Accounting / Forecasting question - Change in inventory forecasting (Circularity)
Hi,
I am trying to forecast change in inventory (as part of an LBO model) for a small company, using inventory days outstanding.
Let's say I have the average inventory days outstanding figure calculated for the past x years and want to use that as a basis of forecast. When doing the forward looking calculation of =-(COGS/365)*Inventory Days, I run into a circular calculation problem.
The COGS for the forward looking years include (among other things) "change in inventory", which in turn I am trying to calculate in the first place by using the above mentioned formula(?).
Am I supposed to just run a circular reference here?
Thanks!
I’m sure you have thought of this but why not forecast COGS as a % or revenue, or simply forecast GP and back into COGS?
If you are determing COGS using the change in inventory I’m not sure there is a way around circularity.
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