Among these tools is financial ratio analysis used for comparative purposes. Aside from it, the annual financial statements can be analyzed using horizontal analysis which highlights the trend of various figures from revenue to expenses and cash flow over the reporting periods. Vertical analysis emphasizes the relative size of each item as a composition of a set of numbers such as operating expenses as a proportion of total sales revenue.
When dealing with financial forecasts and business plans, historical analysis is irrelevant. Rather a forward outlook would be more appropriate. This brings in the creative use of scenario analysis of the business plans to assess the possible outcomes under different conditions or different set of operating
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Roles of financial forecasting
i. Business and investments are forward looking activities. Both the business manager and the investor look towards the future for financial achievements in the form of profits and cash flow. Therefore it is necessary for these business managers and investors to seek and review financial plans and financial forecasts to help them determine financial viability and revenue prospects of the companies they are assessing. ii. A financial forecast is a calculated estimate of financial requirements or outcome in a future financial period. The outcome is usually in the form of sales, profits and cash flow. The purpose of the financial forecast is to aid policy formulation and guide operational strategies to achieve goals and objectives set by the organization’s top management. It can also be expressed a set of estimates of revenue and expenditure for the future period under consideration. iii. In the business environment managers and investors look forward to future revenue, profits and cash flow before making further investments or financial decisions. Without some reasonable estimates of the possible future outcome, business people, financiers and investors would be unable to assess the risks and rewards of their