Forecasting Balance Sheets and Cash Flow Statements for DCF Analyses. Joseph Emanuele ASA, CFA, CPA/ABV/CFF October 8, PDF Free Download

Forecasting Balance Sheets and Cash Flow Statements for DCF Analyses Joseph Emanuele ASA, CFA, CPA/ABV/CFF October 8, 2017

What we are NOT doing today: We are NOT going to be learning how to prepare prospective financial statements (forecasts or projections) in accordance with AICPA standards.

What we ARE doing today: Learning how to take historical financial information and use it to create supportable assumptions in a discounted cash flow model.

Balance Sheet and Cash Flow Statement Items Working Capital Fixed Assets Long-Term Debt

Discounted Cash Flow Model For the Twelve Month Period Ending December 31, 2018 2019 2020 2021 2022 Total Revenue $ 25,993 $ 27,526 $ 29,178 $ 30,929 $ 32,784 Total Cost of Revenue 16,947 17,892 18,907 20,135 21,310 Gross Margin 9,045 9,634 10,271 10,794 11,475 Total Operating Expenses 7,928 8,506 8,987 9,433 9,999 EBITDA 1,118 1,129 1,284 1,361 1,475 Depreciation & Amortization $ 366 $ 433 $ 504 $ 245 $ 293 EBIT 752 696 780 1,115 1,183 Interest Expense 86 73 62 54 46 Earnings Before Taxes 666 623 718 1,061 1,137 Income Taxes 0 0 0 0 0 Forecast After-Tax Income $ 666 $ 623 $ 718 $ 1,061 $ 1,137 Cash Flow Add: Depreciation & Amortization 366 433 504 245 293 After-Tax Gross Cash Flow 1,032 1,056 1,222 1,307 1,429 Decrease / (Increase) in Working Capital (4) (54) (516) (392) (434) Less: Capital Expenditures (260) (275) (292) (309) (328) (Decrease) / Increase in Long-Term Debt (295) (350) (200) (200) (200) Free Cash Flow $ 472 $ 376 $ 214 $ 405 $ 467

Historical Income Statement Year-Ended Year-Ended Year-Ended Year-Ended Year-Ended 12/31/2013 12/31/2014 12/31/2015 12/31/2016 12/31/2017 Income Statement Net Sales $ 20,000 $ 21,000 $ 22,425 $ 23,625 $ 24,755 Cost of Sales 12,400 13,272 14,397 15,333 16,116 Gross Profit 7,600 7,728 8,028 8,292 8,639 Operating Expenses 6,420 6,636 6,929 7,111 7,526 Operating Profit 1,180 1,092 1,099 1,181 1,114 All Other Expenses (net) 220 231 247 213 223 Profit Before Taxes $ 960 $ 861 $ 852 $ 969 $ 891

Historical Balance Sheet 12/31/2013 12/31/2014 12/31/2015 12/31/2016 12/31/2017 Assets Cash & Equivalents $ 1,800 $ 2,250 $ 2,200 $ 2,225 $ 2,675 Trade Receivables - (net) 3,200 3,225 3,350 3,725 3,850 Inventory 2,525 2,600 3,000 3,225 3,375 All Other Current Assets 325 375 450 575 600 Total Current Assets 7,850 8,450 9,000 9,750 10,500 Fixed Assets (gross) 1,400 1,725 1,925 2,125 2,335 Accumulated Depreciation (140) (415) (700) (1,025) (1,335) Fixed Assets (net) 1,260 1,310 1,225 1,100 1,000 Intangibles 500 500 500 500 500 All Other Non-Current Assets 225 235 240 250 265 Total Assets $ 9,835 $ 10,495 $ 10,965 $ 11,600 $ 12,265 Liabilities Accounts Payable $ 1,950 $ 2,165 $ 2,185 $ 2,315 $ 2,465 Cur. Mat.-L/T/D 200 250 265 275 295 Income Taxes Payable 55 90 29 12 86 All Other Current Liabilities 1,200 1,325 1,375 1,450 1,650 Total Current Liabilities 3,405 3,830 3,854 4,052 4,496 Long Term Debt 1,000 1,500 2,000 2,500 2,000 Deferred Taxes 55 75 30 48 50 All Other Non-Current Liabilities 730 650 125 135 225 Total Liabilities 5,190 6,055 6,009 6,735 6,771 Stockholders' Equity 4,645 4,440 4,956 4,865 5,494 Total Liabilities & Equity $ 9,835 $ 10,495 $ 10,965 $ 11,600 $ 12,265

Activity Ratios Accounts Receivable Accounts Receivable Turnover : Annual Sales Accounts Receivable Days Outstanding in Accounts Receivable : 365 A/R Turnover

Activity Ratios Inventory Inventory Turnover : Cost of Goods Sold Inventory Days Inventory : 365 Inventory Turnover

Activity Ratios Accounts Payable Accounts Payable Turnover : Cost of Sales Accounts Payable Days Payables Outstanding : 365 A/P Turnover

Activity Ratios Net Working Capital Sales to Net Working Capital: Sales Net Working Capital

Working Capital Estimation ACTUAL FORECAST 12/31/2013 12/31/2014 12/31/2015 12/31/2016 12/31/2017 12/31/2018 12/31/2019 12/31/2020 12/31/2021 12/31/2022 Revenues $ 20,000 $ 21,000 $ 22,425 $ 23,625 $ 24,755 $ 25,993 $ 27,526 $ 29,178 $ 30,929 $ 32,784 Cost of Goods Sold 12,400 13,272 14,397 15,333 16,116 16,947 17,892 18,907 20,135 21,310 Operating Expenses 6,420 6,636 6,929 7,111 7,526 7,928 8,506 8,987 9,433 9,999 12/31/2013 12/31/2014 12/31/2015 12/31/2016 12/31/2017 12/31/2018 12/31/2019 12/31/2020 12/31/2021 12/31/2022 Current Assets Cash & Equivalents $ 1,800 $ 2,250 $ 2,200 $ 2,225 $ 2,675 $ 2,498 $ 2,330 $ 2,462 $ 2,584 $ 2,740 Trade Receivables - (net) 3,200 3,225 3,350 3,725 3,850 3,917 4,148 4,397 4,660 4,940 Inventory 2,525 2,600 3,000 3,225 3,375 3,482 3,676 3,885 4,137 4,379 All Other Current Assets 325 375 450 575 600 650 688 584 619 656 Total Current Assets $ 7,850 $ 8,450 $ 9,000 $ 9,750 $ 10,500 $ 10,547 $ 10,843 $ 11,327 $ 12,001 $ 12,714 Current Liabilities Accounts Payable $ 1,950 $ 2,165 $ 2,185 $ 2,315 $ 2,465 $ 2,554 $ 2,696 $ 2,849 $ 3,034 $ 3,211 Income Taxes Payable 55 90 29 12 86 130 138 146 155 164 All Other Current Liabilities 1,200 1,325 1,375 1,450 1,650 1,560 1,652 1,459 1,546 1,639 Total Current Liabilities $ 3,205 $ 3,580 $ 3,589 $ 3,777 $ 4,201 $ 4,243 $ 4,485 $ 4,454 $ 4,735 $ 5,014 Net Working Capital $ 4,645 $ 4,870 $ 5,411 $ 5,973 $ 6,299 $ 6,303 $ 6,357 $ 6,874 $ 7,266 $ 7,700 Net Working Capital as a % of Revenue 23.2% 23.2% 24.1% 25.3% 25.4% 24.3% 23.1% 23.6% 23.5% 23.5% Yr/yr Working Capital (Increase)/Reduction NA $ (225) $ (541) $ (562) $ (326) $ (4) $ (54) $ (516) $ (392) $ (434) RMA Working Capital as a % of Revenue 24.5% Days' Operating Expenses in Cash 102.34 123.76 115.88 114.20 129.74 115 100 100 100 100 Days' Revenue Outstanding in A/R 58.40 56.05 54.53 57.55 56.77 55 55 55 55 55 Days' Inventory 74.32 71.50 76.06 76.77 76.44 75 75 75 75 75 Other Current Assets as a % of Revenue 1.6% 1.8% 2.0% 2.4% 2.4% 2.5% 2.5% 2.0% 2.0% 2.0% Days' Payables Outstanding 57.40 59.54 55.40 55.11 55.83 55 55 55 55 55 Income Taxes Payable as a % of Revenue 0.3% 0.4% 0.1% 0.0% 0.3% 0.5% 0.5% 0.5% 0.5% 0.5% Other Current Liabilities as a % of Revenue 6.0% 6.3% 6.1% 6.1% 6.7% 6.0% 6.0% 5.0% 5.0% 5.0%

