A forecast is a quantifiable estimate of future demand. Forecasting in business is the process of estimating the future demand for out products and services. Financial statement forecasting allows organizations to evaluate their current operating performance, review the situation of the economy and determine how they will perform in the future. Forecasting is a key practice in the corporate activity. As an essential part of decision-making processes, financial data forecasting supports a firm to evaluate its profitability in the future. Investors look at corporate financial predictions to ensure that senior managers aren’t just create a positive numbers of their companies.
Potential investors also want to ensure that the business is profitable enough to provide them with the desired return on their invested capital. There are several basic steps to process the financial forecasting. We want through this process to forecasting the income statement, balance sheet, and cash flow of FedEx. Step 1: determine the type of forecasting model to be used. Because FedEx is not a new borne company. The company has very long history, and the data of financial statement is relatively stable. So we will use the historical data to forecasting the financial statement.
Step 2: Determine the forecast horizon.
For the express industry, FedEx is always located in the top of total industry, but in recent years, the increasing rate of FedEx has some level of reduce, even there are some minus increasing rate happen. So we want go through recent year’s data, focus five years financial performance to forecasting next two year’s possible financial performance.
Step 3: Select one or more forecasting Models.
For this step, we will depend on three different financial statements to combine several different kinds of model to analysis and forecasting next two year’s financial performance. For the income statement, the most important and key entry is sale revenue. So we will use the weighted moving average model to forecasting the sales revenue of next years, and use percentage of sales model to forecasting the rest entries of income statement. For the balance sheet, there is the same reason of use percentage of sales to forecasting. The sales of next year will come from we did before and used into the income statement And for the cash flow statement, we will use the weighted moving average model and separate to use different weight for cash flow from operating, cash flow from investing, and cash flow from financing, and effective of exchange rate.
Step 4: Evaluate the models.
The same models we used in this forecasting are weighted moving average model. In this way, we can point out the different influence of each year. In all the statement, we assume three group of the weight. The first group is W=0.1, W=0.3,W=0.6; and the second one is W=0.25, W=0.35; W=0.4; and the last one is W=4; W=5;W=6. We use all of those three groups weight to forecasting sales and the entries in cash flow. And calculate the MAD number. MAD is a measure of how closely a forecasting model compares with actual sales date. We calculate all groups’ MAD number and choose the smallest one as the weight we used in this forecasting. After calculating, the first group got smallest MAD number for the sales and cash flow from operating and investing. And the second group got the smallest MAD number of the cash flow from financing, and the last group got the smallest for the effective of exchange rate.
Step 5: Apply the chosen model:
Weighted moving Average of sale revenue:
Pro Forma Income Statement of 2013 (Percentage of sales):
Pro Forma Balance Sheet of 2013 (Percentage of Sales):
Weighted Moving Average of Entries in Cash Flow:
Pro Forma Cash Flow of 2013(Weighted Moving Average):
As we see the sales are increase fast in 2012, but in 2009 and 2010 the growth rate is lower than 2012. So the forecast of 2013 we found the sales revenue and net income are decrease, but still better than 2010 and after next year the sales will come back. We assume the sales are kept stable; next year the profit of FedEx will slip a little still after next year, the company will running like this year. Form the cash flow we see the money from operating is decrease, and they did less investing than this year, and the financing are increase. So we notice the company should keep the sales like this year, and found some new way to get the revenue. Do more investing, and try to increase sales revenue from more ways. Hope the sales will come back earlier.