Forecasting Financial Statements & Valuation for Accountants

Professor Brooke Eliott, Nerissa , Brian

Module 1: Beyond the Financials - External

Table of Contents
Lesson : About the Course ................................................................................................................ 3
About the Course ................................................................................................................................................. 3

Instructor Introduction- Brian Hamm ............................................................................................... 6

Instructor Introduction- Brian Hamm .................................................................................................................. 6

Instructor Introduction- Nerissa Brown .......................................................................................... 10

Instructor Introduction- Brooke Elliot ............................................................................................. 13
Course Overview- Financial Statements, SEC Filings and Ratio Analysis & Beyond the Financials:
Insights, Analysis and Valuations .................................................................................................... 16
Course Overview- Financial Statements, SEC Filings and Ratio Analysis & Beyond the Financials: Insights,
Analysis and Valuations...................................................................................................................................... 16

Module 1: Beyond the Financials - External .................................................................................... 21

Module 1: Beyond the Financials - External ....................................................................................................... 21

Beyond the Financials (GDP)........................................................................................................... 25

Beyond the Financials (Government) .............................................................................................. 29
Beyond the Financials (Government) ................................................................................................................. 29

Beyond the Financials (Interest Rate) ............................................................................................. 32

Beyond the Financials (Interest Rate) ................................................................................................................ 32

Beyond the Financials (Foreign Exchange) ...................................................................................... 35

Beyond the Financials (Commodities) ............................................................................................. 38
Beyond the Financials (Commodities) ................................................................................................................ 38

Beyond the Financials (Competitive Position) ................................................................................. 41

Beyond the Financials (Industry Competition) ................................................................................ 44
Beyond the Financials (Industry Competition) ................................................................................................... 44

Beyond the Financials (Bargaining Power of Customers) ................................................................ 47

Beyond the Financials (Bargaining Power of Customers) .................................................................................. 47

Beyond the Financials (Bargaining Power of Suppliers) ................................................................... 51

Beyond the Financials (Bargaining Power of Suppliers) ..................................................................................... 51

Beyond the Financials (Threat of Substitutes) ................................................................................. 54

Beyond the Financials (Threat of Substitutes) ................................................................................................... 54

Beyond the Financials (Threat of New Entrants) ............................................................................. 59

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 Forecasting Financial Statements & Valuation for Accountants
Professor Brooke Eliott, Nerissa , Brian
Beyond the Financials (Threat of New Entrants)................................................................................................ 59

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 Forecasting Financial Statements & Valuation for Accountants
Professor Brooke Eliott, Nerissa , Brian

Lesson : About the Course

About the Course

Too often, smart hardworking busy people miss out on education because of traditional
linear learning. Learn on your terms.

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 Forecasting Financial Statements & Valuation for Accountants
Professor Brooke Eliott, Nerissa , Brian

With stackable online content from Gies College of Business, you can take self-paced
classes, earn transcriptable credit, pause, earn a degree.

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 Forecasting Financial Statements & Valuation for Accountants
Professor Brooke Eliott, Nerissa , Brian

Switch in stack coursework, earn a certificate, or learn however you want. You'll get
expert-led education and big or bite-sized increments. Wherever you are in your
learning journey, the right time to start this is your time.

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 Forecasting Financial Statements & Valuation for Accountants
Professor Brooke Eliott, Nerissa , Brian

Instructor Introduction- Brian Hamm

Instructor Introduction- Brian Hamm

Hi everyone, my name is Brian Hamm, Professor of Accountancy at the Gies College of

Business at the University of Illinois. I've taken an unusual path to teaching and my
journey has truly come full circle. I graduated from the University of Illinois in 1995 in
accountancy and earned my CPA. After graduating, I started with
PricewaterhouseCoopers in Chicago. I was with PwC for three years on the audit side.
Then moved to PepsiAmericas. I was with PepsiAmericas for 10 years. PepsiAmericas
was the best job I ever had, it was fun, competitive, and was a great training ground for
those wanting to have a career in accounting or finance. After 10 years of
PepsiAmericas, there was an opportunity to return home, and I joined Energizer, which
is headquartered in St. Louis, Missouri. I was with energizer for 10 years

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Professor Brooke Eliott, Nerissa , Brian

I started as director of North American finance, then became vice president of global
finance, served as vice president of transformation, leading an enterprise wide
restructuring project, and then I took on the chief accounting officer and global controller
role. Then when Energizer spun off to become their own publicly traded company, I was
named the CFO. As you can see, I had the opportunity to ring the opening bell on the
New York Stock Exchange. It was in one of the highlights of my career.