Working Capital Estimation - Simplified ACTUAL FORECAST 12/31/2013 12/31/2014 12/31/2015 12/31/2016 12/31/2017 12/31/2018 12/31/2019 12/31/2020 12/31/2021 12/31/2022 Revenues $ 20,000 $ 21,000 $ 22,425 $ 23,625 $ 24,755 $ 25,993 $ 27,526 $ 29,178 $ 30,929 $ 32,784 Working Capital as a % of Revenues 23.2% 23.2% 24.1% 25.3% 25.4% 24.5% 24.5% 24.5% 24.5% 24.5% Ending Working Capital Balance $ 4,645 $ 4,870 $ 5,411 $ 5,973 $ 6,299 $ 6,368 $ 6,744 $ 7,149 $ 7,578 $ 8,032 Working Capital (Increase)/Decrease NA (225) (541) (562) (326) (69) (376) (405) (429) (455)

Activity Ratios Fixed Assets Fixed Asset Turnover: Sales Fixed Assets

Fixed Asset Estimation - Historical Historical Debt Activity and Interest Expense Period FYE FYE FYE FYE FYE Average 12-31-13 12-31-14 12-31-15 12-31-16 12-31-17 Current Year Ending Balance $ 1,200 $ 1,750 $ 2,265 $ 2,775 $ 2,295 Previous Year Ending Balance NA 1,200 1,750 2,265 2,775 Change in Total Interest-Bearing Debt NA $ 550 $ 515 $ 510 $ (480) Average Debt Balance 2,134 NA 1,475 2,008 2,520 2,535 Average Debt Balance as a % of Revenue 9.5% NA 7.0% 9.0% 10.7% 10.2% Interest Expense $ 80 $ 60 $ 59 $ 80 $ 101 $ 101 Interest Expense as a % of Avg Debt Bal. 3.8% NA 4.0% 4.0% 4.0% 4.0% Interest Expense as a % of Revenue 0.4% 0.3% 0.3% 0.4% 0.4% 0.4% Revenue $ 22,361 $ 20,000 $ 21,000 $ 22,425 $ 23,625 $ 24,755

Fixed Asset Estimation - Forecast For the Twelve Month Period Ending December 31, 2015 2018 2019 2020 2021 2022 Total Revenue $ 25,993 $ 27,526 $ 29,178 $ 30,929 $ 32,784 Beginning Balance - Total Fixed Assets 1,000 894 737 525 589 Capital Expenditures 260 275 292 309 328 Fixed Assets 1,260 1,169 1,028 834 917 Capital Expenditures as a % of Revenue 1.00% 1.00% 1.00% 1.00% 1.00% Depreciation Assumptions as to Depreciable Lives: Beg. Dep. Existing Fixed Assets - avg life 3.0 Capital Additions - avg life 4.0 Beginning Balance $ 333 $ 333 $ 333 $ - $ - 2018 Additions 32 65 65 65 32 2019 Additions 34 69 69 69 2020 Additions 36 73 73 2021 Additions 39 77 2022 Additions 41 Total Depreciation $ 366 $ 433 $ 504 $ 245 $ 293 As a % of Revenue 1.4% 1.6% 1.7% 0.8% 0.9% Net Fixed Assets $ 894 $ 737 $ 525 $ 589 $ 624 As a % of Revenue 3.4% 2.7% 1.8% 1.9% 1.9%

