Question

How are past revenues used in identifying future revenues. What financial tools would you use for your business in projecting future revenues?

Answer 1

Past revenues are used in estimation and forecasting of future revenues. Past revenues reflect the trend and past behaviour of overall revenues in various scenarios on happening of certain events.past set of data are always important in order to make an estimation of the future set of data because the only data which can be relied upon, is performance in the past by the company.The projected sales which have been derived upon the past data is used in various kind of investment opportunities to lure various potential investor.

There are various types of methods which financial analyst uses in order to estimate the future projected revenue on the basis of the past information-

1. Straight line method-this is the simplest type of method in which financial analyst use historical trends to predict the future. It use the same constant growth rate and same constant revenue projection after incorporation of growth rate into the figure.

2. Moving average method-this is a type of method in which an average is calculated of various revenues of past and then it is assigned to the future value. It is a smoothing technique that looks at the underlying figure to arrive at and future data.

3. Regression analysis-regression analysis is used to find the relation of two variables regarding movement in the change of variables when the one variables moves in one direction how much the potential change will be there in other variable.

4. Times revenue method-this is a type of method which is used to calculate the total value of company based upon its revenues and this is used to discount the future revenues of the company in order to calculate and assign an intrinsic value to its share.

there are various financial tools which can be used for an estimation of the future analysis of profit like ratio analysis which will be including the turnover related ratios and the profitability related ratios. It can also be done with tools like those which relates to Statistics like probability charts.And various type of analysis could be done like scenario analysis and sensitivity analysis.