Financial Forecasting Why might the simplest approach not work? How detailed should be the analysis? Does history tell the future? How long of a trend.

Financial Forecasting

Why might the simplest approach not work? How detailed should be the analysis? Does history tell the future? How long of a trend should be observed? Are the line items independent? Is growth in a line item really growth in the firm? Have earnings been manipulated in the past? Are the cash flows sustainable – can the operation

continue this way?

General Guidelines for Good Forecasting

The steps are interdependent. Make adjustments in an order that makes sense for the business model. For example, revenue forecasts may first require forecasts of new stores

The financial statements must interconnect For example, the change in depreciation on the BS should equal the

depreciation expense for the year. Simple errors can be avoided if the spreadsheet is dynamic.

Allow for the firm’s need for capital in at least one account with a “TBD” balance For example, Extra Funds Needed (EFN) may come from debt or somewhere

else. What has been the firm’s history? What is likely to be its future? GIGO – Garbage In, Garbage Out

All assumptions must make sense historically, economically and strategically. The forecast is only as good as the assumptions

Sensitivity Analysis will test key assumptions Those inputs which make the biggest difference when they change are those

which require the most thought care and monitoring.

High-level Forecasting

Projected Sales & Income Approach

Projected Total Assets Approach

Problems with these approaches?

YearSales Growth

RateProjected

SalesNet Profit

MarginProjected Net

Income0 26,935$

FC1 7.3% 28,901$ 10.2% 2,948$ FC2 7.3% 31,011$ 10.2% 3,163$ FC3 7.3% 33,275$ 10.2% 3,394$ FC4 7.3% 35,704$ 10.2% 3,642$ FC5 7.3% 38,310$ 10.2% 3,908$

YearAsset Growth

RateProjected Total

Assets0 21,695$

FC1 4.3% 22,628$ FC2 4.3% 23,601$ FC3 4.3% 24,616$ FC4 4.3% 25,674$ FC5 4.3% 26,778$

Maybe Something More Sophisticated?

Remember our friends at DuPont?

What’s the Implied Growth Rate of Average Assets?

YearProjected

SalesAverage Asset Turnover Rate

Projected Average Total

Assets

Projected Beginning

Total Assets

Projected Ending Total

Assets

Implied % Change in

Total Assets0 26,935$ 21,695$

FC1 28,901$ 1.3 22,232$ 21,695$ 22,769$ 5.0%FC2 31,011$ 1.3 23,855$ 22,769$ 24,941$ 9.5%FC3 33,275$ 1.3 25,596$ 24,941$ 26,251$ 5.3%FC4 35,704$ 1.3 27,465$ 26,251$ 28,683$ 9.3%FC5 38,310$ 1.3 29,469$ 28,683$ 30,255$ 5.5%

What problems exist with this approach?

YearAsset Growth

RateProjected Total

Assets0 21,695$

FC1 6.9% 23,191$ FC2 6.9% 24,791$ FC3 6.9% 26,501$ FC4 6.9% 28,329$ FC5 6.9% 30,283$

YearProjected Total

AssetsProjected Total

Liab. (60%)Projected

Equity (40%0

FC1 23,191$ 13,915$ 9,277$ FC2 24,791$ 14,875$ 9,916$ FC3 26,501$ 15,901$ 10,600$ FC4 28,329$ 16,997$ 11,332$ FC5 30,283$ 18,170$ 12,113$

Detailed Forecasting

Project Operating Revenues Project Operating Expenses Project Operating Assets & Liabilities Project Financial Need & Capital Structure Build Pro Forma Balance Sheet Project Other IS Items Build Pro Forma Income Statement Project Dividends & Change in Retained Earnings Build Pro Forma Statement of Retained Earnings Project Cash Flows from Operations, Investing &

Financing Activities Build Statement of Cash Flows

Adj

ustin

g as

nee

ded

Adapted from Stickney et al, Financial Reporting and Statement Analysis

Operating Revenues

Projecting Sales Segments Volume Price

Projecting Other Revenue Watch for unusual gains, such as from the sale of assets (ask, “is this

a sustainable cash flow?”)

