Financial Forecast

Financial Forecast

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Executive summary

The paper evaluates the hypothetical financial performance of the business. One has to come up with the multiple assumptions used in the generation of both the balance sheet and the statement of financial performance. There is the need to evaluate the growth of the revenues from one fiscal year to the other. One should consider the risks in the business. This issue is factored in by having both the best and the worst-case scenario. Riskiness is taken into consideration in both the financial statements. The change of assumptions changes the growth of the revenues in the business. This change is likely to influence the various figures in the financial statements.

Financial Forecast

Introduction

A company prepares various financial statements. They include the statement of financial performance and that of financial position. The former evaluates the changes in the revenues and expenses while the latter considers the assets, liabilities, and equity (Beyer, 2008). Anthem Inc. has presented its financial performance for the year ended December 31st, 2018. One uses the common size balance sheet to establish the performance of the expenses and the income in terms of revenue. It also evaluates the items of the balance sheet based on the amount of total assets.

Income statement

One assumes that the sales revenues will grow by 10% from one fiscal year to the other. The cost of goods sold will be 60% (Penman & Penman, 2007). This rate results in a gross profit margin of 40%. Research and development and selling general and administrative expenses at account for 5% each. Total expenses translate to 75% resulting in an operating income of 25%. Earnings before interest and taxes were 25% while financial cost accounted for 2% of the revenues. The company also pays corporate taxes accounting for 5% of the revenues while the net income was 20%.

Balance sheet

The items of the balance sheet should be computed based on the total assets of the company in each of the years. Cash accounts and short term investments account for 10% each. Net receivables were 15% while the inventory was 1%. The management team also had 50% in long term assets and 10% in property plant and equipment (PPE). Other assets accounted for 5% of the total assets. It is also vital to consider the proportion of items of liability and equity as compared to the total assets. The accounts payable accounted for 15% while the current debt 2%. Other current liabilities accounted for 10%, and long term liabilities were 25%. Other obligations accounted for 15% of the total assets. This performance makes the current assets to account to 35% of the total assets. The total liabilities account for 70% of the total assets held by the company (Penman & Penman, 2007). One should also consider the equity in the company. The company common stock equates to 10% while the retained earnings are 20%. The total capital is equivalent to net tangible assets accounting to 30%. These assumptions are used in coming up with both the income statement and the balance sheet.

Best and Worst case scenario

The financials use the income and the balance sheet of the company in coming up with the scenarios. It is assumed that the best-case scenario exceeds the current performance by 25% while the worst-case scenario reduces it by 25%. One multiplies the performance by 125% to obtain the best-case scenario and by 75% to find the worst-case scenario (Beyer, 2008). This move is done by both the income statement and the balance sheet.

Change of assumption

One changes the figures by changing the growth of the sales revenues. The growth rate of sales is increased from 10% to 20% from one fiscal year to the other. The change of the assets will change the values and the various figures in both the income statement and the balance sheet. However, the percentages in the common size income statement and balance sheet remain the same. Besides, one assumes that the total assets will grow by 15% from one fiscal year to the other.

References

Beyer, A. (2008). Financial analysts’ forecast revisions and managers’ reporting behavior. Journal of Accounting and Economics, 46(2-3), 334-348.

Penman, S. H., & Penman, S. H. (2007). Financial statement analysis and security valuation (Vol. 3). New York: McGraw-Hill.