Recently I applied for a fund and been asked to perform a few tasks, one of them is provide projection for Income statement, BSheet and CF Statement. Can anyone advise me how I should do this? Should I estimate growth rate for each account or should I forecast major account, such as current asset, only?
Thank you very much
I believe that this is fairly well covered in the Level I curriculum.
Generally you’ll grow revenue at a constant rate: either an historical average rate, or a higher rate if the company’s expanding.
You’ll usually estimate variable costs as an historical average percentage of revenues, though you may use a trend in that percentage if the company’s costs are known to be increasing or decreasing.
You’ll estimate fixed costs based on your projections of their future operations; e.g., you’ll increase interest expense if you anticipate that they’ll be borrowing money to expand operations.
They may need to invest in working capital, borrow money, issue new stock, and so on if they’re planning to expand: those effects will show up on the balance sheet.
Cash flows will generally follow from the income statement and balance sheet adustments; you’ll typically assume historical rates for A/R and A/P as a percentage of sales and purchases, respectively.
There are a lot of details, but none of them are particularly difficult.
@S2000magician: you are right. This is exactly why you should read curriculum.
Thank you very much, I will read it.
Revenues drive the forecast, use a mix of volume and price, same goes for COGS, qualitative analysis supports your assumption, capital structure is based on management direction and industry outlook, BS and CF statements are tied to the IS.
Check for a model online and see how it goes, read a sell-side research report as a professional example of how to project a company’s performance. McKinsey’s template is my favourite to use.