Business plan

Question 1

FORECASTING BS: how to forecast debt and other financial liabilities?

Answer 1

initially leave them out, then use them to balance the BS (usually as residual item), to impute interest expense for the period through an iterative process.

Question 2

what are the second 5 steps to create a forecasting model?

Answer 2

project the BS (leaving out cash and debt), project the CF statement, balance the BS and calculate interest (these two steps are iterative and must be completed together), create a summary output page.

Question 3

what are the 3 main categories of numerical assumptions one needs to make before forecasting?

Answer 3

macroeconomic (inflation, GDP growth). evolution of key financials (sales growth, working capital, R&D expense, CAPEX) and capital structure (leverage and sources of financing, fiscal policy in the long term).

Question 4

FORECASTING IS: how does one estimate interest expense?

Answer 4

initially leave it out, come back to it when balancing the BS and estimating debt.

Question 5

how many historical financials does one need to calculate the ratios?

Answer 5

3-5 years usually

Question 6

how does the cash sweep work?

Answer 6

if CADR is positive it goes to repay debt, if it is negative the company must take up debt in order to meet the restricted cash needs.

Question 7

FORECASTING IS: how to estimate COGS and SG&A?

Answer 7

historical % of revenues and comparable analysis.

Question 8

what are important ratios to calculate for forecasting?

Answer 8

margins from the IS, growth rate of key financials, turnovers and days for payables, receivables and inventory from the BS.

Question 9

FORECASTING IS: how to estimate tax expense?

Answer 9

either use the marginal or actual tax rate.

Question 10

FORECASTING BS: how to estimate goodwill?

Answer 10

keep it flat

Question 11

FORECASTING BS: how to estimate changes in operating WC?

Answer 11

use payables, receivables and inventory days.

Question 12

what are the things one should clearly define when pinpointing the actions needed to pursue the company’s strategy?

Answer 12

which objective is the action achieving? what is the future impact of this action on financial statements? when will this action take place and how long will it last? what are risks related to it?

Question 13

FORECASTING IS: how to estimate D&A?

Answer 13

as a % of PPE and intangibles at the beginning of the period.

Question 14

what should you consider when making assumptions about the evolution of key ratios?

Answer 14

historical trends, strategic assessment and comparables.

Question 15

how to calculate cash available for debt repayment?

Answer 15

operating CF + investing CF + equity issuance - dividends/repurchases - restricted cash.

Question 16

FORECASTING IS: how does one forecast future revenues?

Answer 16

assumptions about price and volume. volume is dictated by market size and the share of the market. you can speculate and assume on both of those things. price can grow due to inflation and possible strategic choice.

Question 17

FORECASTING BS: how to estimate other operating liabilities?

Answer 17

they are driven by sales, usually % or fundamental analysis.

Question 18

why is narrative important in business planning? how should i go about generating it?

Answer 18

risk of generating and plugging senseless numbers in the model. develop a narrative and test it against historical evidence, translate part of it in value drivers and link these drivers numerically in the model.

Question 19

what are things to consider in the market analysis part of business planning?

Answer 19

does the company only operate in 1 sector? what about geographical markets?

Question 20

how should one go about the inference of the company’s strategy?

Answer 20

2 levels, strategy of the company as a whole and the consequent strategies of each business unit that drive the company towards the overarching strategic objective.

Question 21

what are the 5 steps of business planning?

Answer 21

analysis of company’s features and market standing, definition of competitive strategies, recognition of the actions needed to pursue these strategies, definition of quantitative assumptions, forecasting of financial statements.

Question 22

what are the first 5 steps to create a forecasting model?

Answer 22

set up the template, imput historical financials and build ratios, add in the assumptions in a dedicated table and start by forecasting the income statement (leaving out interest).

Question 23

FORECASTING BS: how to estimate growth in PPE?

Answer 23

use a separate PPE schedule, CAPEX as a % of revenues combined with depreciation, always make considerations about maintenance vs growth. (you want positive net CAPEX for growth and 0 for maintenance)

Question 24

FORECASTING BS: how about forecasting equity?

Answer 24

use a separate sheet where you imput net income, regular and preferred dividends, capital injections, share repurchases etc.