Lesson 3 of 8 · All lessons in this module
- The model's structure and the revenue forecast
- Operating costs, non-operating items and the pro forma income statement
- Forecasting the cash flow statement and balance sheetVideo lesson
- Behavioural biases in analyst forecasts
- Competitive factors: Porter's five forces, prices and costs
- Forecasting sales and costs under inflation and deflation
- Integrated cases: volume shocks, fixed and variable costs and assumption sets
- The forecast horizon and long-term projections
Lesson 3 of 8 · 15 min
Forecasting the cash flow statement and balance sheet
Once the income statement is done, the cash flow statement needs only capex, D&A, working capital and financing assumptions, and the balance sheet is mostly a matter of linking: if every line is linked correctly, it balances.
In short
- The cash flow statement starts from forecast net income and adds estimates for D&A, share-based compensation, working capital, capex, dividends, buybacks and debt.
- Capex is often forecast as a % of revenue; D&A as a % of prior-year fixed assets. Capex above D&A grows the fixed asset base.
- Working capital is modelled with days ratios (DSO, days of inventory, DPO) applied to forecast revenue and COGS. An increase in net working capital reduces CFO.
- Equity = prior equity + net income + share-based compensation − dividends; immaterial or unpredictable lines are held constant (or zeroed in the cash flow statement).
- The model delivers valuation inputs such as FCFF = EBIT(1 − t) + D&A − increase in working capital − capex.
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