Yardstick Essay

a. The factors that are important in establishing the appropriate forecast period and forecasting interval include building and supporting a schedule of assumptions, beginning with a forecast of revenue, deciding whether to develop the forecast in real or nominal terms, integrating the financial statements, choosing an appropriate time span for the forecast, choosing an appropriate forecasting interval, and assessing the reasonableness of the model. In an established business, revenue forecast is based on prior experiences. For example, projecting revenue growth at the average nominal growth rate of past 5 years of a company. Forecasting could be improved if a real growth rate is used because the sales forecast is in real (inflation adjusted) terms. Additionally,

To overcome this problem, new ventures should identify reasonable yardstick companies that have public and non-public data available. A yardstick is an established company that can be compared with a new venture through its financials. For example, if a new venture wants to enter the carbonated drinks industry, it can use the financials of Coca Cola Company, lever and unlever the beta by using the weights of the company and get a good comparison. However, yardsticks don’t need to be producing the same product as the new venture. The yardstick can be used to compare factors such as distribution channels, adoption rates, uniqueness of product, manufacturing technology and expected market for the product. Benefits of the yardstick approach include data availability and using the IPO prospectus of a company to understand financing needs, measuring revenue growth during private years and obtaining information on the various stages of new venture growth. Another approach is using fundamental analysis which involves observing traffic at a venture, analyzing product offerings, product pricing, advertising, competition, location and