Build and challenge a three-statement forecast

Learning goals

• Build a sales-driven model with balance-sheet and cash consistency.
• Address competition, inflation, horizon and behavioral bias.

Draft · approximately 80 minutes, excluding further revision.

Translate operating drivers into linked statements

Project revenue from price×volume, then operating costs, working capital, capital expenditure, depreciation, financing and tax. Separate assumptions from formulas. Receivables, inventory and payables should connect to their own sales, cost or purchase drivers. Close the cash flow and balance sheet with an explicit financing policy, not an unexplained cash plug that hides funding shortfalls.

A consistent simple cash bridge is CFO=NI+D&A−increase in operating working capital under stated classifications; cash after capex and financing updates ending cash. Retained earnings increases by net income less distributions. If the balance sheet fails to balance, trace signs, units, timing and omitted movements before adding a balancing line.

Competition and inflation change margins

Analyze entry barriers, buyer and supplier power, substitutes and competitive rivalry to explain price pass-through and cost pressure. A strong market position can support prices but is not immunity from disruption. Model volume losses if prices rise and supplier bargaining if inputs tighten. Translate inflation into separate selling-price, wage, input-cost and balance-sheet effects rather than applying one growth rate everywhere.

Multiplicative effects matter: volume growth 5% and price growth 4% produce revenue growth 1.05 × 1.04−1=9.2%, not exactly 9%. Deflation can reduce revenue while inventory acquired at older higher costs compresses margin. Separate nominal from real growth and use internally consistent inflation, discount-rate and terminal assumptions.

Make horizon and bias controls explicit

Choose an explicit forecast horizon long enough to represent the business’s transition to sustainable economics; cyclical recovery, capacity investment or patent expiry may require different horizons. Beyond it, use normalized margins, reinvestment and growth consistent with competition and financing. A terminal assumption should not preserve an impossible growth advantage indefinitely.

Anchoring on last year, confirmation bias, overconfidence and pressure to match consensus can distort forecasts. Use base rates, independent downside cases, predefined revision triggers and a forecast-error log. Ask a reviewer to articulate the strongest contrary case. A spreadsheet that balances exactly can still contain unrealistic assumptions; quantify uncertainty rather than replace it with false precision.

A complete balanced three-statement scenario

Opening assets: cash 50, receivables 100, inventory 120, PPE 500, total 770. Opening financing: payables 90, debt 300, equity 380, total 770. Forecast revenue 1,100, COGS 660, cash operating expense 220, depreciation 40, interest 10 and tax 25%.Thus EBIT 180, EBT 170, tax 42.5 and NI 127.5. Assume interest and tax are included in operating cash flow, no new debt, no OCI, no other balance movements.

Closing targets: receivables 110, inventory 132 and payables 99 imply operating working capital 143 versus 130 initially, an increase 13. CFO=127.5+40−13=154.5. Capex 80 and dividends 40 give ending cash 50+154.5−80−40=84.5. Ending PPE=500+80−40=540; equity=380+127.5−40=467.5. Assets 84.5+110+132+540=866.5 equal payables 99+debt 300+equity 467.5. This explicit reconciliation checks financing needs instead of concealing them with a plug.

Forecast the financing gap and make the model balance

Beginning operating working capital is 80 and forecast closing requirement 110, creating a cash use 30. Forecast EBITDA 100, cash tax 15, interest 10 and cash capex 60 give prefinancing cash flow 100−15−10−30−60=−15 under the stated simplified cash definitions. With beginning unrestricted cash 20 and minimum cash requirement 10, only 10 can fund the shortfall; additional financing 5 is required. A profitable forecast can therefore require new funding.

After adding financing, recalculate interest, tax and closing cash if the financing convention creates those effects. State whether borrowing occurs at the start, midpoint or end of the period; otherwise the interest/debt circularity is hidden. Check the balance sheet, retained-earnings roll-forward and cash reconciliation in every scenario. A spreadsheet that balances only by silently plugging an unexplained cash figure is not a validated model.

Formula and assumptions

Revenue=units×price; growth=(1+volume growth)(1+price growth)−1; simple CFO=NI+D&A−Δoperating WC

A sales-led forecast with a funding check

1. Base revenue 1,000. Volume rises 5%, price 4%: forecast 1,092. COGS 60% of sales=655.2; cash operating costs 200; depreciation 50; interest 10; tax 25%.
2. EBIT=186.8, EBT 176.8, NI 132.6. Target operating working capital 20% of revenue rises from 200 to 218.4, consuming 18.4.
3. Under the stated CFO bridge, CFO=132.6+50−18.4=164.2. Capex 100 and dividends 40 leave 24.2 cash before borrowing. If price growth is only 1%, revenue becomes 1,060.5; rebuild margins and funding rather than change revenue alone.

Calculation lab

Errors to catch

• Using the same percentage driver for every working-capital item.
• Treating a balanced spreadsheet as proof of a valid forecast.

Original knowledge check

Answer every question before checking. Review explanations after submitting; retry starts a new attempt.

Sources and coverage status

These original lessons are drafts. Public outlines are used to check scope; the official learning-outcome text and proprietary question banks are not reproduced here. Follow the source for exam-year requirements and updates.

• Reference · www.sec.gov
• Reference · www.sec.gov
• Reference · www.ifrs.org