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CFA Level I Exam · Financial Statement Forecasting in Equity Valuation

Forecasting Capex, Working Capital and Financing for CFA Level I

Updated 7 October 2026 · Fact-checked

Forecasting capex, working capital and financing means projecting investment in fixed assets, depreciation, receivables, inventory, payables, debt, interest and share count. You tie each to a driver such as sales or days ratios, roll balances forward, then let the cash flow statement and balance sheet reconcile through cash.

Understand Forecasting Capex, Working Capital and Financing

A forecast model starts with the income statement, but the balance sheet and cash flow statement need their own forecasts. Every balance sheet line is either driven by an operating assumption or is the plug that balances the model. Capex, working capital and financing are the three main groups.

Capital expenditure and depreciation. Capex is driven by growth plans, maintenance needs and capacity. Analysts often forecast it as a percentage of sales or relative to depreciation. A growing firm usually spends more on capex than it records as depreciation. Net PP&E rolls forward as beginning net PP&E plus capex minus depreciation. Depreciation is forecast from the asset base, for example a percentage of beginning gross PP&E, or from the useful life and method. Depreciation is non-cash, so it is added back in operating cash flow.

Working capital. Receivables, inventory and payables move with activity. The usual approach is to forecast days ratios: days sales outstanding (DSO) for receivables, days inventory outstanding (DIO) for inventory, and days payables outstanding (DPO) for payables. Apply them to sales or cost of goods sold. The change in net working capital matters for cash. An increase in operating working capital uses cash. A decrease releases cash.

Financing. Debt rolls forward as beginning debt plus new borrowing minus repayments. Interest expense is the interest rate times debt, either beginning or average balance. Using average debt can create circularity, because borrowing may depend on cash needs that depend on interest. Share count rolls forward as beginning shares plus issuance minus buybacks, and it feeds earnings per share and dividends.

Putting it together. Net income plus depreciation minus the increase in working capital gives cash flow from operations. Capex is the main investing outflow. Debt and equity changes and dividends make up financing. Ending cash from the cash flow statement goes onto the balance sheet. If assets do not equal liabilities plus equity, an error exists in the links.

Key formulas to remember

Net PP&E roll-forward
Ending net PP&E = Beginning net PP&E + Capex − Depreciation
Ignores disposals and impairments. Add or subtract them if the question gives them.
Straight-line depreciation
Annual depreciation = (Cost − Salvage value) ÷ Useful life
Many models instead use depreciation as a percentage of beginning gross PP&E or of sales.
Receivables
Receivables = Sales × DSO ÷ Days in year
Use the day count the question gives, usually 365.
Inventory
Inventory = COGS × DIO ÷ Days in year
Use COGS, not sales.
Payables
Payables = COGS × DPO ÷ Days in year
Strictly, payables relate to purchases, but COGS is the usual simplification unless purchases are given.
Change in net working capital
ΔNWC = Ending operating NWC − Beginning operating NWC
Operating NWC excludes cash and debt. A positive ΔNWC is a cash outflow.
Debt roll-forward
Ending debt = Beginning debt + New borrowing − Repayment
Check whether repayment is made at year end or during the year.
Interest expense
Interest = Interest rate × Average debt (or Beginning debt)
Use the basis stated in the question. Average debt is more accurate but creates circularity.
Share count roll-forward
Ending shares = Beginning shares + Shares issued − Shares repurchased
Use the weighted average share count for EPS.
Operating cash flow link
CFO = Net income + Depreciation − Increase in operating NWC
Add other non-cash charges if given.
Ending cash
Ending cash = Beginning cash + CFO + CFI + CFF
This is the figure that goes on the forecast balance sheet.

How to solve Forecasting Capex, Working Capital and Financing questions

Use the same sequence for any question on forecasting the balance sheet and cash flows. It keeps signs and links straight.

  1. 1Identify what the question asks for: a balance, an expense, or a cash flow. Note the basis given, such as days ratios, percent of sales or average balance.
  2. 2List the drivers given: sales, COGS, DSO, DIO, DPO, capex, depreciation rate, interest rate, repayments and share changes.
  3. 3Forecast each balance with its driver. For working capital, compute receivables, inventory and payables separately, then net them.
  4. 4Roll forward PP&E, debt and shares: beginning balance plus additions minus reductions.
  5. 5Compute the flows: change in NWC, interest on the stated debt basis, capex and depreciation.
  6. 6Check the sign. An increase in an operating asset or a fall in an operating liability uses cash. Depreciation is added back.
  7. 7Link to the cash flow statement and check that your answer fits the three options. Look for options made by a common slip, such as using 360 days or the wrong balance.

Quickest way: Driver, roll-forward, then sign check

When to use it: Use this for 90-second MCQs where the question gives days ratios, capex and debt figures and asks for one number.

