Financial forecasting outlook is an activity where a firm creates futuristic models of its outlook. The process involves coming up with forecast assumptions and applying these assumptions to existing numbers. The outcome of financial forecasting is predictive models which will help the decisions makers make more informed decisions. Financial forecasting is important when sourcing for capital, researching on the viability of an investment, budgeting and determining the appropriate capital investments of a project. For this project, we shall employ the time series analysis. This type of forecasting relies solely on historical data in order to arrive at its decisions. It seeks to establish patterns and changes in the financial statements from a number of years (Bloomenthal, 2020). For this exercise, we shall be looking out for regular or systematic variations in the data which may be due seasons. Secondly we shall be in the lookout for cyclic patterns. This is patterns which may appear every few years. Thirdly we shall be looking out for trends kin the day. They may be trends for consistency or inconsistency. Armed with this data, we shall be in a position to forecast a growth or a decline (Segal, 2020). A drawback of this method is that it is not possible to differentiate between trends and cycles. This paper will propose some assumptions for 2020 figures based on the financial figures provided. A conclusion of the trends will be given at the end of the exercise.
Sales Assumption
Between 2016 and 2018 the sales have been on a growth trajectory but in 2019 the sales declined by 7.4% to 108324000. In our financial projections we shall assume a worst case scenario and sales will decline by a similar percentage. The sales figure arrived at are 103,308,000.
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Cost of Revenue Assumption
From the financial statements, the cost of revenues appears to follow the sales trend. When the sales increase the cost of revenues increase and vice versa. In our case we shall assume that the cost of revenues shall decline accordingly. In 2018, the cost of revenue of 7.08%. Assuming the business environment won’t change, we anticipate the cost of sales will be 73,310,560
Gross Profit Assumption
The general trend in gross profit has been a decline, signifying a challenge in operating environment. We shall assume this declining trend shall persist, in 2018 the level of profitability reduced
Expenses Assumptions
Similarly the expenses have been assuming a similar trajectory as gross profit and cost of revenues. When sales decline, the expenses decline too. In 2019, the expenses reduced by 0.061%. Having assumed that our sales will reduce, the expenses will reduce marginally to 867,470
Operating Profit Assumptions
The gross profit is an arithmetic calculation and it shall be expected that the operating profit will not go below 5,821,730.
Assumptions for Interest Expenses.
In 2018 the interest expense reduced by 0.03% from the previous years. We shall continue maintaining the assumptions that the interest expense will reduce by a similar figure we anticipate the expense to be 453863
Assumptions for Income/Expenses Net
Net expenses have also been decreasing and increasing with the sales figure. In2019 they declined by 0.2%. In 2020 we expect that they will decline by a similar percentage to 103792
Income Tax Expense
The interest expense has been consistently been at 0.2% and in 2020 anticipate the taxation rate to prevail the same to 2,068,076
Assumption for Net Income
In 2019 net income reduced by 0.22% and it is anticipated the same will be replicated in 2020. Applying an equivalent reduction in net income we anticipate a figure of
Net Income Available to Shareholders Assumptions
Over the years it has been the norm of the business that all the net income of the year is available to shareholders. In 2020 it is anticipated that the trend will continue.
Balance Sheet Assumptions
Current Assets.
In 2019 due to reduction in sales, cash and its equivalents reduced but so did the debtors. This should be attributed to a tough business environment and this is projected to spill over to 2020. The inventory and the assets have been on a steady growth year on year and this growth trajectory is anticipated to prevail. The total current assets in 2020 are expected to increase in 2020
Non-current Assets Assumptions
The non-current assets have been increasing across the years and this trend is expected to prevail in 2020 too.
Current Liabilities Assumptions
The total current liabilities have been increasing over the years and this trend is expected to continue into 2020.
Shareholders’ Equity
A glance at the financial statements shows that Valero energy is operating in a sector that is full of turmoil. The business environment is unpredictable which explains why over the company has been retaining it has been increasing its earning s over the years. Be trend is expected to be carried forward into 2020.
Ratio Analysis Assumptions
From the ratio analysis it is evident that the asset turnover showed there was efficient use of assets to generate revenue a scenario that will be carried over to 2020. The current ratio is expected to decline signifying the business risks not servicing its debts in future. Profitability has been on a steady decline and this is expected to be the case in 2020 too. The company’s gearing ratio has been healthy and the figures are expected to persist across 2020.
Conclusion
From the assumptions it is evident the business has been operating from a position of strength as is visible from the financial ratios. However from the cash and equivalent figures and the net receivables it is evident that business environment is depressed. This is compounded further by a decline in sales. A decline in sales means that revenues will continually be put under pressure. From this analysis the management needs to explore how to revamp sales (Symese et al 2007) . Additionally they need to be aggressive and vibrant on the collection of debts. It is a worrying trend for sales to be on the decline but the amount of debt is rising. From a strategic point of view, there may be challenges in the sales department that need immediate addressing
References
Annual Report (2018). Valero annual report. Retrieved from http://www.investorvalero.com/static-files/fb83f183-2552-41ac-ae52-5799da708ac1>
Bloomenthal, A. (2020). Ratio Analysis. Investopedia . Retrieved from https://www.investopedia.com/terms/r/ratioanalysis.asp
Segal, T. (2020). Fundamental Analysis. Retrieved https://www.investopedia.com/terms/f/fundamentalanalysis.asp
Symes, H., Sharma, U., & Davey, H. (2017). The impact of accounting regulations on annual report length. International Journal of Economics and Accounting , 8 (3-4), 275-302.
Yahoo Finance (2020). Valero Energy Corporation (VLO). Retrieved from https://finance.yahoo.com/quote/VLO/financials?p=VLO