Forecasting errors Some assumptions will be incorrect, but the significance of each

needs to be understood. For example, high DOL means more potential for forecasting error. A

small error in sales projections can lever up into larger errors in projected cash flows.

Projecting Sales

Overall Sales GrowthYear -2 Year -1 Year 0

Sales 23,385$ 25,185$ 26,935$ Growth 7.7% 6.9%CAGR 7.3%



Sales Growth by SegmentYear -2 Year -1 Year 0

Snack Food SegmentSales 12,506$ 13,621$ 14,504$ Percent of Total SalesGrowthCAGR (in $)CAGR (in Sales Volume)CAGR (in Price)

Worldwide Beverage SegmentSales 8,886$ 9,592$ 10,440$ Percent of Total SalesGrowthCAGR (in $)CAGR (in Sales Volume)CAGR (in Price)

Subsidiary CompanySales 1,993$ 1,972$ 1,991$ Percent of Total SalesGrowthCAGR (in $)CAGR (in Sales Volume)CAGR (in Price)




Snack Food SegmentSales 12,506$ 13,621$ 14,504$ Percent of Total Sales 53.5% 54.1% 53.8%GrowthCAGR (in $)CAGR (in Sales Volume)CAGR (in Price)






Snack Food SegmentSales 12,506$ 13,621$ 14,504$ Percent of Total Sales 53.5% 54.1% 53.8%Growth 8.9% 6.5%CAGR (in $) 7.7%CAGR (in Sales Volume)CAGR (in Price)






Snack Food SegmentSales 12,506$ 13,621$ 14,504$ Percent of Total Sales 53.5% 54.1% 53.8%Growth 8.9% 6.5%CAGR (in $) 7.7%CAGR (in Sales Volume) 5.4%CAGR (in Price) 2.2%







Worldwide Beverage SegmentSales 8,886$ 9,592$ 10,440$ Percent of Total Sales 38.0% 38.1% 38.8%Growth 7.9% 8.8%CAGR (in $) 8.4%CAGR (in Sales Volume) 5.0%CAGR (in Price) 3.2%

Subsidiary CompanySales 1,993$ 1,972$ 1,991$ Percent of Total Sales 8.5% 7.8% 7.4%Growth -1.1% 1.0%CAGR (in $) -0.1%CAGR (in Sales Volume) -1.0%CAGR (in Price) 1.0%

Overall Sales GrowthYear -2 Year -1 Year 0 FC 1 FC 2 FC 3 FC 4 FC 5


Sales Growth by SegmentYear -2 Year -1 Year 0 FC 1 FC 2 FC 3 FC 4 FC 5







Snack Food SegmentSales 12,506$ 13,621$ 14,504$ Percent of Total Sales 53.5% 54.1% 53.8%Growth 8.9% 6.5%CAGR (in $) 7.7%CAGR (in Sales Volume) 5.4% 5.0% 5.0% 5.0% 5.0% 5.0%CAGR (in Price) 2.2% 2.0% 2.0% 2.0% 2.0% 2.0%






Snack Food SegmentSales 12,506$ 13,621$ 14,504$ Percent of Total Sales 53.5% 54.1% 53.8%Growth 8.9% 6.5%CAGR (in $) 7.7% 7.1% 7.1% 7.1% 7.1% 7.1%CAGR (in Sales Volume) 5.4% 5.0% 5.0% 5.0% 5.0% 5.0%CAGR (in Price) 2.2% 2.0% 2.0% 2.0% 2.0% 2.0%






Snack Food SegmentSales 12,506$ 13,621$ 14,504$ 15,534$ 16,637$ 17,818$ 19,083$ 20,438$ Percent of Total Sales 53.5% 54.1% 53.8%Growth 8.9% 6.5%CAGR (in $) 7.7% 7.1% 7.1% 7.1% 7.1% 7.1%CAGR (in Sales Volume) 5.4% 5.0% 5.0% 5.0% 5.0% 5.0%CAGR (in Price) 2.2% 2.0% 2.0% 2.0% 2.0% 2.0%







