You can check your work with the same method: calculate the Change in WC as a % of the Change in Revenue and verify that it follows a relatively clean trend line over time. If that doesn’t work, you could just set these items to a % of revenue instead and simplify the whole process. If we had linked to an incorrect line item instead, such as linking Trade Payables to Revenue rather than OpEx, it would be fairly noticeable since the Change in WC would not follow a clean trend.įor “random items,” such as Maintenance Provisions on a company’s Balance Sheet, you can always try to match them with the relevant Income Statement line items. Historically, the average Change in WC as a % of the Change in Revenue was around 23%, and going forward it is set to approximately 10-20%, so we feel it is a reasonable estimate. “Random” Items: Find a matching Income Statement item and link them there, or make them a percentage of revenue.Įxample for Atlassian – Checking Your Workįor Atlassian, we check all the numbers by calculating the historical Change in Working Capital and then comparing the Change in WC as a % of the Change in Revenue to the future numbers there. “Other” Assets or Liabilities: Hold these constant or link them to revenue. If you understand that bigger picture item, you’ll be well on your way to “getting” this concept.Īccounts Payable, Accrued Expenses, and Prepaid Expenses: Link these to COGS, or OpEx, or both, depending on the company. Remember that all that Balance Sheet items such as Accounts Receivable, Prepaid Expenses, Inventory, and Deferred Revenue really impact is the company’s cash flow – does it spend cash as it grows, or does it earn more cash as a result of growth? This question represents a case of overlooking the forest for the trees – yes, how you link individual items can make a difference, but it does NOT make a bigger difference than the overall change in working capital. The rough answer is: “Stop worrying about what each individual item should be linked to, and instead worry about the OVERALL change in working capital as a % of the change in revenue.” The Rough Answer to Projecting Balance Sheet Line Items You’ll also see an example of how to check your work, how to tell when you’ve linked something incorrectly, and what to do with more “random” line items.Ģ:23: The Rough Answer to Projecting Balance Sheet Line Itemsĥ:43: Rules of Thumb for Specific Line Itemsĩ:36: Example for Atlassian – Checking Your Work In this tutorial, you will learn which Income Statement line items should be linked to Balance Sheet accounts such as Accounts Receivable, Prepaid Expenses, and Deferred Revenue.
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