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Not only because it was a cool thing to do, but also I got to bring my family, my two boys
and my wife were there and it was great to be able to share that special moment with
them.

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After 10 years at Energizer, I had the opportunity to join TruGreen as their CFO.
TruGreen was private equity owned. After TruGreen, I returned home to [inaudible] and
joined the faculty at the Gies College of Business at the University of Illinois. My career
path definitely impacts my teaching style. I try to combine technical accounting aspects
with how you apply these principles and practice. I'll teach you how to look at the
business through the eyes of a CFO.

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Professor Brooke Eliott, Nerissa , Brian

Instructor Introduction- Nerissa Brown

Instructor Introduction- Nerissa Brown

Hi everyone. My name is Nerissa Brown. I'm a Professor of Accountancy at the Gies

College of Business at the University of Illinois. I've been teaching accounting for over
20 years and my professional journey has taken some fun twists and turns. I'm a native
of the Caribbean island, Jamaica, and earned a bachelor's degree in accounting from
the University of the West Indies in 1996, followed by a masters degree also in
accounting in 1998. I began my career working as a financial analyst at a large
Caribbean conglomerate, GraceKennedy.

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GraceKennedy is often referred to as a General Electric or GE of the Caribbean, as it

consists of over 20 subsidiaries in the Caribbean, North America, and Europe, spanning
six core segments in food services and financial services. I spent almost two years at
GraceKennedy working closely with the Chief Financial Officer in areas such as
financial analysis and valuation for acquisitions and the preparation of consolidated
financial reports. Now, while my experiences as a financial analyst was fun and
challenging, I felt the urge to learn more about the theoretical and strategic side of
financial reporting. I was introduced to accounting research in my masters program and
my intrigue into academic side of accounting stuck with me. I then took a leap of faith
and moved to the US to pursue a PhD degree in accounting at the University of
Maryland at College Park. [inaudible] After completing my PhD, I spent five years as an
assistant professor at the University of Southern California, where I taught managerial
accounting to undergraduates. I then moved to Georgia State University for five years
where I taught intermediate financial accounting, followed by a four-year stint at the
University of Delaware, where I also taught a masters class on accounting theory. This
class was full circle for me as I was now teaching the very same type of class that got
me interested in accounting research some 20 years ago. While at Delaware, I had the
great opportunity to spend a year at the US Securities and Exchange Commission as an
Academic Fellow in the Office of the Chief Accountant. The SEC has oversight over the
capital markets, accounting standard setting, and financial reporting regulation. My time
at SEC was invaluable as it gave me the opportunity to work closely with the chief
accountant and regulatory staff on key accounting policy matters. After the SEC, I was
invited to join a great faculty here at the Gies College of Business at the University of
Illinois. I teach advanced accounting topics to graduate students and also hold a

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leadership role in steering a curriculum and learning experiences of our accountancy
students. My professional journey is a key aspect of what I will bring to your virtual
classroom. I love teaching learners about the why behind technical accounting skills and
tying that to my practical experiences in financial analysis and policy making. On a
personal note, I have one beautiful daughter and love watching college sports and
traveling. Fun fact, I have traveled to close to 30 countries over five continents.