Worldwide Beverage SegmentSales 8,886$ 9,592$ 10,440$ Percent of Total Sales 38.0% 38.1% 38.8%Growth 7.9% 8.8%CAGR (in $) 8.4%CAGR (in Sales Volume) 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%CAGR (in Price) 3.2% 3.0% 3.0% 3.0% 3.0% 3.0%






Worldwide Beverage SegmentSales 8,886$ 9,592$ 10,440$ Percent of Total Sales 38.0% 38.1% 38.8%Growth 7.9% 8.8%CAGR (in $) 8.4% 8.2% 8.2% 8.2% 8.2% 8.2%CAGR (in Sales Volume) 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%CAGR (in Price) 3.2% 3.0% 3.0% 3.0% 3.0% 3.0%






Worldwide Beverage SegmentSales 8,886$ 9,592$ 10,440$ 11,291$ 12,211$ 13,206$ 14,283$ 15,447$ Percent of Total Sales 38.0% 38.1% 38.8%Growth 7.9% 8.8%CAGR (in $) 8.4% 8.2% 8.2% 8.2% 8.2% 8.2%CAGR (in Sales Volume) 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%CAGR (in Price) 3.2% 3.0% 3.0% 3.0% 3.0% 3.0%







Subsidiary CompanySales 1,993$ 1,972$ 1,991$ Percent of Total Sales 8.5% 7.8% 7.4%Growth -1.1% 1.0%CAGR (in $) -0.1%CAGR (in Sales Volume) -1.0% 0.0% 0.0% 0.0% 0.0% 0.0%CAGR (in Price) 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%






Subsidiary CompanySales 1,993$ 1,972$ 1,991$ Percent of Total Sales 8.5% 7.8% 7.4%Growth -1.1% 1.0%CAGR (in $) -0.1% 1.0% 1.0% 1.0% 1.0% 1.0%CAGR (in Sales Volume) -1.0% 0.0% 0.0% 0.0% 0.0% 0.0%CAGR (in Price) 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%






Subsidiary CompanySales 1,993$ 1,972$ 1,991$ 2,011$ 2,031$ 2,051$ 2,072$ 2,093$ Percent of Total Sales 8.5% 7.8% 7.4%Growth -1.1% 1.0%CAGR (in $) -0.1% 1.0% 1.0% 1.0% 1.0% 1.0%CAGR (in Sales Volume) -1.0% 0.0% 0.0% 0.0% 0.0% 0.0%CAGR (in Price) 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%


Sales 23,385$ 25,185$ 26,935$ 28,836$ 30,879$ 33,075$ 35,437$ 37,977$ Growth 7.7% 6.9%CAGR 7.3%




Subsidiary CompanySales 1,993$ 1,972$ 1,991$ 2,011$ 2,031$ 2,051$ 2,072$ 2,093$ Percent of Total Sales 8.5% 7.8% 7.4%Growth -1.1% 1.0%CAGR (in $) -0.1% 1.0% 1.0% 1.0% 1.0% 1.0%CAGR (in Sales Volume) -1.0% 0.0% 0.0% 0.0% 0.0% 0.0%CAGR (in Price) 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%


Sales 23,385$ 25,185$ 26,935$ 28,836$ 30,879$ 33,075$ 35,437$ 37,977$ Growth 7.7% 6.9%CAGR 7.3%


Snack Food SegmentSales 12,506$ 13,621$ 14,504$ 15,534$ 16,637$ 17,818$ 19,083$ 20,438$ Percent of Total Sales 53.5% 54.1% 53.8% 53.9% 53.9% 53.9% 53.8% 53.8%Growth 8.9% 6.5%CAGR (in $) 7.7% 7.1% 7.1% 7.1% 7.1% 7.1%CAGR (in Sales Volume) 5.4% 5.0% 5.0% 5.0% 5.0% 5.0%CAGR (in Price) 2.2% 2.0% 2.0% 2.0% 2.0% 2.0%

Worldwide Beverage SegmentSales 8,886$ 9,592$ 10,440$ 11,291$ 12,211$ 13,206$ 14,283$ 15,447$ Percent of Total Sales 38.0% 38.1% 38.8% 39.2% 39.5% 39.9% 40.3% 40.7%Growth 7.9% 8.8%CAGR (in $) 8.4% 8.2% 8.2% 8.2% 8.2% 8.2%CAGR (in Sales Volume) 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%CAGR (in Price) 3.2% 3.0% 3.0% 3.0% 3.0% 3.0%

