From the course: Financial Accounting Part 2
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Forecasting cash flows
From the course: Financial Accounting Part 2
Forecasting cash flows
- [Instructor] A DCF or discounted cash flow analysis requires that we have a number for the interest rate so that we can do the discounting and also that we have a forecast of the cash flows. We can use the structure of accounting to create a discipline forecast of the future cash flows for a business. Now, this brief discussion is merely an introduction to the fascinating topic of creating proforma or projected or forecasted financial statements. Three important questions to ask in preparing a proforma or projected financial statement are as follows. One, what is the starting point of any financial statement forecast? Two, what causes increases in the company's assets and liabilities? And three, what causes increase in the company's expenses? The starting point, and in many ways the most important point, of any discounted cash flow analysis is the sales forecast. With a good sales forecast, the forecast of future cash…
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