How to convert Negative FCF to POSITIVE FCF? (model inside)
Thank to all for your help!
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I don't think anyone can help you in any meaningful way. We can't even tell where the numbers came from or what assumptions were made since virtually the entire model is hard-coded.
Just glancing at it, the assumptions seem ridiculous. You rarely have less than 100% y.o.y. growth in sales.
The biggest outflow is due to investment in NWC. I think your friend just straight-lined NWC as a % of sales after Year 4 (20%). If that is the case, then the growth in NWC is probably being driven by the ridiculous growth in revenue.
Have your friend reexamine the assumptions he made about revenue growth, capex, and the drivers behind NWC.
Thank you for your reply!
This model is required for the case solution. You have to value a start-up company (that's why growth in sales is so high). It's also asked if this company requires additional financing or not. The thing is that Sales/EBITDA/CapEx/WC numbers were given. But using them, you can't calculate positive FCF (as I think). I'm also concerned about so big outflow in WC, but there's nothing we can change there. So may be there's a possibility of using some financing options? But I don't really understand to what will it lead.
getting people to do your homework for you I see...
As you see, I haven't even written a task. I really can't figure out is it possible to fix this model or it's just a mistake in data given.
For some reason I ended up looking at that abortion of a 'model', clearly a loose term here, but as mentioned earlier you are modeling activities that are consuming all of your CFs.
Just so you know... Your growth rate assumed in Yr 2 from Yr 1 if 100%, Yr 3 is 100%, Yr 4 275%, Yr 5 100%, and so on until Yr 10 when it drops to a modest 50%. Not to be outdone, your WC is outstripping your growth rates in an incredible fashion growing from Yr 1 to 2 at 300%, then 200%, then 400%, then 100%, and 150% after that. Your 'friend' is also modeling 100% growth in CapEx. all the to 425% and back down to 50%. I mean fuck son, your WC + CapEx is at least 100% of your EBITDA and grows to be 200% of EBITDA.
Either way dude you need to back down the activities that will burn your CFs to get this to a positive number. And no, you can't do anything with debt b/c FCF is a measure of the operations of a business, not financing. However, you should be financing negative FCF w/ financing. That will at least keep your company 'solvent' otherwise it's just bankrupt or some shit and the analysis makes no sense.
Maybe your friend should open his/her textbook for Finance 151 instead of buddy fucking you with homework that he/she clearly decided to put zero effort into.
It's a startup company - likely to have negative free cash flows for awhile.
"It's also asked if this company requires additional financing or not."
It's easy to hypothetically tell. If your cash balance at start is $50m and the undiscounted free cash flows in the first five years are greater than negative $50m, you need some financing.
To my understanding talking to VC folk (and using logic), people don't use models to value early-stage companies - it's all based on swag and negotiations. But if you insist on using a DCF, use an exit, multiple at a estimated exit date (geared more towards IPO or M&A will effect this estimate) and slap on 25% - 50% discount rate depending on the stage - these kinds of rates are the rates VC investors are looking for.
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