Welcome back once again, in this lesson, we're going to better understand forecasting what some may refer to as projections. Now I'm going to use forecasting and projecting interchangeably in this lesson to mean an estimate of future financial results. The basis of all things financial is a future forecast of cash flows. These cash flow forecasts are useful for any number of purposes including estimating value, evaluating finance requirements, ensuring compliance with covenants, forecasting, cash surpluses or deficiencies, evaluating dividend policies, making strategic decisions, or investing in new capital assets. One source of information is to pick up the most recent financial statements where accounting is concerned about reporting the past. Finances more interested in In projecting the future, in fact, let's make an important note about this finance is future oriented.
However, the financial statements are still a good starting place, because history has a tendency to repeat itself. By looking at past performance, we can develop an expectation of the future. The financial analysis techniques discussed in our last lesson, help us project what the future results will look like, based on various key assumptions. assumptions are developed to answer such questions as what are expected growth rate in sales in coming years. How do we expect profit margins to trend in coming years? How much capital does the business require to sustain itself and how much working capital does the business require?
And what exactly are we forecasting? For many types of analysis in finance, we are ultimately Interested in cash flow. In our purest definition of Finance. After all, it's the management of cash. The value of an opportunity is based on the expected future cash it will generate. But in practice, knowing what the forecasted earnings and what the future balance sheet will look like, is often equally as important.
I've developed a separate course on how to model the financial statements of the company if you want to learn more. The financial forecast is the foundation for other types of financial analysis, including present value, future value, financial instruments and capital structure. So in the lessons to come, we're going to get into much more detail until then,