Subsidiary CompanySales 1,993$ 1,972$ 1,991$ 2,011$ 2,031$ 2,051$ 2,072$ 2,093$ Percent of Total Sales 8.5% 7.8% 7.4% 7.0% 6.6% 6.2% 5.8% 5.5%Growth -1.1% 1.0%CAGR (in $) -0.1% 1.0% 1.0% 1.0% 1.0% 1.0%CAGR (in Sales Volume) -1.0% 0.0% 0.0% 0.0% 0.0% 0.0%CAGR (in Price) 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%


Sales 23,385$ 25,185$ 26,935$ 28,836$ 30,879$ 33,075$ 35,437$ 37,977$ Growth 7.7% 6.9% 7.1% 7.1% 7.1% 7.2%CAGR 7.3% 7.1%


Snack Food SegmentSales 12,506$ 13,621$ 14,504$ 15,534$ 16,637$ 17,818$ 19,083$ 20,438$ Percent of Total Sales 53.5% 54.1% 53.8% 53.9% 53.9% 53.9% 53.8% 53.8%Growth 8.9% 6.5%CAGR (in $) 7.7% 7.1% 7.1% 7.1% 7.1% 7.1%CAGR (in Sales Volume) 5.4% 5.0% 5.0% 5.0% 5.0% 5.0%CAGR (in Price) 2.2% 2.0% 2.0% 2.0% 2.0% 2.0%

Worldwide Beverage SegmentSales 8,886$ 9,592$ 10,440$ 11,291$ 12,211$ 13,206$ 14,283$ 15,447$ Percent of Total Sales 38.0% 38.1% 38.8% 39.2% 39.5% 39.9% 40.3% 40.7%Growth 7.9% 8.8%CAGR (in $) 8.4% 8.2% 8.2% 8.2% 8.2% 8.2%CAGR (in Sales Volume) 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%CAGR (in Price) 3.2% 3.0% 3.0% 3.0% 3.0% 3.0%

Subsidiary CompanySales 1,993$ 1,972$ 1,991$ 2,011$ 2,031$ 2,051$ 2,072$ 2,093$ Percent of Total Sales 8.5% 7.8% 7.4% 7.0% 6.6% 6.2% 5.8% 5.5%Growth -1.1% 1.0%CAGR (in $) -0.1% 1.0% 1.0% 1.0% 1.0% 1.0%CAGR (in Sales Volume) -1.0% 0.0% 0.0% 0.0% 0.0% 0.0%CAGR (in Price) 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%

Operating Expenses

Percent of Sales: Cost of Goods Sold Selling, General & Administrative Expenses Other Operating Expenses

Watch for “one time” expenditures. These may be legitimately unique or be an indication of manipulation.

Projecting Operating Expenses

Cost of Goods SoldYear -2 Year -1 Year 0

Sales 23,385$ 25,185$ 26,935$ COGS 9,635$ 10,099$ 10,747$ COGS as % of Sales

Cost of Goods SoldYear -2 Year -1 Year 0

Sales 23,385$ 25,185$ 26,935$ COGS 9,635$ 10,099$ 10,747$ COGS as % of Sales 41.2% 40.1% 39.9%

Cost of Goods SoldYear -2 Year -1 Year 0 FC 1 FC 2 FC 3 FC 4 FC 5

Sales 23,385$ 25,185$ 26,935$ 28,836$ 30,879$ 33,075$ 35,437$ 37,977$ COGS 9,635$ 10,099$ 10,747$ COGS as % of Sales 41.2% 40.1% 39.9% 39.7% 39.5% 39.3% 39.1% 39.0% flattening at 39.0% for FC6+


Sales 23,385$ 25,185$ 26,935$ 28,836$ 30,879$ 33,075$ 35,437$ 37,977$ COGS 9,635$ 10,099$ 10,747$ 11,448$ 12,197$ 12,999$ 13,856$ 14,811$ COGS as % of Sales 41.2% 40.1% 39.9% 39.7% 39.5% 39.3% 39.1% 39.0% flattening at 39.0% for FC6+



