Page 333 - Encyclopedia of Business and Finance

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Financial Forecasts and Projections

flows in future periods under two different conditions. ogy being introduced into the industry? What are the eco-
Financial forecasts assume that the entity will continue to nomic conditions within the industry?
function in the manner in which it is currently function-
ing. For example, if the entity is a retail store chain, then Factors Related to the Market. Market factors must be
it will continue to do business in the manner in which it considered. What are the trends in business or consumer
is currently engaged. The financial forecast presents the demand related to the services or goods being sold by the
predicted results for the next year. Financial projections, entity? Are competitive companies emerging, perhaps
on the other hand, make one or more hypothetical with new or different products? Is unique marketing
assumptions about an entity’s future course of action. For required? Are there pricing developments to be factored
example, if the retail store chain were considering a Web into the forecast?
site at which it would also sell merchandise in addition to
the merchandise sold in the stores, a financial projection Factors Related to the Economy. Numerous factors
would provide expected results. Financial forecasts and related to the economy must be considered. What are the
projections should be distinguished from pro forma finan- economic conditions in the country? What are critical
cial statements, which show the effect of a hypothetical economic trends? Is the economy inflationary, deflation-
future event on the historical financial statements results. ary, or stable? What is the trend with regard to labor avail-
ability? What are the financing considerations in relation
PREPARATION OF PROSPECTIVE to the economy? What are interest rates? Are there signif-
FINANCIAL STATEMENTS icant factors related to long-term versus short-term
financing? Is a public stock offering a possible financing
The preparation of prospective financial statements
option?
requires considerable knowledge of the entity’s business
and the factors that are likely to determine its future
results. The following key factors related to future results ATTESTATION SERVICES PROVIDED
must be considered in the preparation of such statements: FOR FINANCIAL FORECASTS AND
FINANCIAL PROJECTIONS
• Factors related to the specific entity
Forecasts and projections are important in an organiza-
• Factors related to the industry tion. They are also of great interest to financial analysts
and others in the business environment who make deci-
• Factors related to the market
sions about future business behavior. Because of outsider
• Factors related to the economy
interest, public accountants are engaged to provide profes-
sional services. There are three types of engagements that
Factors Related to the Specific Entity. The principal cost a certified public accountant may undertake in relation to
elements of the entity’s doing business must be consid- financial forecasts and projections:
ered. Depending on the entity, these elements may
include such costs as payroll and benefits, needed employ- 1. Examination: An accountant evaluates the prepara-
ees, raw materials, products the entity sells, freight or tion, underlying support, and presentation of the
shipping, and advertising. financial statements, and expresses an opinion on
them
Another consideration is the availability of resources.
For example, are the expert, specialized, or skilled workers 2. Applying agreed-upon procedures: Users establish
available to meet the needs of the entity under the plan as the nature and scope of the engagement, and only
initially proposed? Are the raw materials and/or products the results of the procedures performed are provided
for resale available? Can the delivery system be organized 3. Compilation: An accountant prepares the prospec-
to accomplish the task? Are the company’s physical facili- tive statements from information and assumptions
ties sufficient for the uses and for the capacities contem- provided, and no assurance is given
plated?
Examination. The American Institute of Certified Public
Factors Related to the Industry. Factors related to the Accountants (AICPA) has prepared guidelines for
industry in which the entity is operating must be consid- prospective financial statements engagements. The person
ered. Is the industry one in which companies are very or persons who prepare the financial statements, called the
competitive? Are competitive industries emerging? Is responsible party, are usually the management of the com-
obsolescence emerging within the industry? Are there reg- pany but may be outsiders, such as the management of an
ulatory considerations and requirements? Is new technol- entity considering acquiring the company. The account-

310 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION