Module 5: Connecting Financial Statements & Simple Forecasting

How do the three financial statements connect?

Net income links to equity and operating cash flow; cash flows explain changes in cash on the balance sheet.

A company makes a $10M sale on credit. What changes right away?

Revenue and receivables rise $10M, but no cash arrives yet. This ignores costs and taxes.

A customer pays an old $10M invoice. Does revenue rise again?

No. Cash rises $10M and receivables fall $10M. The sale was recorded earlier.

A company buys $5M of inventory with cash. Is that immediately an expense?

Not normally. Cash falls and inventory rises; the inventory cost becomes an expense when sold.

A company sells inventory for $8M that cost $5M. Gross profit?

$3M: $8M of revenue minus $5M of cost of goods sold.

The company buys $20M of equipment with cash. What happens?

Cash falls $20M, equipment rises $20M, and investing cash flow shows a $20M outflow.

The company borrows $50M. Does that raise EBITDA?

No. Cash and debt rise $50M, and financing cash flow shows an inflow. EBITDA does not change.

The company repays $10M of loan principal. Is that an expense?

No. Cash and debt fall $10M; the principal repayment is a financing cash outflow.

What happens when a company records $5M of depreciation?

Profit and equipment book value fall $5M. Depreciation is added back in indirect operating cash flow.

How do I explain a change in the cash balance between two dates?

Start with operating, investing, and financing cash flows; also check any exchange-rate effects.

How would you start forecasting a company’s revenue?

Start with business drivers, often units or customers times average price, adjusted for the industry.

Units rise 10% while price falls 5%. What happens to revenue?

Revenue rises 4.5%: 1.10 times 0.95 equals 1.045.

Revenue is $200M and you forecast 5% growth. Next-year revenue?

$210M: $200M times 1.05.

Revenue is $150M and EBITDA margin is 20%. EBITDA?

$30M: $150M times 20%.

Revenue rises from $200M to $220M, but EBITDA margin falls from 15% to 10%. EBITDA?

EBITDA falls from $30M to $22M, even though revenue grows.

Revenue grows but EBITDA stays flat. What happened to the margin?

EBITDA margin fell. Operating costs absorbed the extra revenue.

An acquisition boosts revenue. How would you forecast the underlying business?

Separate acquired sales from existing-business growth and test any claimed cost savings.

One year had unusually strong margins. Should you forecast that forever?

No. I would check for one-time benefits, unusual costs, and what margins look like normally.

How do you roughly get from EBITDA to cash after capex?

Subtract cash interest, cash taxes, capex, and working-capital investment; check other cash items.

EBITDA $80M, interest $20M, taxes $10M, capex $25M, working capital uses $5M. Cash?

About $20M before other cash items: 80 minus 20, 10, 25, and 5.

Receivables increase $15M because customers pay slower. Cash-flow effect?

About a $15M use of cash, all else equal, because revenue has not been collected.

A company finances new equipment with debt. Does borrowing improve FCF?

No. The borrowing funds the purchase but is financing cash flow, not operating FCF.

Debt starts at $300M; the company borrows $40M and repays $25M. Ending debt?

$315M, before any other debt changes.

Cash starts at $30M; operating flow is +$45M, investing -$25M, financing -$10M. Ending cash?

$40M, assuming no exchange-rate effect or other cash adjustments.

Sales are $100M, variable costs $60M, fixed costs $20M. Sales fall 10%. New EBITDA?

$16M if variable costs fall 10% and fixed costs stay $20M; EBITDA was $20M.

Debt stays at $400M while EBITDA falls from $100M to $75M. Leverage?

It rises from 4.0 times to about 5.3 times.

EBITDA falls from $80M to $60M; interest stays $20M. EBITDA interest coverage?

It falls from 4.0 times to 3.0 times.

A forecast shows falling revenue but flat EBITDA. What would you question?

What costs are falling enough to offset lost sales, and are those savings realistic?

Your forecast shows cash dropping below zero. What does that signal?

A funding gap. I would test borrowing availability, asset sales, cost cuts, or other financing needs.

The case lacks capex and cash-tax data. Can you forecast exact FCF?

No. I would identify what is missing and use clear assumptions or a range, not false precision.