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Professor Brooke Eliott, Nerissa , Brian

Instructor Introduction- Brooke Elliot

Instructor Introduction- Brooke Elliot

Hi everyone. My name is Brooke Elliott. I'm the EY professor of accounting and

associate dean for online in the Gies College of Business at the University of Illinois. I've
spent my entire academic and administrative career at the University of Illinois. I love
our mission as a land-grant institution, and I particularly love how the Gies College of
Business exemplifies this mission by creating and delivering accessible and
transformative learning experiences to individuals around the world. I'm a Hoosier by
birth and I stayed in my home state to earn a bachelor's degree in accounting and an
MBA from the Kelley School of Business at Indiana University. I have a love for Indian
and basketball that rivals most any fan. After completing my MBA, I moved across the
country to the Pacific Northwest to pursue a PhD from the University of Washington and
also explore the amazing mountains, lakes, and rainforests that the area has to offer. I
was granted a PhD in accounting in 2003. This educational experience truly
transformed my life and is part of the reason I have such a passion for inspiring others
with the confidence to pursue education. At the University of Illinois, I spent the first part
of my career immersing myself in research and teaching.

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Professor Brooke Eliott, Nerissa , Brian

I developed and taught several courses and enjoyed teaching accounting and financial
statement analysis to students ranging from undergraduates to graduate accounting
and finance students, to MBA and PhD students. I absolutely love teaching. The
individuals, it has provided me the opportunity to meet, engage, and learn with, and
even develop friendships with. As I progressed in my career, I realized that I could
impact more individual lives in a positive way if I chose an administrative path. On this
path, I've had the opportunity to transform our entire undergraduate curriculum, lead the
greatest accountancy department in the world and now lead, grow, and develop some
of the most disruptive business education programs in the world. I love what I do and
I'm grateful for the opportunity to do it. I've also been afforded opportunities to share my
expertise and learn from others outside of the University of Illinois. In 2019, I joined the
board of directors and audit committee of Gordon Food Service. It has been so much
fun to learn deeply about the food service industry.

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It has been rewarding and awe-inspiring to be part of a five generation family-owned

company that is truly a purpose-driven organization. On the personal side, I have an
amazing bank CEO husband, and two awesome kids. We love to travel mostly to watch
the kids play sports, but also to the far reaches of the Earth, to places like Patagonia
where I can display my Gies pride.

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Course Overview- Financial Statements, SEC Filings and Ratio Analysis &
Beyond the Financials: Insights, Analysis and Valuations

Course Overview- Financial Statements, SEC Filings and Ratio Analysis & Beyond the
Financials: Insights, Analysis and Valuations

Hi everyone. Welcome to financial statement analysis and valuation. Financial

statement analysis is the process of extracting information from financial statements to
better understand a company's current and future performance and financial condition.
Valuation is the process of drawing on the results of the financial statement analysis to
estimate a company's worth or enterprise value. Together it involves analyzing historical
financial results to assess performance and identify risk and opportunities, and
combining that with insights gained from evaluating company strategies, industry trends,
and competitive position to ultimately develop a forecast for their future performance.
That forecast will then help calculate a company's value. You can use these techniques
and skills we learned throughout the course, not only in the stock market, but also when
you're evaluating a project or a merger and acquisition opportunity.

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Throughout our course, we'll learn how to perform a thorough financial statement
analysis and valuation by breaking it down into four sections. Number 1, introduction to
financial statements and SEC filings. Number 2, beyond the financials. Three,
forecasting, and number 4, valuation. Let's dive into each section. First, introduction of
financial statements in SEC filings. We'll review the five financial statements. The
balance sheet, income statement, statement of cash flows, and statement of
comprehensive income, and illustrate how they work together. We'll also obtain an
understanding of the SEC filings that are required from a publicly traded company, and
look what's included within the filings from the 10K, the 10Q, the proxy, the 8K, SEC
common letters, there's a lot of valuable information that's available to investors as they
perform their financial statement analysis and valuation. We'll also analyze the
differences between book value, intrinsic value, and market value of a stock, and
highlight the limitations within gap financial statements

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Professor Brooke Eliott, Nerissa , Brian