Long Term Debt- Historical Historical Debt Activity and Interest Expense Period FYE FYE FYE FYE FYE Average 12-31-13 12-31-14 12-31-15 12-31-16 12-31-17 Current Year Ending Balance $ 1,200 $ 1,750 $ 2,265 $ 2,775 $ 2,295 Previous Year Ending Balance NA 1,200 1,750 2,265 2,775 Change in Total Interest-Bearing Debt NA $ 550 $ 515 $ 510 $ (480) Average Debt Balance 2,134 NA 1,475 2,008 2,520 2,535 Average Debt Balance as a % of Revenue 9.5% NA 7.0% 9.0% 10.7% 10.2% Interest Expense $ 80 $ 60 $ 59 $ 80 $ 101 $ 101 Interest Expense as a % of Avg Debt Bal. 3.8% NA 4.0% 4.0% 4.0% 4.0% Interest Expense as a % of Revenue 0.4% 0.3% 0.3% 0.4% 0.4% 0.4% Revenue $ 22,361 $ 20,000 $ 21,000 $ 22,425 $ 23,625 $ 24,755

Long Term Debt- Forecast As of For the Twelve Month Period Ending December 31, Forecast Debt Activity and Interest Expense 12-31-17 2018 2019 2020 2021 2022 Current Portion of LT Debt Beginning Principal $ 295 $ 295 $ - $ - $ - $ - Change in Balance (295) - - - - Ending Principal 0.00 0.00 0.00 0.00 0.00 Average Balance 148 - - - - Interest Expense @ 4.00% $ 6 $ - $ - $ - $ - 4.00% LT Debt 1 Beginning Principal $ 1,000 $ 1,000 $ 1,000 $ 900 $ 800 $ 700 Change in Balance - (100) (100) (100) (100) Ending Principal 1,000 900 800 700 600 Average Balance 1,000 950 850 750 650 Interest Expense @ 4.00% $ 40 $ 38 $ 34 $ 30 $ 26 4.00% LT Debt 2 Beginning Principal $ 950 $ 950 $ 950 $ 750 $ 650 $ 550 Change in Balance - (200) (100) (100) (100) Ending Principal 950 750 650 550 450 Average Balance 950 850 700 600 500 Interest Expense @ 4.00% $ 38 $ 34 $ 28 $ 24 $ 20 4.00% LT Debt 3 Beginning Principal $ 50 $ 50 $ 50 $ - $ - $ - Change in Balance - (50) - - - Ending Principal 50 - - - - Average Balance 50 25 - - - Interest Expense @ 4.00% $ 2 $ 1 $ - $ - $ - 4.00% LT Debt 4 Beginning Principal $ - $ - $ - $ - $ - $ - Change in Balance - - - - - Ending Principal 0.00 0.00 0.00 0.00 0.00 Average Balance - - - - - Interest Expense @ 4.00% $ - $ - $ - $ - $ - 4.00% Total Ending Balance 2,295 2,000 1,650 1,450 1,250 1,050 Total Change in Balance (295) (350) (200) (200) (200) Total Average Balance 2,148 1,825 1,550 1,350 1,150 Total Interest Expense $ - 86 73 62 54 46 Interest Expense as a % of Total Avg Bal. 0.0% 4.0% 4.0% 4.0% 4.0% 4.0%

Discounted Cash Flow Model Terminal Value Terminal Cash Flow= Final Year FCF x (1+Long Term Growth Rate) (Discount Rate Long Term Growth Rate) Terminal Cash Flow= $467 x (1+Long Term Growth Rate) (Discount Rate Long Term Growth Rate)

Discounted Cash Flow Model Terminal Value Terminal Value Working Capital Change - Residual Year Net Income - Residual Year $ 1,171 Add: Depreciation 338 Revenue - Residual Year $ 33,768 Less: Capital Expenditures (338) Debt-Free ONWC % 23.5% Less: Working Capital Increase (231) Debt-Free ONWC 7,931 Prior Year Debt-Free ONWC 7,700 Cash Flow $ 940 Net Increase $ 231 Divide by: Capitalization Rate Discount Rate 21.0% Less: Long-Term Sustainable Growth Rate 3.0% Capitalization Rate 18.0% Terminal Value $ 5,221

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Forecasting Balance Sheets and Cash Flow Statements for DCF Analyses. Joseph Emanuele ASA, CFA, CPA/ABV/CFF October 8, 2017