Inventory – The main driver for inventory is cost of goods sold (COGS) which is itself driven by sales.
This historic formula can then be rearranged to solve for the year-end balance of accounts receivable.Īccounts Receivable = (Sales x Accounts Receivable Days) / 365 The common metric to refer to accounts receivable is days sales outstanding as is shown below.ĭays Sales Outstanding = (Accounts Receivables / Sales) x 365 A certain amount of sales will be in cash, and a certain amount may remain outstanding. After this minimum level of cash is determined, short-term credit facilities can act as the “plug” in the model to keep cash at a healthy level.Īccounts Receivable – The main driver behind accounts receivable would be sales. Cash on the balance sheet for any given year will be determined by the projected cash flow statement.Ī certain amount of cash always needs to be kept on hand to pay suppliers, employees and the like. In real life, cash should always tie to the bank statement, and a proper forecast will have a beginning and ending cash balance flowing neatly in the statement of cash flows. ASSETSĬash – As mentioned previously, the various parts of the financial statements are all interrelated and cash is the perfect example of this. The income statement should be forecasted first which then drives a lot of the information on the balance sheet.Īs we go through the formulae for calculating each major balance sheet item, the term “ending” refers to the amount that will be shown on the balance sheet for the current year and the term “beginning” refers to the closing amount on the balance sheet from the previous year. Some will be driven by sales and others will be driven by cost of goods sold. As we forecast out assets and liabilities, we have to think about what are the “drivers” behind each specific item. While every balance sheet looks a little different, there are a few major line items that will be consistent across every business. A simple average “ratio” of one account to another, whether in decimal form or percentage form, can also establish the relationship. Knowing a turnover or days metric is one and the same as an analyst just needs to divide 365 days by the turnover rate. A “days” metric will convert this same turnover metric into the average number of days the account represents. Side Note on Turnover, Days, and Ratios: A “turnover” rate is how many times an account’s average balance can be divided into, or “turned over” another account. As always, using more years of historical data can help form a more accurate average.Ī good model will tell users the average level but will also allow users to override and adjust the historical figure if the analyst has good reason to believe the metric will change from its historic average. If any metric has been steadily changing in a certain direction, it would be most wise to take the latest level. Projections need a solid base in reality and this is done by using historical financial data to form relationships which can then be carried forward into future years. Using Historical Data to form Relationships
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