After we have a good understanding of the financial statements in SEC filings, we'll put
this information to work by calculating and analyzing several ratios that will allow an
investor to identify risk and opportunities within a business by looking at trends and
benchmarking versus peer companies. Finally, we discuss accounting quality. Since
historical financial results will be the base or foundation for our analysis and future
forecast, we need to make sure we have confidence in the accounting quality and
reported results. For section 2, we'll go beyond the financials to analyze other
information that investors should consider as they're learning about the business,
evaluating risk and opportunities, and ultimately building their forecast that leads to a
valuation. We'll look at external factors, such as the economy, the regulatory
environment, industry trends, and assess a firm's competitive strengths and
weaknesses to determine how these items can impact the success of a company. We'll
also look at internal decisions that have been made by the company that will influence
their performance, such as evaluating their strategies, their focus on diversity, how
they've designed management incentive plans, and discuss whether these incentive
plans are aligned with driving shareholder value. Finally, we'll discuss the pros and cons
of using non-GAAP information and how to use this for developing a baseline and future
forecast. In section 3, we'll discuss forecasting. Investors can take two approaches to
forecasting. First, simple forecasting. This involves using trend-based or macro
indicators to develop a future outlook needed for inputs into evaluation model. Or
second, advanced forecasting

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Professor Brooke Eliott, Nerissa , Brian

This involves a bottoms up build to the forecast by incorporating financial and non-
financial data, macro indicators, management strategies, and industry and competitive
dynamics into the assumptions needed to project revenue, gross profit, operating
expenses, interests, taxes, and net income for a firm. Finally, in section 4, we'll look at
valuations. There are many different approaches and models to develop a valuation.
Some are very high level and simple, others are more detailed and advanced. There's
not a one size fits all approach.

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Choosing the right model depends upon your company, the industry they operate in,
and the maturity or life-cycle of the company. We'll go through the pros and cons of both
approaches and discuss several different valuation models.

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Module 1: Beyond the Financials - External

Module 1: Beyond the Financials - External

Hi everyone. Financial statement analysis evaluation is performed in four parts;

introduction to financial statements in SEC filings, beyond the financials, forecasting,
and valuation. Today we will go beyond the financials, first looking at external factors.
As we will see, doing a thorough financial statement analysis is more than just looking
at a balance sheet, income statement, or statement of cashflows. To perform a
complete analysis and ultimately evaluation, you need to go beyond the financials to
obtain an understanding of the business, their strategies, and the risk and opportunities.
We're going to cover beyond the financials in two parts, discussing external factors, and
internal dynamics.

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Professor Brooke Eliott, Nerissa , Brian

External factors include discussion about how the overall economy and regulatory
environment impact a firm. In addition, we will discuss how the industry a firm operates
in, and their competitive position have a significant impact on the success of a
company. For example, in the electric vehicle industry, Tesla was one of the first to
market. They gained significant market share.

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However, the attractiveness of the industry enticed new entrants. Now we have every
major auto manufacturer investing in electric vehicles. Even Apple has explored entry
into the market. Undoubtedly, increased competition will impact Tesla their growth
potential and valuation. When we talk about beyond the financial statements and the
external factors that could impact the future outlook of a company, there are several
things that we should consider; industry dynamics, the government, and regulatory
environment, and competition.

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In order to obtain an understanding of these factors and assess how they impact your
firm, you can access several sources of information; SEC filings for your company and
their competitors, industry news, business news and media, and also consultants and
advisors can provide a valuable perspective. When we talk about external information, it
basically means that you have to have a pulse as to what is going on in the world
around you and assess how these factors could impact your company. The key point
here is that you can't just take one data point and run with it to develop a conclusion, or
a set of assumptions. You have to have a 360 view of all the potential impacts, and
most importantly, understand how they might affect your company's future outlook.

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Professor Brooke Eliott, Nerissa , Brian

Beyond the Financials (GDP)

Beyond the Financials (GDP)

Hi everyone. As we go beyond the financials and dive deeper into the external factors
that impact a company's success, we will consider several macro-economic effects,
such as GDP, government regulations and policy decisions, interest rates, foreign
exchange rates, and commodity pricing.

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Professor Brooke Eliott, Nerissa , Brian

Let's start with gross domestic product. GDP can have a significant impact on the
success of a company if the overall economy is healthy, employment levels increase
and consumers generally have more disposable income, which can increase demand
for goods and services. Some industries are more impacted than others when it comes
to the health of the economy.