Selling, General & AdministrativeYear -2 Year -1 Year 0 FC 1 FC 2 FC 3 FC 4 FC 5

Sales 23,385$ 25,185$ 26,935$ 28,836$ 30,879$ 33,075$ 35,437$ 37,977$ SG&A 10,266$ 10,981$ 11,609$ SG&A as % of Sales 43.9% 43.6% 43.1% 43.1% 43.1% 43.1% 43.1% 43.1% flat at 43.1% for all FC years



Selling, General & AdministrativeYear -2 Year -1 Year 0 FC 1 FC 2 FC 3 FC 4 FC 5

Sales 23,385$ 25,185$ 26,935$ 28,836$ 30,879$ 33,075$ 35,437$ 37,977$ SG&A 10,266$ 10,981$ 11,609$ 12,428$ 13,309$ 14,256$ 15,274$ 16,368$ SG&A as % of Sales 43.9% 43.6% 43.1% 43.1% 43.1% 43.1% 43.1% 43.1% flat at 43.1% for all FC years

Assets Cash & Marketable Securities Accounts Receivable Inventories Other Current Assets Investments in Unconsolidated Affiliates Property, Plant & Equipment Other Assets

What assets vary as a function of Total Assets?

Assets

Cash & Marketable Securities (Days Sales?) Accounts Receivable (Days Sales) Inventories (COGS x Inventory Turnover) Other Current Assets (% of Total Assets?) Investments in Unconsolidated Affiliates (TBD) Property, Plant & Equipment (explicit model) Other Assets (TBD)

Few assets vary as a % of Total Assets

Projecting Assets

CashYear 0 FC 1 FC 2 FC 3 FC 4 FC 5

Days Sales in Cash 10 days 10 days 10 days 10 days 10 days 10 days flat 10 days Sales in CashSales $26,935 $28,836 $30,879 $33,075 $35,437 $37,977Avg Sales per DayYear-end Cash Balance


Days Sales in Cash 10 days 10 days 10 days 10 days 10 days 10 days flat 10 days Sales in CashSales $26,935 $28,836 $30,879 $33,075 $35,437 $37,977Avg Sales per Day $73.8 $79.0 $84.6 $90.6 $97.1 $104.0Year-end Cash Balance


Days Sales in Cash 10 days 10 days 10 days 10 days 10 days 10 days flat 10 days Sales in CashSales $26,935 $28,836 $30,879 $33,075 $35,437 $37,977Avg Sales per Day $73.8 $79.0 $84.6 $90.6 $97.1 $104.0Year-end Cash Balance $738 $790 $846 $906 $971 $1,040

Accounts ReceivableYear 0 FC 1 FC 2 FC 3 FC 4 FC 5

Accounts Receivable Collection 29 days 29 days 29 days 29 days 29 days 29 days flat 29 days A/R CollectionSales $26,935 $28,836 $30,879 $33,075 $35,437 $37,977Average Accounts ReceivableEnd of Year Accounts Receivable $2,142Beg. Of Year Accounts Receivable


Accounts Receivable Collection 29 days 29 days 29 days 29 days 29 days 29 days flat 29 days A/R CollectionSales $26,935 $28,836 $30,879 $33,075 $35,437 $37,977Average Accounts Receivable $2,291 $2,453 $2,628 $2,816 $3,017 Sales * Collection Period / 365End of Year Accounts Receivable $2,142Beg. Of Year Accounts Receivable $2,142


Accounts Receivable Collection 29 days 29 days 29 days 29 days 29 days 29 days flat 29 days A/R CollectionSales $26,935 $28,836 $30,879 $33,075 $35,437 $37,977Average Accounts Receivable $2,291 $2,453 $2,628 $2,816 $3,017 Sales * Collection Period / 365End of Year Accounts Receivable $2,142 $2,440 $2,467 $2,789 $2,842 $3,193Beg. Of Year Accounts Receivable $2,142 $2,440 $2,467 $2,789 $2,842



