Reconcile the forecast with the latest trading
Start with actual results through a defined date and identify where the forecast begins. Compare the current run rate with the plan and explain seasonality, lost contracts or unusual activity. A forecast built before a material trading change needs explicit reconsideration.
Keep the original version and document changes rather than overwriting it. This makes it possible to understand whether a valuation difference comes from new evidence, a corrected error or a changed commercial expectation. Version control is particularly useful when several parties discuss the same company.
Build growth from observable drivers
Break revenue into prices, volumes, customers, capacity and timing where the business model allows it. Distinguish signed contracts, renewals, qualified opportunities and early pipeline. Applying the same confidence to all categories can hide execution risk.
Ask what must happen operationally for the forecast to be delivered. Hiring, production lead times and customer onboarding may constrain growth. A percentage uplift in a spreadsheet does not show that the business has the people, equipment or demand needed to achieve it.
Test margin assumptions alongside growth
Higher revenue may require recruitment, marketing, support and additional supervision. Check whether the forecast includes those costs when they are incurred. Historical margins may not apply to a new product or customer mix.
For example, a hypothetical £200,000 revenue increase with 35% incremental contribution adds £70,000 before additional fixed costs. If a new management role costs £50,000, the remaining earnings effect is £20,000. This original illustration shows why a simple revenue growth rate can overstate the benefit.
Include working capital and investment
Translate customer and supplier terms into cash movements. More revenue may require a larger debtor balance or stock investment before receipts arrive. Capital expenditure and ongoing maintenance can also make cash generation differ from accounting earnings.
Check whether the cash-flow definition used matches the valuation method. Avoid deducting the same investment twice or omitting it because it is absent from EBITDA. A forecast that balances only through an unexplained cash plug needs further investigation.
Use connected downside scenarios
A useful downside links related consequences. A sales delay may postpone receipts while leaving payroll and investment unchanged; weaker demand may also affect purchasing commitments. Changing every variable independently can produce a scenario that is internally inconsistent.
Identify which assumptions influence the result most and show their effects clearly. Sensitivity is not a substitute for selecting reasonable inputs, and a wide range does not resolve weak evidence. Explain what additional information would reduce uncertainty and what remains a commercial judgement.
Challenge the largest forecast improvement
Identify the single assumption responsible for the largest increase over current performance. Ask what operational event supports it, when that event occurs and what it costs. Recalculate the forecast if the event is delayed. The aim is not to reject growth, but to understand whether the result depends on an action that remains uncommitted or outside management’s control.
| Area | Evidence to examine | Question to resolve |
|---|---|---|
| Revenue uplift | Customer, price or volume evidence | What must happen before it is earned? |
| Margin expansion | Delivery plan and cost assumptions | Which costs arrive before the benefit? |
| Cash generation | Collection and investment schedules | When does the forecast benefit become available cash? |
Keep valuation evidence separate from negotiation
A buyer or seller may have a negotiating preference, but the forecast should disclose its underlying assumptions. Distinguish the company’s stand-alone outlook from benefits that a particular buyer expects to create. Their relevance depends on the valuation basis and instructions.
Consult EFC can discuss forecast analysis within an agreed valuation scope. Start with the purpose, date and available forecast versions. No model can remove future uncertainty; the useful outcome is a transparent account of what has to happen for the conclusion to hold.
Your preparation checklist
- Bridge actual trading into the forecast start date.
- Separate signed work, renewals and pipeline.
- Include growth costs, working capital and investment.
- Keep version history and show connected downside cases.
Frequently asked questions
Should the latest forecast always be used?
Use the version appropriate to the valuation date and purpose, with changes and available evidence explained.
Does a downside case mean the base case is wrong?
No. It helps assess uncertainty and consequences, while the base assumptions still need their own support.
Can buyer synergies be included?
Their treatment depends on the agreed basis and subject. Separate them from the company’s stand-alone performance and explain the instructions.
Sources and scope
This is general preparation guidance. Worked examples are original hypothetical illustrations, not client outcomes, market multiples or individual advice. Agree the purpose, evidence and scope before commissioning professional work.
Professional background: ICAEW business and share valuation resources and IVSC standards overview. These links provide context and do not imply endorsement, assurance or compliance for an individual engagement.
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