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What statistical forecasting tools, models & techniques would you suggest?

Statistical ForecastingWe're raising funds to buy an existing business and expand it. We have the acquiree's records and are attempting to realistically forecast what future sales and budget estimations would be for the acquired and expanded entity.

How would you proceed and with what statistical forecasting tools, models and techniques? The resulting data is intended for not only fundraising purposes, but also as a realistic plan going forward that we'll be measured against by ourselves and our investors.




Topic Expert
Regis Quirin
Title: Director of Finance
Company: Gibney Anthony & Flaherty LLP
LinkedIn Profile
(Director of Finance, Gibney Anthony & Flaherty LLP) |

I would recommend developing a proforma of future cash flows (36 months), with three scenarios: current situation, transition, and end state. The end state represents the financial situation you need to justify the "funds raised." The current situation represents the company's projected financials if you did not acquire it. The transition includes the changes you will need to implement to integrate the acquired company with your own. Use these models to set targets and establish plans.

(President/CEO) |

In addition, it may b obvious, but the can flow statements for 36 months should reflect the first year as monthly, second year quarterly and third year annually. Cash flow for fund raising is best prepared in the direct method especially for the first year because it discloses how funds are being spent and is mor transparent.

Topic Expert
Christie Jahn
Title: CFO
Company: Prime Investments & Development
(CFO, Prime Investments & Development) |

If you currently operate a similar business you could easily plug in your current model into the new business and project out cash flow as well as a P&L statement based on existing data. We do this when looking to acquire a new store. After analysis of their current sales, we decide which one of our existing stores they tend to function like. We then anticipate sales growth (after plugging in our own model) and forecast out over a certain time frame projected GM, NI and CF. Then you can go to the investors with confidence that you can do what you say you can.

If this is your first acquisition, I would do heavy market analysis and hopefully based on historical data you can trend outward your expected growth and why you anticipate this expected growth to your investors. This may be easier to answer if we knew the type of business, but Regis's idea will work really well too! Good luck! Let us know if you have other questions. I love acquisitions; there is so much challenge in accurate projections.

david waltz
Title: Assistant Treasurer
Company: Integrys Energy Group
(Assistant Treasurer, Integrys Energy Group) |

Regression, factor analysis, and time series techniques may all be useful depending on what data exists and how reliable it is.

David Collins
Title: CEO
Company: Glentyde Capital Advisors
(CEO, Glentyde Capital Advisors) |

Full agreement with Mr Waltz with respect to the difficulty of recommending any specific methodology(ies), as your choice of statistical weapon is highly situation-specific. But I can mention a couple of basic ideas which tend to have general across-the-spectrum applicability:

On any given P&L or balance sheet, only a small minority of the individual line items have a "pure" relationship or correlation with sales, volume, or some other predictor variable. For example, it many cases it'd be a mistake to crunch some historical data and conclude that Expense A has some X correlation with Sales, and then use this misleading correlation to forecast Expense A. Instead, a little dissection of that line item will reveal that Expense A includes some subset which moves in relation to Sales based on some logical correlation, another subset which is linked more closely to local payroll tax rates, and perhaps another subset which is tied to some commodity price. (A bit o' regression work can help to measure the strength of the relationships.) The point is that accounting doesn't group together line items based on commonality of linkages to predictor variables. Hence a little dissection of at least the key line items can lead to superior forecasting.

For another thing, I really like to make use of industry stats and data whenever possible. Most industries have put together one or more trade associations, with economists and data crunchers on board cranking out all sorts of forecasts and econ outlooks for the benefit of their membership. Such reports can sometimes make for a helpful 'reasonableness' test against which to gauge your own projections for the target company. Granted, this latter point is something you're already on top of in your due diligence work, but its tie-in to the forecasting exercise impels me to toss it out there anyway.

Best of success with the acquisition.

Topic Expert
Patrick Dunne
Title: Chief Financial Officer
Company: Milk Source
(Chief Financial Officer, Milk Source) |

We have typically attacked it as follows:
-Leverage current management to get a realistic sales forecast by customer.
-If its retail, you will have to obtain managements forecast and validate using some of the tools above.
-Consider demographics and trends
-Consider industry sources such as Technomics providing growth based on GDP and trends in the industry.
-For some specific customers, there may be other factors that can be used (Customer is expanding and sales would be increasing at a faster rate that the above average growth rates).

Martin Le Comte
Title: Manager - Business Modeling
Company: Modelcom
(Manager - Business Modeling, Modelcom) |

In this case, there are 2 questions you need to answer here :

1-How much money do you need to acquire your target ?
2-Will your company, post acquisition, will have enough cash flows to support the debt contracted for the acquisition.

To answer the first question, you need to build a business evaluation model to know how the acquiree worth. It should not be a problem because you have the acquiree's record and are able to consult the management team to obtain all the information that you need.

For the question #2, I suggest that you build a complete 5 years financial model with proformas built with revenues and costs drivers that reflect the company operations including those of the acquiree. I recommend to develop the first 3 years of the plan on a monthly base and the last 2 years on a annually base so you will be able to be more accurate at the beginning of the post acquisition period. Once the financial model is developped,it would be relevant to identify the 3 or 4 most importants drivers of your plan and make Monte Carlo simulations to highlight what are the probabilities that your plan succeed.

Well, that's an interesting case and there is a lot of work to be done, I wish you the best of success. If you have questions, don't hesitate to contact me mlecomteatmodelcom [dot] com.

Bruce Lynn
Title: Managing Partner
Company: The FECG LLC
(Managing Partner, The FECG LLC) |

Without knowing the type of business (service, manufacturing, etc) you are acquiring or how it will fit into your existing businesses (i.e. are you a PE firm? in businesses similar to the one being acquired?) it is difficult to give an accurate answer but consider the following:

- you will need both a short term and long term (i.e. strategic) forecast. A short term forecast can rely on past information from the business. A strategic forecast will need more external information including competitors, markets, etc. The exact length of the forecast periods depends on you. Example: most PE firms do not plan on holding onto a company for 5 years so maybe a 3 year forecast is good??

- You will need to integrate operating cash flows with investment cash flows (CAPEX) since you plan on expanding the business. Investment cash flows are "lumpy" as they are large and occur only sporadically; however, with out them you will not be able to keep up with the competition.

- It is possible that operating and investment cash flows + liquidity on hand will be insufficient. If so a second round of financing could be required.

- you will meed success metrics to understand whether the business is generating enough cash flow. Expect your forecasts to be wrong . With the appropriate metrics you can determine how wrong they can be and still succeed.

Joshua Hurni
Title: Account Exec
Company: AMS
LinkedIn Profile
(Account Exec, AMS) |

In terms of tools Adaptive Planning is a cloud solution that could help without the high cost of other systems out there. You can learn more at the link or contact me directly.

Martin Buckle
Title: President
Company: Bjorklund & Company
(President, Bjorklund & Company) |

In addition to the various cashflow forecasting ideas mentioned above I would suggest you need to think about the accounting impact and your synergies.

On the accounting side , there may be covenants in your debt agreements that require minimum balance sheet (accounting) ratios and you need to make sure you don't accidentally trigger any of those (regardless of what's happening to your cashflows).

If you anticipate synergies from the takeover be sure you can detail them in advance and then measure their achievement. Often the premium paid over business value is paid for by these synergies and if you fail to achieve them you will be destroying value not creating it.

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