Budgeting and forecasting are vital tasks for the running of any business. These necessary functions provide information that guides the decision-making process all year long. One such piece of information is how much a business is currently worth, and how much it is expected to grow over the budget period.
Business valuation can be performed via a method known as the discounted cash flow technique. Using the data from your company’s cash flow forecast, you can do the math that will allow you to see exactly how much your business is worth. Here’s how it works.
1. Find the forecasted free cash flow.
Make your cash flow projection based on income history, upcoming marketing campaigns, and production plans. Then refine this data by subtracting taxes and projected costs. This gives you your forecasted free cash flow.
2. Calculate your discount rate.
First, determine your weighted average cost of capital by adding the current value of your company’s equity, debt and preferred stock, and then dividing each of these by the total. Then multiply the number you calculated for equity by the cost of that equity, divide your result for debt by the current tax rate, and divide the answer for preferred stock value by the cost of the stock. Add these together to create the discount rate.
3. Determine your company’s terminal value.
Divide your company’s earnings before taxes by the previous value of your business, and then multiply the answer by the combined estimated value for the final year of the forecasted free cash flow projection. Then subtract the weighted average cost of capital from the total, to get the terminal value.
4. Find your company value.
Multiply the free cash flow and the terminal value by the discount rate to determine their discounted values. Those discounted values then give you your company’s cash flow growth and your projected company value, respectively.
5. Calculate your company’s stock value.
Finally, the combined projected value of your common stock can be determined by subtracting the current values of your company’s debt, preferred stock shares, and other liabilities, from your projected company value.
Calculations like these can be time-consuming and error-prone when done without using a dedicated forecasting solution. In order to quickly, easily, and most importantly, accurately determine your company budget, projected free cash flow, and company value, your best bet is to make use of a business budgeting and forecasting product like True Sky.
True Sky reduces the effort required to manage your processes through the use of centralized control, dynamic security models and reusable content. It provides users easy access to data input forms and analytical reporting, and makes the entire process so simple that it allows your organization to switch their focus from data capture to performance management and information analysis, which can be used to move your business forward. For more information about how we here at TGO Consulting can help you streamline your budgeting and forecasting processes, and make valuation of your business simpler, contact us today.