Explain how to perform a projected financial analysis. Identify at least one problem that may result from an incorrect projection.
A projected financial analysis contains the forecasted income statement and balance sheet. When a business seeks financing from a financial institution, it is usually required to produce a minimum of three years of projected financial statements. There are 6 steps in performing a projected financial analysis:
1) Prepare the projected income statement. Start by projecting sales.
This step is done before preparing the balance sheet. First, forecast sales as accurately as possible. Do not simply copy the past sales figures into future years. Instead, consider what the company did to obtain those past sales, and what is different between then and the future. For example, if increased sales coincided with creating a website, the future years might not hold a similar increase. Also keep in mind that to increase sales, the company ...
This solution answered in 547 words defines and describes the 6-step process of a projected financial analysis. It also identifies one problem that a company might experience from an incorrect projection. Reference used is included.