POCFF - A Primer on Forecasting Business Performance There...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
A Primer on Forecasting Business Performance There are two common approaches to forecasting: qualitative and quantitative. Qualitative forecasting methods are important when historical data is not available. These methods include the Delphi and market share approaches. The Delphi method involves solicitation of expert opinion. The market share method entails making an estimate of the current size of the total market and its future growth rate. The analyst must then assume the firm’s future market share and how long it likely to take the firm to achieve that penetration. Consequently, a firm’s sales for a given year can be projected by multiplying the assumed market share by the projected size of the market in that year. The focus in this appendix will be on using quantitative methods analyzing historical time series to determine causal relationships between variables to project financial statements for target and acquiring companies. Other topics such as alternative regression models, model specification, the purpose of various types of test statistics, and the limitations of regression analysis are also addressed. Hanke and Wichern (2005) and Marks and Samuelson (2003) provide more rigorous treatments of this subject. The Art of Forecasting For purposes of business valuation, key determinants of future valuation cash flows include unit sales, costs and selling prices. To project these factors, it is necessary to determine the key drivers behind their growth. For example, increases in auto sales may be a result of increasing consumer personal disposable income, while costs may be affected by changes in wage rates and other input expenses. Future selling prices may reflect an increase or decrease in intra-industry price competition. The drivers vary by the type of industry and business. In general, the annual forecast period should be long enough so that the analyst is comfortable projecting growth to the sustainable growth period. For very high growth or cyclical companies, the analyst may need forecast periods of ten years or more to reach a period reflecting sustainable growth for the firm. Whether the analyst should use 3, 5, 10 or more years of annual projections before assuming a sustainable growth period depends largely on how much confidence the analyst has in longer-term forecasts. The perceived credibility of any forecast depends on the reasonableness of the underlying assumptions. Ultimately, what forecasting is all about is translating the underlying assumptions into the numbers they imply. Some of the most critical forecast assumptions relate to the analyst’s opinion about the firm’s future growth rate in sales and profit relative to the industry’s overall growth rate and how long it can be sustained. General Guidelines for Sales and Profit Forecasting
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 01/28/2011 for the course FIN 315 taught by Professor Welker during the Spring '09 term at IUP.

Page1 / 7

POCFF - A Primer on Forecasting Business Performance There...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online