S02_6315_ FinStatements-Forecasting-FinRatios-ConversionCycle-Initial Upload Version.pptx - Financial Theory Forecasting Financial Ratios Conversion

S02_6315_ FinStatements-Forecasting-FinRatios-ConversionCycle-Initial Upload Version.pptx

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Financial TheoryForecasting; Financial Ratios; Conversion Cycle, EARS02Dr. Rajiv R. ShahFounder & Program Director, Systems Engineering & Management (SEM) Clinical Professor, Institute for Innovation & Entrepreneurship (IIE)Naveen Jindal School of Management, UT Dallas
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2Schedule-1
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3Schedule-2
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4Schedule-3
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AgendaForecastingIntroductionFinancial statement projectionsSustainable growth rateAdditional Funds Needed FormulaBreakSources and Uses of CashFinancial Ratios and Conversion CycleEffective Annual RateQuestions/Discussion 5
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Financial ModelsElements of a model:Sales forecast – In most cases, the revenue forecast drives the modelExpensesAsset requirementsFinancial requirementsEconomic assumptionsPro Forma statements – Income Statement, Balance Sheet, Cash FlowsA “plug” to make the balance sheet “balance” on a projected basis6
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Asset RequirementsProjected balance sheet will contain assumptions for: Fixed assetsNet working capitalThese may be forecast explicitly, or alternatively, financial ratios could be forecast that calculate the amountsExample- Forecast receivables turnover and calculate the Accounts Receivable balance from the turnover ratio and revenue forecast7
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Financial and Economic AssumptionsDividend policyFund raisingType of security (debt or equity)Target capital structure- D/E mixOther financial assumptions such as:Tax rate for the firmExpected interest rate on borrowed funds8
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Forecasting Revenue for a New BusinessNo prior track record of salesTwo approaches to new venture forecastingBenchmarksFundamental analysis9
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Benchmarksestablished firms comparable to the new venture on some dimensions important to forecasting revenueproduct/customer attributesdistribution channelsadoption ratestechnologymay be public or privateIPO prospectuses contain data on recently-private/newly-public venturesOther data sourcesForecasting Revenue of a New Venture: BenchmarksSource: Entrepreneurial Finance, Smith, Smith and Bliss10
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Fundamental analysismarket size and market shareengineering cost estimatesdemand-side approach (tops down)supply-side approach (bottoms up)credibility and support for assumptions Forecasting Revenue of a New Venture: Fundamental AnalysisSource: Entrepreneurial Finance, Smith, Smith and Bliss11
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Demand-side considerationsWhat geographic market will the venture serve?How many potential customers are in the market?How rapidly is the market growing?How much, in terms of quantity, is a typical customer likely to purchase during a forecast period?
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  • Spring '15
  • Balance Sheet, Generally Accepted Accounting Principles, Net Plant & Equipment,  Sales forecast

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