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Professor Brooke Eliott, Nerissa , Brian

For example, some industries are considered essential, such as healthcare, food, and
even accounting services, which will have a more consistent demand for their products
and services during good times and bad. However, discretionary and luxury items will
likely be much more impacted during times of a recession.

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As such, the travel industry, jewelry, and retail department stores generally see a
downturn during challenging economic times. As we develop our forecast and outlook
for our business, it is important that we consider the overall health of the economy and
how it could impact an industry and the success of a business.

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Professor Brooke Eliott, Nerissa , Brian

Beyond the Financials (Government)

Beyond the Financials (Government)

Hi everyone. As we evaluate macroeconomic factors, we now turn our attention to how

government policies, regulations, and agendas can have a significant impact on an
industry and business. In the US when there's a change in administration and political
party, it can have a significant impact on the overall economy, industries, and
companies.

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Policy decisions regarding taxes, international trade and regulations, often vary widely
depending upon which political party controls the White House and Congress. Policy
decisions can have a significant impact on an industry and business. For example,
reduced corporate taxes can stimulate investments, accommodative trade policy can
increase sales and distribution opportunities, and cutting regulations can stimulate
M&A activity. However, there can be unintended and potentially negative
consequences of each of these decisions. For example, too much of a reduction in
taxes could lead to an increased deficit, which may lead to inflation, future governmental
spending reductions and possible tax increases. It's important to note that not all
businesses will be impacted the same. For example, those businesses that operate only
in the US may not be as affected by trade policies as those with international
operations, therefore, it is important to be aware of governmental policy and be
prepared to assess the impacts that it has on a business and their competitors.

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In addition, a government spending decisions can have a significant impact on an

industry. Infrastructure initiatives, military spending and incentives can stimulate
demand for a company. For example, an increase in infrastructure spending could lead
to an additional demand for steel manufacturing, construction and building materials. An
increase or decrease in military spending could substantially impact the success of the
aerospace and defense industries, and incentives directed towards specific initiatives
like renewable energy could impact some industries positively, such as electric vehicles,
wind and solar, and others negatively, such as oil and gas. Therefore, it is important to
be aware of an administration spending decisions to assess the impacts that it could
have on a business and the overall industry.

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 Forecasting Financial Statements & Valuation for Accountants
Professor Brooke Eliott, Nerissa , Brian

Beyond the Financials (Interest Rate)

Beyond the Financials (Interest Rate)

Hi everyone, as we evaluate macroeconomic factors, we now turn our attention to how

interest rates can have a significant impact on an industry and business. Interest rates
set by the Federal Reserve can have a significant impact on borrowing costs and
accompanies internal rate of return requirements.

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Professor Brooke Eliott, Nerissa , Brian

For example, lower borrowing costs can stimulate spending as companies can use
leverage to fund acquisitions and internal investments. As you are aware, interest rates
have been at low levels for a number of years, many companies have taken advantage
of lower rates to refinance debt and improve their capital structure. This has resulted in
lower debt service requirements, which is freed of cash to invest in other business
opportunities. Additionally, interest rates influence a company's cost of capital and
thereby internal project return requirements, reduce interest rates can lower a
company's weighted average cost of capital and thereby hurdle requirements, which
could stimulate spending. Therefore, careful monitoring of the interest rate environment
and impacts to accompany are critical to evaluating performance, interest rates can also
influence equity valuations.

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Professor Brooke Eliott, Nerissa , Brian

For example, in a low interest rate environment, investors may not be satisfied with
returns that fixed income investments offer. As a result, they may be willing to take on
additional risk as they target higher returns in the equity markets, increased cash flow
into equity markets could raise multiples and valuations. The reverse could be true as
fixed income rates, rice, as you see on the attached chart as the 10 year treasury yield
catches up to dividend yields, investors may begin reallocating investment dollars out of
equities and into less risky fixed income options. In summary interest rates often have a
material impact on a company influencing spending, borrowing and valuations. These
factors need to be considered when determining a company's outlook and valuation.

