1. Introduction to financial statements
Welcome to this course on exploring the intricacies of financial forecasting with Python. My name is Victoria Clark, I am a chartered global management accountant and have worked extensively with Python and forecasting in financial management.
2. About this course
As we have access to more and more data in a digital format, it is important that we develop the skills in finance to be able to technically manipulate and analyze this data in a simple way. Python is a simple programming language that we can use to build smart models to enable us to handle all the data we need to take into account in our modern world.
But first, let's get started with the basics of financial forecasting, understanding the financial statements.
3. Financial statements, an introduction
So what are financial statements exactly? In short, they are records that outline the financial activities of a business, an individual or any other entity and provide an excellent format for reading and comparison.
Financial statements are meant to present the financial information of the entity in question as clearly and concisely as possible in order for users to understand the financial health of the company and be able to make decisions regarding it.
We will be using the important metrics within the financial statement to provide structure for the course and how to use these to build a robust forecast.
4. Types of financial statements
So what types of financial statements are there? There are four types: the income statement, also known as a profit and loss statement, which is a statement of the income and expenses of a company. Second, the balance sheet, a statement of assets, liabilities, and capital of a business. There is also the cash flow statement and statements of shareholders' equity.
We will only be focusing on the first two in this course, and we will specifically focus on financial forecasting guided by the information within these two statements.
5. How financial statements are used in forecasting
So, how are financial statements used in forecasting? Financial statements provide important metrics of the financial health of a company, now and in the future. We will use the metrics of the income statement and balance sheet as our structure for financial forecasting.
6. The income statement \ profit & loss statement
Here is an example of an income statement. Do you see the income statement seems to be split into two profit totals?
The two are gross profit and net profit.
We need to understand the difference between these two, as it is very important.
7. Gross profit
First, let's have a look at the gross profit. It is very important to note that only costs and income related to the sale of a company’s goods or services can be placed here. In finance terms, this is called cost of goods sold, which is often abbreviated to COGS.
Gross profit is calculated as follows: total sales minus total costs of goods sold.
You can already see how gross profit is a useful indicator of how profitable a product is on its own merit, and is an important indicator of the underlying product.
8. Net profit
Next, we have net profit. Almost everything else, other than costs and income from directly manufacturing or producing the product or service of the company, will be put under here.
As you can see, it includes things like insurance costs, admin and sales costs, R&D costs and office costs, but this list is not exhaustive and can include a lot of other costs as well.
The calculation for net profit is gross profit minus operating expenses or OpEx.
9. Let's practice!
So now that you know the difference between gross profit and net profit let's get on to some exercises to practice forecasting both of these.