InventoriesYear 0 FC 1 FC 2 FC 3 FC 4 FC 5

Inventory Turnover 8.7 8.7 8.7 8.7 8.7 8.7 flat 8.7 Inventory Turnover rateCOGS $10,747 $11,448 $12,197 $12,999 $13,856 $14,811Average InventoriesEnd of Year Inventories $1,310Beg. Of Year Inventories




Inventory Turnover 8.7 8.7 8.7 8.7 8.7 8.7 flat 8.7 Inventory Turnover rateCOGS $10,747 $11,448 $12,197 $12,999 $13,856 $14,811Average Inventories $1,316 $1,402 $1,494 $1,593 $1,702End of Year Inventories $1,310Beg. Of Year Inventories $1,310




Inventory Turnover 8.7 8.7 8.7 8.7 8.7 8.7 flat 8.7 Inventory Turnover rateCOGS $10,747 $11,448 $12,197 $12,999 $13,856 $14,811Average Inventories $1,316 $1,402 $1,494 $1,593 $1,702End of Year Inventories $1,310 $1,322 $1,482 $1,506 $1,679 $1,725Beg. Of Year Inventories $1,310 $1,322 $1,482 $1,506 $1,679

Property, Plant & EquipmentYear 0 FC 1 FC 2 FC 3 FC 4 FC 5

Sales Growth 7.1% 7.1% 7.1% 7.1% 7.2%Capital Expenditures $1,324 grows at same rate as SalesEnding Balance at Cost $12,180Depreciation Expense per depreciation scheduleAccumulated Depreciation ($5,304)Ending Balance Net $6,876


Sales Growth 7.1% 7.1% 7.1% 7.1% 7.2%Capital Expenditures $1,324 $1,417 $1,518 $1,626 $1,742 $1,867 grows at same rate as SalesEnding Balance at Cost $12,180Depreciation Expense per depreciation scheduleAccumulated Depreciation ($5,304)Ending Balance Net $6,876


Sales Growth 7.1% 7.1% 7.1% 7.1% 7.2%Capital Expenditures $1,324 $1,417 $1,518 $1,626 $1,742 $1,867 grows at same rate as SalesEnding Balance at Cost $12,180 $13,597 $15,115 $16,741 $18,483 $20,350Depreciation Expense per depreciation scheduleAccumulated Depreciation ($5,304)Ending Balance Net $6,876


Sales Growth 7.1% 7.1% 7.1% 7.1% 7.2%Capital Expenditures $1,324 $1,417 $1,518 $1,626 $1,742 $1,867 grows at same rate as SalesEnding Balance at Cost $12,180 $13,597 $15,115 $16,741 $18,483 $20,350Depreciation Expense ($903) per depreciation scheduleAccumulated Depreciation ($5,304) ($6,207)Ending Balance Net $6,876


Sales Growth 7.1% 7.1% 7.1% 7.1% 7.2%Capital Expenditures $1,324 $1,417 $1,518 $1,626 $1,742 $1,867 grows at same rate as SalesEnding Balance at Cost $12,180 $13,597 $15,115 $16,741 $18,483 $20,350Depreciation Expense ($903) per depreciation scheduleAccumulated Depreciation ($5,304) ($6,207)Ending Balance Net $6,876 $7,390


Sales Growth 7.1% 7.1% 7.1% 7.1% 7.2%Capital Expenditures $1,324 $1,417 $1,518 $1,626 $1,742 $1,867 grows at same rate as SalesEnding Balance at Cost $12,180 $13,597 $15,115 $16,741 $18,483 $20,350Depreciation Expense ($903) ($967) ($1,036) ($1,110) ($1,190) per depreciation scheduleAccumulated Depreciation ($5,304) ($6,207)Ending Balance Net $6,876 $7,390


Sales Growth 7.1% 7.1% 7.1% 7.1% 7.2%Capital Expenditures $1,324 $1,417 $1,518 $1,626 $1,742 $1,867 grows at same rate as SalesEnding Balance at Cost $12,180 $13,597 $15,115 $16,741 $18,483 $20,350Depreciation Expense ($903) ($967) ($1,036) ($1,110) ($1,190) per depreciation scheduleAccumulated Depreciation ($5,304) ($6,207) ($7,174) ($8,210) ($9,320) ($10,510)Ending Balance Net $6,876 $7,390 $7,941 $8,531 $9,163 $9,840

Liabilities

Accounts Payable (Based on Days Inventory) Other Current Liabilities (Same % as SG&A?) Short-term Borrowings (Trend?) Long-term Debt (Trend?) Current Maturities of LT Debt (Explicit Model) Deferred Income Taxes (Same % as Sales?) Other Non-current Liabilities (Same % as

SG&A?)

