When forecasting PP&E from first principles, we typically start by forecasting acquisitions and disposals and then work down to PP&E net book value. Breaking down the calculations will allow us to identify forecast acquisitions and disposals, which are necessary to complete a cash flow forecast. In our financial modeling exercise, we put all our supporting schedules in another section to keep our building blocks for input processing and outputs separate. In order to do this easily within a model, the best approach is to put the PP&E breakdown in a supporting schedule. In a more complex forecast, we may need to break down PP&E into further detailed items. This first formula defines the capital asset turnover ratio:įorecasting PP&E Acquisitions and Disposals The second formula shows how we can use forecast sales and capital asset turnover to forecast capital assets. The capital asset turnover ratio is often used to link capital asset forecasting directly to revenue. This first formula defines the capital asset turnover ratio: The capital asset turnover ratio is often used to link capital asset forecasting directly to revenue. The other simplification benefit related to the latter approach is that linking PP&E to revenues ensures that as revenues grow, PP&E also grows. On the other hand, the “quick and dirty” approach will allow us to build a model in a much more straightforward way with the benefit that our model will be simpler and easier to follow and audit. Applying the first principles approach in forecasting balance sheet items will provide high levels of detail and precision in the model, even though it is more challenging to follow and audit. For now, we will exclude the financing items on the balance sheet and only forecast operating (non-current) assets, accounts receivable, inventories, and accounts payable.įorecasting Property, Plant, and Equipment (PP&E)īefore we begin to forecast, it is important to remind ourselves of the first principles approach and the “quick and dirty” approach. When preparing a financial forecast, the first step is to forecast the revenues and operating costs, the next step is to forecast the operating assets required to generate them. To begin, we will forecast the balance sheet by learning how to model operating assets, such as PP&E, accounts receivable, inventories, and accounts payable. This article aims to provide readers with an easy to follow, step-by-step guide to forecasting balance sheet items in a financial model in Excel, including property, plant, and equipment (PP&E), other non-current operating assets, and various components of working capital. Updated OctoForecasting Balance Sheet Items in a Financial Model
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