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Professor Brooke Eliott, Nerissa , Brian

Beyond the Financials (Foreign Exchange)

Beyond the Financials (Foreign Exchange)

Hi everyone. As we evaluate macroeconomic factors, we now turn our attention to how

foreign exchange rates can have a significant impact on an industry and business. For
companies that operate in international markets, foreign exchange rates can have a
significant impact. When the US dollar strengthens versus a foreign currency, importing
products become less expensive

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As such, companies that rely upon international operations to supply their products
could benefit by a stronger dollar as compared to companies that manufacture their
products domestically. However, when it comes to exporting products to an international
market, a stronger dollar or a weaker foreign currency tends to reduce demand as US
products become more expensive for international customers. Therefore, companies
with international sales and distribution may experience volume shortfalls during times
of a strong US dollar as compared to those selling only domestically. Finally, a strong
US dollar can have a significant impact on international earnings. For many companies
with operations outside of the US, their results are transacted in their local currency and
then translated into US dollars for consolidation purposes. When the US dollar
strengthens as compared to a foreign currency, international results earnings are
reduced when translated into US dollars.

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The opposite impact is true when the US dollar weakens, imports become more
expensive. Exports usually experience an increased demand and international results
that are translated into US dollars increase. It is critical to understand a companies'
international footprint as well as that of their competitors, as foreign exchange rates can
have a significant impact on the future outlook and valuation of a business.

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Beyond the Financials (Commodities)

Beyond the Financials (Commodities)

Hi, everyone. As we evaluate macroeconomic factors, we now turn our attention to how
commodity pricing can have a significant impact on an industry and business. The price
of commodities represents a major part of a company's input cost and cost of goods
sold.

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Professor Brooke Eliott, Nerissa , Brian

Commodity markets and pricing can experience tremendous volatility depending upon
supply-demand, natural disasters, and policy decisions. During times of rising
commodity costs, gross margin percent of sales and overall profitability can be
significantly reduced. Companies typically attempt to pass along the cost of commodity
price increases to their customers by raising net selling prices. However, these attempts
are not always successful. In order to perform a forecast for a business and a
subsequent valuation, it is important to understand the makeup of the cost of goods
sold, commodity inputs, and their pricing volatility. When performing financial statement
analysis, you need to consider all of these factors for not only your company but also
the company's competitors

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Professor Brooke Eliott, Nerissa , Brian

Your company's position versus their peers can create a significant advantage or
disadvantage.

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Professor Brooke Eliott, Nerissa , Brian

Beyond the Financials (Competitive Position)

Beyond the Financials (Competitive Position)

Hi, everyone. In addition to macroeconomic factors, a company's competitive position

can have a big impact on their success, risk, and opportunities.

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Professor Brooke Eliott, Nerissa , Brian

To understand a company, assess their performance, evaluate their strategies, and

forecast their future performance, we must know the business; the industry they operate
in, and their competitors. A common way to measure a firm's competitive position is to
evaluate the following Porter's Five Forces. Industry competition, bargaining power of
customers, bargaining power of suppliers, threat of substitution, and threat of new
entrants.

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As you analyze your firm's competitive advantage, it is important to assess how

sustainable it is over the long term. Just because one has an advantage now does not
mean that it will last forever. Patents and copyrights may expire, barriers to entry may
fall, thereby enticing others to enter the market. In order to be successful over the long
term, firms have to continue to innovate and stay a step ahead of the competition. As
we perform our financial statement analysis, develop forecasts, and ultimately, estimate
evaluation, a firm's competitive advantage, and their ability to sustain it have to be
factored in.

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Beyond the Financials (Industry Competition)

Beyond the Financials (Industry Competition)

Hi everyone. Let's dive into each of the porter's five forces. We will begin with industry
competition. Industry competition can have a significant impact on management
decisions and a business's profitability. For example, the soft drink industry is known for
intense competition. The cola wars between Pepsi and coke have been around for
years. Both companies fighting for increased distribution, shelf space and market share.
The cola wars have taken on different forms from competing on price through increased
discounts, new advertising campaigns or new products and innovation. Pepsi and coke
have been battling it out for years and will likely continue for years to come.

