IntroductionIn order to value a company or understand its credit position, it is necessary to have a view about its future profitability, financial position and growth.
The assessment of future profitability, financial position and growth is based on assumptions about how fast a company will increase its sales, how much it will need to invest in order to be able to produce its goods, and how efficiently the company will be at turning sales into profits.
Making assumptions is not an exact science: assumptions are reasonable or unreasonable, aggressive or conservative. On the other hand, producing an integrated set of financial statements based on agreed assumptions should only give one potential outcome: the answer is either right or wrong.
In building any financial forecast model, it is easy to become too engrossed in the details and lose focus on the aggregate result. It is often the case that once a model is built, it is better to improve a valuation by matching a decline in future ROCE (Return On Capital Employed) against a reduction in competitive advantage, rather than precisely modelling accounts receivable in 20 years’ time. There is value in thinking about how to go about forecasting and what level of detail is required in the model.
This manual covers how to build a fully integrated Excel model to forecast the financial performance of a company, based on reasonable assumptions and on the correct mechanics. It discusses how to achieve realistic forecasts and provides guidance in terms of model design, structure and formatting best practices.