  1. Underline the one number asked for and ignore the rest.
  2. Compute only the balances needed. For a change in working capital, you need the net balance and the prior balance.
  3. Use the exact day count given. If it is not given, use 365.
  4. Estimate the answer first. If it is a cash flow, decide whether it should be positive or negative before calculating.
  5. Match to the options. Two options usually come from wrong day counts or the wrong debt balance, so eliminate them by recomputing the one detail that differs.

Common mistakes in Forecasting Capex, Working Capital and Financing

  • Treating an increase in working capital as a cash inflow.

    Candidates see a bigger balance and think it is positive for the firm.

    Fix: Remember that cash is tied up in receivables and inventory. An increase in operating NWC reduces cash flow from operations.

  • Applying DIO and DPO to sales instead of COGS.

    DSO uses sales, so candidates use sales for all three ratios.

    Fix: Receivables use sales. Inventory and payables use COGS, unless the question says otherwise.

  • Forgetting to add depreciation back, or subtracting it twice.

    Depreciation is already deducted in net income, so it is easy to lose track of it.

    Fix: Start from net income and add depreciation once. Capex is a separate investing outflow.

  • Including cash and debt in operating working capital.

    The words current assets and current liabilities suggest every current item belongs.

    Fix: Use only operating items such as receivables, inventory and payables. Cash and short-term debt belong to financing and balance items.

  • Calculating interest on the wrong debt balance.

    Questions vary between beginning, ending and average debt.

    Fix: Read the basis in the question. If it says average debt, add beginning and ending debt and divide by two.

  • Using ending share count for EPS.

    Ending shares are the easiest figure to find after a roll-forward.

    Fix: Use the weighted average shares outstanding for EPS, and adjust for the timing of issuance or buybacks if given.

Worked examples

Example 1

A company forecasts sales of $800 million and cost of goods sold of $480 million. It expects DSO of 45 days, DIO of 60 days and DPO of 40 days, using 365 days. Operating net working capital (receivables plus inventory minus payables) at the start of the year was $110 million. The forecast increase in operating net working capital is closest to: A) $14.9 million, B) $16.7 million, C) $124.9 million.

Show the solution
  1. Receivables = 800 × 45 ÷ 365 = $98.63 million.
  2. Inventory = 480 × 60 ÷ 365 = $78.90 million.
  3. Payables = 480 × 40 ÷ 365 = $52.60 million.
  4. Ending operating NWC = 98.63 + 78.90 − 52.60 = $124.93 million.
  5. Increase = 124.93 − 110 = $14.93 million. This is a cash outflow.
  6. Option B comes from using 360 days (NWC $126.67 million, increase $16.67 million). Option C is the ending balance, not the change.

Answer: A) $14.9 million

Example 2

A firm starts the year with debt of $300 million. It repays $40 million at year end and issues no new debt. Interest is 6% on average debt. Expected capex is $120 million and depreciation is $60 million, so net PP&E rises by $60 million. Forecast interest expense is closest to: A) $15.6 million, B) $16.8 million, C) $18.0 million.

Show the solution
  1. Ending debt = 300 + 0 − 40 = $260 million.
  2. Average debt = (300 + 260) ÷ 2 = $280 million.
  3. Interest = 6% × 280 = $16.8 million.
  4. Option A uses ending debt (6% × 260 = 15.6). Option C uses beginning debt (6% × 300 = 18.0). The capex and depreciation figures do not affect interest here, except that they would affect cash needs and any borrowing in a full model.

Answer: B) $16.8 million

Exam tips

  • Read the basis for every ratio and balance. Questions often include beginning, ending and average versions as wrong options.
  • Always decide the sign of a cash flow before you calculate. It helps you eliminate options quickly.
  • Distinguish operating working capital from total current items. Cash and debt are usually excluded.
  • Use your calculator memory for a chain such as 800 × 45 ÷ 365 on the BA II Plus or HP 12C. Enter each calculation in order and store each result. Do not round until the end.
  • Conceptual items ask what a forecast driver should link to, such as capex to growth plans or interest to the debt schedule. Pick the answer that keeps the three statements consistent.

Practice questions from Financial Statement Forecasting in Equity Valuation

Forecasting Capex, Working Capital and Financing in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Forecasting Capex, Working Capital and Financing: frequently asked questions

How do you forecast working capital for a company?

Forecast receivables, inventory and payables using DSO, DIO and DPO. Apply DSO to sales and DIO and DPO to COGS. Net them to get operating working capital and take the change from the prior year.

How is depreciation forecast in a financial model?

Depreciation can be a percentage of beginning gross PP&E, a percentage of sales, or built from useful life and method. It should be consistent with the asset base that capex builds. It is a non-cash expense that is added back in operating cash flow.

Why does interest expense create circularity?

If interest uses average debt and debt depends on cash needs that depend on net income, each figure depends on the other. Analysts break the circle by using beginning debt or by iterating. In exam questions, the basis is stated for you.

Is an increase in working capital good or bad for cash flow?

An increase in operating working capital uses cash, so it reduces cash flow from operations. It can be a sign of growth, but it must be funded. A decrease releases cash.