Forecasting Financial Statements

From the previous tables and external information, we construct a table of input data as follows (see Table 8.11):

The real interest rate can be estimated by deflating the risk-free rate and averaging it. Another option is to look for reports from research in universities and/or the Central Bank. Expected inflation rate can be obtained from Central Bank estimates. Growth of volume in units is estimated using the investment in physical assets.

With these input data, we can construct three financial statements: The CB, the IS, and the BS. In the next table, we show the procedure to do this. We start with some IT and we end with the financial statements. Table 8.12 presents the nominal increase in prices and growth in units.

For instance, the nominal increase in selling price for year 6 from Table 11 is (1 + 1.03%) x (1 + 4.00%)-1 = 5.1%.

In Table 8.13, we show the forecast of other variables.

In the previous table, sales in units for year 8 is 59.2 = 57.5 x 1.03.

When we forecast prices and volume using the average of real increase in price and the average of increase in volume, we are splitting the "real" increase in sales revenues in two. In that specific case, it is the same to forecast prices and volume or sales revenues. Usually, we forecast volume based on the growth of the demand driver (population, construction, car production, etc.) and not using the average of past volume increases. In general, we would forecast a real growth in volume (units) that is linked not to the average of historical growth of units but to a forecast growth based on the demand driver and/or the explicit investment in operating assets. In general, they are not identical. See Table 8.14.

In Table 8.15, we show the depreciation and investment schedule.

We assume that the firm invests in fixed assets an amount equal to the depreciation charges. In addition, we assume that in year 8 there will be an extra investment in fixed assets (see Table 8.11). The previous table shows the calculation

Year

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