Does cash flow correspond to the change in cash and cash equivalents on the balance sheet? If you’re okay with that, you can confirm that the model is technically integrated.
Now let’s look at the income statement.
High-end projections (sales, gross margin) also have an impact on several expense items. For example, personnel expenses and other operating expenses. Here’s why:
- Payroll expenses reflect the number of employees. Thus, a significant change in turnover goes hand in hand with a change in the base of the employer. Unless the company can adjust the capacity of its employees. This is something you would need to discuss with the company.
- Other operating expenses should also move in the same direction. Other operating expenses consist of a fixed part and a variable part. Take the example of office rent. Up to a certain capacity, the rent will remain stable but will change if a certain threshold is exceeded. Therefore, other operating expenses must also be in line with turnover.
Here too, the theme of capacity will be present. A significant development in revenue could potentially require a change in the asset base. For example, an industrial manufacturer increases the number of units produced. How could this work?
- The number of teams is increased,
- part of the production is outsourced,
- the equipment has not yet been used to full capacity, or
- an expansion is planned.
This is also something you will need to check to understand the development. Additionally, you should check whether the projection of capital expenditures and depreciation and amortization are planned consistently in the balance sheet and income statement.
To understand projected working capital, a quick way is to calculate DIO, DSO, and DPO. If you compare the historical numbers with the projected numbers, you will also see the development – which you need to check. If factoring is applied in the future or changes are made to the supply chain, expect this to be reflected in these KPIs as well.
This aspect mainly concerns tax debts, allocations to provisions or pensions. Changes in the balance sheet from one period to another must be consistent with the corresponding expenses in the income statement.
