MODULE 12: INTRODUCTION TO FINANCIAL STATEMENT MODELING

REVENUE FORECASTING

1. The core idea is simple: future revenue comes from volume, price or mix, foreign currency, and scope changes. Volume means how many units you sell. Price means how much you charge. Mix means selling more high-priced or low-priced products. Currency matters when sales are earned outside the reporting currency. Scope means acquisitions or divestitures. CFA separates organic growth from currency and acquisition effects.

2. The most important numerical is volume and price growth together. Do not add mechanically unless the question simplifies it. If volume grows 7 percent and price grows 4 percent, revenue does not grow 11 percent exactly. You grow quantity first, then grow price on the larger quantity. So say: take 1.07, multiply by 1.04, subtract 1. That gives 11.3 percent organic revenue growth.

3. Forecast next-year revenue. If current revenue is 1,000 and organic growth is 11.3 percent, next revenue is 1,000 multiplied by 1.113, so 1,113.

4. Split revenue growth into drivers. If revenue grew 12 percent, volume added 5 percent, price and mix added 4 percent, and currency added 3 percent, It might be asked which driver mattered most or what organic growth was. Organic usually means volume plus price/mix, excluding currency and acquisitions.

5. Segment revenue forecasting. Forecast each business separately, then add them. A cognac division, liqueur division, and partner-brand division can have different growth rates and margins.

6. Inflation and deflation revenue forecasting. If prices rise but volume falls, revenue depends on both. So if inflation lifts price by 5 percent but volume drops by 2 percent, revenue grows by 1.05 multiplied by 0.98, minus 1, which is about 2.9 percent.

SALES BASED PROFORMA MODEL

1. Start with revenue. Once you forecast revenue, many lines are no longer independent guesses. Cost of goods sold usually follows sales through a gross margin or COGS percentage. SG&A may follow sales, but not always perfectly, because some operating costs are fixed. Then you get operating profit, subtract non-operating items, subtract tax, and reach net income and EPS.

2. Now the key link: income statement to balance sheet. Receivables follow sales because customers owe money after sales. Inventory follows cost of sales because inventory supports production and selling. Payables follow cost of sales because suppliers are tied to purchases. Retained earnings follows net income minus dividends. So if sales rises, the model usually needs more working capital unless the company improves DSO, inventory days, or payable days.

3. Then the cash flow statement starts with forecast net income. Add back depreciation and amortization. Adjust for working capital. Subtract capex. Then include dividends, share repurchases or issuance, and debt issuance or repayment. Once income statement and cash flow are forecast, the balance sheet is mostly a linking exercise.

4. Do not forecast each statement separately.** A pro forma model is a chain. Sales drives costs. Sales and cost of sales drive working capital. Capex and depreciation drive fixed assets. Net income and dividends drive retained earnings. Cash usually absorbs the final difference.

5. Holding/corporate-level costs are shown as a percentage of total revenue, not segment revenue. You can be tricked here by mixing segment-level margin with company-level overhead.
6. Non-operating items are forecast after EBIT. Net finance costs, other financial expenses, income from associates, and discontinued operations are below operating profit. Do not let them contaminate operating margin