In order to generate automatic assumptions and perform a forecast, we apply statistical techniques to the company's historical data. If there are only two periods of historical data, we perform a simple trend analysis.
Example:
Using historical values for sales from 2018 and 2019, what is the predicted value for sales in 2020?12/15/2020 12/15/2019 12/15/2018 Sales $8 $5 $3
Since there are only 2 periods of historical data, we perform a simple trend analysis:
Predicted % Change = ($5 - $3) / $3 = 66.66%
Predicted 2005 Sales = $5 * 1.66 = $8.3
If there are three or more periods of historical data, we use a combination of Ordinary Least Squares regression, Simple Exponential Smoothing, and Holt-Winters Exponential Smoothing models to perform the forecast. The following table lists each account with its corresponding method of prediction:
Account | Prediction Algorithm |
Sales | Holt-Winters Exponential Smoothing |
Cost of Sales | Calculated |
Gross Profits | Calculated |
Gross Profit Margin | Exponential Smoothing |
Depreciation and Amortization | Percentage of Gross Fixed Assets |
Interest Expense | Calculated using Loan Information |
Other Overhead or S,G,&A Expense | Holt-Winters Exponential Smoothing |
Other Operating Expenses | Fixed (not predicted) |
Net Profit before Taxes | Calculated |
Adjusted Owner's Compensation | Most recent historical value |
Adjusted Net Profit before Taxes | Calculated |
Taxes Paid | Percentage of NPBT |
Other Income | Fixed (not predicted) |
Other Expenses | Fixed (not predicted) |
Net Income | Calculated |
Cash | Calculated (see below for more information) |
Accounts Receivable | Exponential Smoothing on Accounts Receivable Days |
Inventory | Exponential Smoothing on Inventory Days |
Other Current Assets | Holt-Winters Exponential Smoothing |
Total Current Assets | Calculated |
Gross Fixed Assets | Holt-Winters Exponential Smoothing |
Accumulated Depreciation | Most recent historical value + predicted Depreciation |
Net Fixed Assets | Calculated |
Other Assets | Holt-Winters Exponential Smoothing |
Total Assets | Calculated |
Accounts Payable | Exponential Smoothing on Accounts Payable Days |
Short Term Debt | Calculated using Loan Information |
Current Portion of Long Term Debt | Calculated using Loan Information |
Other Current Liabilities | Holt-Winters Exponential Smoothing |
Total Current Liabilities | Calculated |
Senior Debt | Calculated using Loan Information |
Subordinated Debt | Calculated using Loan Information |
Other Long Term Liabilities | Calculated using Loan Information |
Long Term Liabilities | Calculated |
Total Liabilities | Calculated |
Retained Earnings | Most recent historical value + predicted Net Income |
Total Equity | Calculated |