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The auto industry is also known for being extremely competitive. New car designs,
increased technology and sometimes lower pricing is offered to consumers to drive
sales for one manufacturer versus another. In order to perform a thorough financial
statement analysis, prepare a forecast and ultimately evaluation. It is important that
USS accompanies strengths and weaknesses to determine their overall competitive
position. A company can have an advantage or strength in terms of industry competition
when they offer innovative products to their customers.

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Are able to differentiate their products from the competition and build brand loyalty with
their consumers. However, industry competition should be viewed as a weakness for a
company. If they rely upon pricing discounting to drive sales. Have many competitors
offering similar or interchangeable products and the consumer would have a low impact
or low switching costs. Regardless of the product they purchase industry competition
can have a significant impact on the firm's competitive position and future success.

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Beyond the Financials (Bargaining Power of Customers)

Beyond the Financials (Bargaining Power of Customers)

Hi, everyone. We will continue to dive into each of Porter's five forces.

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Next, we will discuss the bargaining power of customers. Bargaining power of

customers has changed rapidly with the growth of e-commerce, customers can easily
shop, compare pricing, and obtain reviews on products with a point and click.

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Professor Brooke Eliott, Nerissa , Brian

A company can have an advantage or strength in terms of bargaining power over

customers if they offer unique products that are not readily available from other
suppliers. In addition, a firm can have a competitive advantage if there are high
switching costs for the customer to change brands or providers. This tends to increase
brand loyalty, and make the customer sticky, thereby creating advantage over the
bargaining power of the customer.

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 Forecasting Financial Statements & Valuation for Accountants
Professor Brooke Eliott, Nerissa , Brian

However, the firm would be at a disadvantage if there is an oversupply of inventories of

interchangeable products available for sale to the customer. In addition, if there is a
history of negotiation or price concession, the advantage shifts to the customer. Also,
price shopping in comparison often results in price discounting in order to increase
demand and achieve sales. As a result, bargaining power of the customer can have a
significant impact on affirms competitive position and future success.

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 Forecasting Financial Statements & Valuation for Accountants
Professor Brooke Eliott, Nerissa , Brian

Beyond the Financials (Bargaining Power of Suppliers)

Beyond the Financials (Bargaining Power of Suppliers)

Hi everyone. We will now consider the bargaining power of suppliers as we evaluate a firm's
competitive position. Where, how, and from whom companies source their products and input
cost has a significant impact on their future success. Depending on the number of suppliers,
uniqueness of the product design, a company size, and how important they are to the supplier,
can dramatically impact their competitive position. In order to perform a thorough financial
statement analysis, prepare a forecast, and ultimately evaluation, it is important that you assess
a company's strengths and weaknesses to determine their overall competitive position.

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 Forecasting Financial Statements & Valuation for Accountants
Professor Brooke Eliott, Nerissa , Brian

A company can have an advantage or strength in terms of bargaining power over

suppliers if there is an abundant supply, and there would be low switching costs by
changing from one supplier to another. In addition, if a company represents a major
customer for the supplier, it increases the competitive position of a firm.

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 Forecasting Financial Statements & Valuation for Accountants
Professor Brooke Eliott, Nerissa , Brian

Conversely, if there are high switching costs, limited supply, and/or a company's
manufacturing process has been designed for a specific input from the supplier, the
balance of power can significantly shift to the supplier. In addition, if a company
represents a small portion of the supplier's business, they will likely not be prioritized,
and product supply and pricing could be impacted. Bargaining power of suppliers can
have significant impact on a firm's competitive position and future success. It is
important to evaluate the impact on your company and its competitors.

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 Forecasting Financial Statements & Valuation for Accountants
Professor Brooke Eliott, Nerissa , Brian

Beyond the Financials (Threat of Substitutes)

Beyond the Financials (Threat of Substitutes)

Hi everyone. Threat of substitution is the next factor we will consider, as we evaluate a

firm's competitive position. Products that are not differentiated and can be easily
substituted, can have a significant impact on the business, their strategies and future
outlook.