Projecting Liabilities

Accounts PayableYear 0 FC 1 FC 2 FC 3 FC 4 FC 5

COGS $10,747 $11,448 $12,197 $12,999 $13,856 $14,811PLUS Ending Inventory $1,310 $1,322 $1,482 $1,506 $1,679 $1,725LESS Beginning InventoryInventory PurchasesPaybles Period 41 days 41 days 41 days 41 days 41 days flat at 41 daysAverage Accounts PayableBeg. Of Year Accounts PayableEnd of Year Accounts Payable $1,238


COGS $10,747 $11,448 $12,197 $12,999 $13,856 $14,811PLUS Ending Inventory $1,310 $1,322 $1,482 $1,506 $1,679 $1,725LESS Beginning Inventory ($1,310)Inventory PurchasesPaybles Period 41 days 41 days 41 days 41 days 41 days flat at 41 daysAverage Accounts PayableBeg. Of Year Accounts PayableEnd of Year Accounts Payable $1,238


COGS $10,747 $11,448 $12,197 $12,999 $13,856 $14,811PLUS Ending Inventory $1,310 $1,322 $1,482 $1,506 $1,679 $1,725LESS Beginning Inventory ($1,310) ($1,322) ($1,482) ($1,506) ($1,679)Inventory PurchasesPaybles Period 41 days 41 days 41 days 41 days 41 days flat at 41 daysAverage Accounts PayableBeg. Of Year Accounts PayableEnd of Year Accounts Payable $1,238


COGS $10,747 $11,448 $12,197 $12,999 $13,856 $14,811PLUS Ending Inventory $1,310 $1,322 $1,482 $1,506 $1,679 $1,725LESS Beginning Inventory ($1,310) ($1,322) ($1,482) ($1,506) ($1,679)Inventory Purchases $11,459Paybles Period 41 days 41 days 41 days 41 days 41 days flat at 41 daysAverage Accounts PayableBeg. Of Year Accounts PayableEnd of Year Accounts Payable $1,238


COGS $10,747 $11,448 $12,197 $12,999 $13,856 $14,811PLUS Ending Inventory $1,310 $1,322 $1,482 $1,506 $1,679 $1,725LESS Beginning Inventory ($1,310) ($1,322) ($1,482) ($1,506) ($1,679)Inventory Purchases $11,459 $12,358 $13,022 $14,029 $14,857Paybles Period 41 days 41 days 41 days 41 days 41 days flat at 41 daysAverage Accounts PayableBeg. Of Year Accounts PayableEnd of Year Accounts Payable $1,238


COGS $10,747 $11,448 $12,197 $12,999 $13,856 $14,811PLUS Ending Inventory $1,310 $1,322 $1,482 $1,506 $1,679 $1,725LESS Beginning Inventory ($1,310) ($1,322) ($1,482) ($1,506) ($1,679)Inventory Purchases $11,459 $12,358 $13,022 $14,029 $14,857Paybles Period 41 days 41 days 41 days 41 days 41 days flat at 41 daysAverage Accounts Payable purchases * period / 365Beg. Of Year Accounts PayableEnd of Year Accounts Payable $1,238


COGS $10,747 $11,448 $12,197 $12,999 $13,856 $14,811PLUS Ending Inventory $1,310 $1,322 $1,482 $1,506 $1,679 $1,725LESS Beginning Inventory ($1,310) ($1,322) ($1,482) ($1,506) ($1,679)Inventory Purchases $11,459 $12,358 $13,022 $14,029 $14,857Paybles Period 41 days 41 days 41 days 41 days 41 days flat at 41 daysAverage Accounts Payable $1,287 purchases * period / 365Beg. Of Year Accounts PayableEnd of Year Accounts Payable $1,238


