Forecasting WC without a balance sheet.
Hello everyone!
I'm just 2 weeks into an equity research intern role and have a question to ask you all. Any help would be awesome.
How could I forecast the working capital or increase in WC in a cash flow without building a balance sheet?
One method I read was a % to sales method but the historical data is not steady. WC as a % of sales in FY13 was 2% and in FY19 was 16%.
So what method would you guys suggest I use?
Thank you! :)
I would average from what you have. Seems FY13-FY19 data's available. But why wouldn't you build balance sheet?
I didn't build a balance sheet because I wanted to limit the no. of guesstimates while completing the model. I know financial modelling as a whole is a lot of calculated guesses but I don't have enough data about the company's future to finish up a balance sheet.
But would you recommend me creating a balance sheet to get bit more sense on the Working Capital aspect?
So you major big line items in working capital are AR, Inv, AP etc.
You can calculate days outstanding by
AR= AR/Rev * 365 Inv= In/COGS * 365 AP= AP/COGS * 365
calculate these for the last however years you have data, see the trend and make a judgement call on those how those will be for your forecasting period. Then, reverse-calculate to AR, Inv, AP, etc. Then you will have calculated BS, then use those for SCF.
Is there a reasonable comps set from which you could infer averages? You could always add an additional sensitivity analysis showing changes in valuation based on various working capital assumptions.
Nope no other companies that I can compare side by side. The company I am on is the only company in that particular industry that has gone public.
Hmm, that is a good idea. I'll try working that out. Thanks for the help. Will let you know how it goes. :)
Depends on how granular you want to go.
But as above posters said, would average historical. However, probably wouldn’t go back 6 years since the business may have changed over time. So when you do look at historical look to see what drivers have changed WC.
Mhmm yeah that is true, the company has shifted it's momentum to another product mix the last couple of years. Great point. I'll go through and spot out some factors which could help me forecast the WC.
Thank you! :D
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