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 Forecasting Financial Statements & Valuation for Accountants
Professor Brooke Eliott, Nerissa , Brian

Private label penetration has increased across many categories, thereby creating
pricing pressure and forcing companies to make additional investments to combat this
growing threat of substitution. In order to perform a thorough financial statement
analysis, prepare a forecast and ultimately evaluation. It is important that you asses a
company's strengths and weaknesses, to determine their overall competitive position.

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 Forecasting Financial Statements & Valuation for Accountants
Professor Brooke Eliott, Nerissa , Brian

A company can have an advantage or strength in terms of threat of substitution, when

they are able to offer a unique product with a custom application. Thereby causing a
high customer switching cost, if they were to consider another brand. In addition, those
product categories and brands that are associated with prestige or increased status,
usually can fend off the threat of substitution. Apple has done a good job with creating
an ecosystem of connected products that limit the threat of substitution for other
products.

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 Forecasting Financial Statements & Valuation for Accountants
Professor Brooke Eliott, Nerissa , Brian

However, when there is limited ability to increase pricing and the customer views the
product as interchangeable with low switching costs, this usually creates a weakness
and risk for a company. This type of category dynamic usually presents opportunities for
private label brands to take hold. The disposable battery category is an example of a
product that has a high risk of substitution.

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 Forecasting Financial Statements & Valuation for Accountants
Professor Brooke Eliott, Nerissa , Brian

Battery performance and their uses, are viewed similarly and as a result, companies
have relied upon heavy price discounting and increased advertising in an effort to
combat this threat. Threat of substitution can have a significant impact on affirms
competitive position and future success. It is important to evaluate the impact in not only
your company, but also its competitors.

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 Forecasting Financial Statements & Valuation for Accountants
Professor Brooke Eliott, Nerissa , Brian

Beyond the Financials (Threat of New Entrants)

Beyond the Financials (Threat of New Entrants)

Hi everyone. Threat of New Entrants is another critical factor we will consider, as we

evaluate a firm's competitive position. Tesla had a first mover advantage in the electric
vehicle market. They gained significant market share and held a dominant competitive
advantage. However, an interactive industry and projected increase consumer demand,
will entice new entrants. This is exactly what happened with electric vehicles.

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 Forecasting Financial Statements & Valuation for Accountants
Professor Brooke Eliott, Nerissa , Brian

Tesla's slice of the pie has shrunk as every major vehicle manufacturer, has now
entered the space and have announced plans for increased future investments. It is
important to realize that just because you enjoy a competitive advantage at one time, it
may not last forever. Successful companies need to evolve, innovate, and out-execute
their competition, to sustain success over the long term. In order to perform, a thorough
financial statement analysis, prepare a forecast, and ultimately evaluation, it is important
that you assess a company's strengths and weaknesses to determine their overall
competitive position.

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 Forecasting Financial Statements & Valuation for Accountants
Professor Brooke Eliott, Nerissa , Brian

A company can have an advantage or strength in terms of threat of new entrants, when
they are able to build brand loyalty with their customers. Sometimes this is achieved by
blocking out competition for a period of time with patents and trademarks. In addition,
significant upfront investments with low initial profitability, may create a natural deterrent
for new competitors to enter the market. However, an interactive market will entice new
entrants, like we discussed for the electric vehicle industry.

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 Forecasting Financial Statements & Valuation for Accountants
Professor Brooke Eliott, Nerissa , Brian

Industries that are highly profitable and have low barriers are ripe for new entrants. In
addition, new technologies and innovation may attract new entrants as the category
evolves. The shaving category is a good example for threat of new entrants. For years
there were two primary players in the US, Gillette and Schick. However, this was a very
profitable category that attracted new entrants with an innovative go-to-market
approach. Dollar Shave Club and Harry's, offered a new approach for customers to buy
razors at an affordable price, and thereby took market share from the two dominant
players in the category. Threat of new entrants can have a significant impact on a firm's
competitive position and future success. It is important to evaluate the impact, to not
only your company but to its competitors.

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