COGS $10,747 $11,448 $12,197 $12,999 $13,856 $14,811PLUS Ending Inventory $1,310 $1,322 $1,482 $1,506 $1,679 $1,725LESS Beginning Inventory ($1,310) ($1,322) ($1,482) ($1,506) ($1,679)Inventory Purchases $11,459 $12,358 $13,022 $14,029 $14,857Paybles Period 41 days 41 days 41 days 41 days 41 days flat at 41 daysAverage Accounts Payable $1,287 purchases * period / 365Beg. Of Year Accounts Payable $1,238End of Year Accounts Payable $1,238


COGS $10,747 $11,448 $12,197 $12,999 $13,856 $14,811PLUS Ending Inventory $1,310 $1,322 $1,482 $1,506 $1,679 $1,725LESS Beginning Inventory ($1,310) ($1,322) ($1,482) ($1,506) ($1,679)Inventory Purchases $11,459 $12,358 $13,022 $14,029 $14,857Paybles Period 41 days 41 days 41 days 41 days 41 days flat at 41 daysAverage Accounts Payable $1,287 purchases * period / 365Beg. Of Year Accounts Payable $1,238End of Year Accounts Payable $1,238 $1,336


COGS $10,747 $11,448 $12,197 $12,999 $13,856 $14,811PLUS Ending Inventory $1,310 $1,322 $1,482 $1,506 $1,679 $1,725LESS Beginning Inventory ($1,310) ($1,322) ($1,482) ($1,506) ($1,679)Inventory Purchases $11,459 $12,358 $13,022 $14,029 $14,857Paybles Period 41 days 41 days 41 days 41 days 41 days flat at 41 daysAverage Accounts Payable $1,287 $1,388 $1,463 $1,576 $1,669 purchases * period / 365Beg. Of Year Accounts Payable $1,238 $1,336 $1,440 $1,486 $1,666End of Year Accounts Payable $1,238 $1,336 $1,440 $1,486 $1,666 $1,672

Equity Items

Consider these is these in the context of assets & liabilities which have been forecasted Preferred Stock (rarely changes) Minority Interest (rarely changes) Common Stock (TBD) Capital In Excess of Par Value (TBD) Accumulated Other Comprehensive Loss (TBD) Other Equity Adjustments (TBD) Treasury Stock (TBD)

Financial Need & Capital Structure

The Balance Sheet will probably not balance without adjustment

Is there a source of or a need for additional capital? EFN (Extra Funds Needed) can be modeled explicitly from

financial statements (based on the imbalance), but this will require iterative adjustments to expenses such as interest, which will influence balances such as cash, which leads to…


EFN can also be estimated in this way:

Where A* = assets that increase proportionally with sales L* = liabilities that increase proportionally with sales g = growth rate in sales EBIT = operating income T = tax rate d = dividend payout ratio I0 = interest expense (ignoring any additional financing)

i = interest rate on additional funds borrowed


Where is EFN going to be applied? Change in cash or marketable securities Change in long-term investment securities Change in long-term, interest bearing debt Change in dividends or treasury stock repurchases

Now the Pro Forma Balance Sheet can be constructed

Other IS Items

Interest Expense Interest Income Income Taxes Net Income

Now the Pro Forma Income Statement can be constructed

Dividends & Change in Retained Earnings

Dividend Policy Change in RE = NI – Dividends

Now the Pro Forma Statement of Retained Earnings can be constructed

Statement of Cash Flows

Cash Flows from Operations Cash Flows from Investing Cash Flows from Financing Activities Change in Cash

From here, we can compute Free Cash Flows

Assumptions

What assumptions are we making about the subject company?

How can we test each? What segments for sales are you using? How are you attributing growth to

volume & price? What is the subject company’s relationship

between sales & assets? What about costs of raw materials?

Financial Forecasting Why might the simplest approach not work? How detailed should be the analysis? Does history tell the future? How long of a trend.

Documents

sale of assets

function of total assets

cash flows sustainable

projected cash flows

earningsproject cash

sustainable cash flow

sales projections

financial reporting