statement and cash flow statements to indicate the company performance.
The 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.
The 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.
The Statement of Cash Flows is the most critical forecast since it reflects viability rather than profitability. It can also be the most uncertain statement as projections extend into the future. Therefore, monthly cash flow is a key statement since it enables calculation of “coverage” at any given point.
Preparing projected financial statements can be very time consuming and it requires a careful analysis of the company’s past and present financial health. Projected financial statements project or forecast a company’s performance in the near future.
Preparing Projected Financial Statements:
Preparing projected financial statements require careful analysis. Prior to preparing projected financial statements, an analyst studies the financial history of the company. There may be some drawbacks, which the company may have encountered down the years. To eradicate such hurdles and for the betterment of the company’s financial status, an analysis is conducted.
Factors Considered while Preparing Projected Financial Statements:
Various factors are considered for analysis of the financial health of the company. An analyst uses the following points to evaluate the position of the company:
Whether the company’s operational activities are up to the mark
If the company is well equipped financially
Condition of the market- if the market is in the process of growth, is at equilibrium or shriveling up.
The status of the company in relation to the other companies in the industry.
Strengths, weaknesses prevailing in the management of the company, type of product produced by the company, economic cycle of the company, accompanying hazards in the production of goods.
Role of the management’s performance in company growth
Risks associated with operational activities
Company’s past performance records.
By carefully studying the various trends in the company’s past performances, the analyst tries to predict the company’s performance in future. Even if the financial health of a company has remained fairly stable over the years and the projected financial statements forecast a still better growth trend in the financial statement, any unforeseen event may change the course, in the projected financial statement.
The unforeseen events may occur in any part of the globe thereby impacting global economy in an adverse manner. An analyst keeps provision for such events and prepares details of a contingency fund, which can be made use of, if the above mentioned circumstances are encountered by any company.
Last Updated on : 23rd June 2015