Best And Worst Case Financial Statements

Best And Worst Case Financial Statements

The semester is winding down and at the end of my class assessing financial sustainability of businesses, I ask students to project the financial statements of a few prominent firms such as Apple, Zoom, and Tesla under three sets of assumptions: the optimistic case, the base case, the pessimistic case. In particular, I ask students to decompose a company's revenue into quantity, selling price, and currency noise. Comparably, costs are expected to be broken down into fixed and variable costs. Students then tweak the expected quantity sold, expected selling price and expected fixed and variable costs to project what the company would look like in the next couple of years under such three scenarios. An extension of this idea is to either voluntarily encourage or to begin conversations around asking managers to disclose income statements and balance sheets for the next two years based on the three sets of assumptions. In essence, this expands the practice earnings earnings and capital expenditure projections that many CFOs give analysts for the following year. How would this policy proposal help investors? Analysts, both on the buy and the sell side, spend a significant amount of time trying to piece together a projected income