4 5 6 7 -8 -9 0 -1 2 -3 4 -5 6 A 9 -0 B 3 Drift Forecasting A forecast is always based on a "hypothesized scenario". 5 As we said earlier in this Workbook, developing a hypothesized scenario is highly judgmental and is a combination of art and science. 6 As discussed in "Intro to Forecasting' a Judgmental Forecast may also include some "Drift' as an alternative to a naive forecast. The Drift assumes a modest improvement or degradation of the recent figures over time, i.e., a positive or negative drift in the model's driver. This is similar to following a trendline, although the trendline may also be created using a statistically derived figure applying Regression. 8 9 In addition to a "Naive' or 'Drift" forecast, the financial analyst may also simply use the average of values of the previous several years. -0 1 If the financial analyst were to create a drift forecast for 2021E, what values should you insert in the yellow cells in 2021E? 2 In the yellow cells below in column G, insert your drift forecast. -3 0 Revenues C EXHIBIT: SIMPLEST COMPANY MODEL WITH A DRIFT FORECAST 2018 Growth Cost of Revenues Gross Profits Gross Margin Operating Expenses (OpEx) D OpEx Percent of Revenues EBIT Source: Marianne Wolk & Richard Horwitz 1 2 3 4 5 What would the EBIT be in 2020E be? 100 60 40 40% E 15 15% 25 -6 S 7 In contrast to this optimistic scenario, let's hypothesize a draconian scenario. 8 Let's assume a new competitor enters the market and destroys the market: F 2019 110 10% 64 46 42% 17 15% 29 2020E 123.2 12% 69 54 G 44% 17 14% 37 19 Revenues decline by 25% (Growth is -25%) Gross Margin decline to 30% 1 OpEx Percent of Revenues increases to 20% because of higher selling and marketing expenses "2 What would the EBIT be in 2020E be? 3 4 If both of the above boxes are not red, you have successfully used the mechanics of hypothesized forecasting. 2021E 123.2 H 123 Forecasting Using a Basic Hypothesized Scenario As we indicated in "Intro to Forecasting', even a Judgmental Forecast includes a point of view. Though it is not thoroughly analyzed, the forecast always includes some judgement about the future which reflects a basic hypothesis. As a reminder, "Fundamental Forecasting involves conducting in-depth analyses to support the hypothesis and will be explored in the next Workbook. Let's start by hypothesizing that the company will do exceptionally well with the following results in 2020E. Growth accelerating to 20%, Gross Margin increasing to 50% OpEx Percent of Revenues staying flat. I J K L M N