FAMOS, which stands for Financial Analysis Model of Small and Medium Enterprises (SMEs), forecasts assets and capital as expressed on the balance sheet. In addition, the model generates a number of financial indicators, from which the financial situation of firms can be derived instantly (e.g. liquidity, solvency). FAMOS distinguishes between 16 sectors and 4 size classes. The modeling of the size-class structure is the surplus value of the model. FAMOS comprises corporations and non-corporations. Corporations are further divided into small, medium-sized and large enterprises.

The model can be used for various purposes. Firstly, model estimates can be used to describe the actual financial situation of firms, and to forecast the balance structure for the coming years, differentiated by size class and sector. Secondly, the impact of changes in turnover, investments, profits and financial costs on the composition of assets and capital can be analyzed. For instance, an increase of the interest rate of 2 percentage points affects the liquidity and solvency of firms. With FAMOS, it is possible to address the effects of such changes across sectors and size classes.

To construct the financial model, two steps have been made:

• determination of the form of the relationships of the endogenous variables of the model
• determination of the coefficients of these relationships.

The endogenous variables are the components of assets and capital structure on the balance sheet. On the assets side can be distinguished: (in)tangible assets, financial assets, inventories, short-term accounts receivables and liquid assets. The capital side comprises shareholders funds, retained earnings and long-term and short-term debts. Exogenous variables are variables of the profit-and-loss account, such as turnover, depreciation, interest rate, paid interest and profits. Financial indicators are derived from both endogenous and exogenous variables.

The form of the relationships of the endogenous variables is based on the economic theory relating to the assets and capital structure of enterprises. The interest rate plays an important role; in the financing theory the influence of the interest rate on the assets and liabilities is better known as portfolio analysis. On the assets side, firms do not want excessive cash, because interest can be earned when these funds are invested in marketable securities (opportunity costs). The higher the interest rate, the higher the opportunity costs of holding cash. On the liabilities side, the interest rate is important when choosing between short- or long-term financing. A disadvantage of short-term financing is that the interest rate is often higher than that for long-term capital. Besides the interest rate, other factors influence the level and composition of the assets and liabilities. These factors may be flexibility or the lender's requirements. For each asset and liability a trade-off has to be made between profitability and risk.

The relationships are formulated in a set of model equations. For each sector and size class, the model equa-tions are estimated separately, using Ordinary Least Squares (OLS).

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