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Understand which cash is being valued
Start by asking what the forecast represents and whose cash flow it measures. Operating cash available to capital providers and cash available to equity holders require consistent treatment of financing and the discount rate.
Keep profit and cash separate. Working capital, investment and other movements can change cash even when reported profit is steady. Our cash statement guide explains the main categories.
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Test the forecast as a business plan
Examine customer demand, pricing, margins, capacity and the investment required to deliver growth. Distinguish contracted work from hoped-for sales. Ask whether staffing, equipment and working capital expand consistently with the revenue assumptions.
A forecast should describe a plausible operating path. A neat series of growth percentages is less useful if it has no explanation of how the business will achieve them.
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Examine discount and terminal assumptions
The discount rate reflects the required return appropriate to the cash flows and risks being considered. The terminal value represents value beyond the detailed forecast period. Both can materially affect the result.
Ask how the assumptions were chosen and whether they are consistent with the forecast. Long-term growth must be considered alongside the investment and resources needed to support it.
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Use sensitivity to guide the discussion
Test plausible changes in the assumptions that matter, such as margins, growth, working capital and the discount rate. Look at combinations where risks move together rather than only changing one cell at a time.
Compare the conclusion with other relevant evidence. Our valuation method comparison explains how approaches can complement one another without being mechanically averaged.
Use this in your business
Questions for a DCF discussion
| Assumption | Ask |
|---|---|
| Revenue | Which customers, volumes and prices support the forecast? |
| Margins | What changes in costs or mix are assumed? |
| Reinvestment | Which assets and working capital support growth? |
| Discount rate | Does it match the cash flow basis and risks? |
| Terminal value | What sustainable position is assumed after the forecast? |
| Sensitivity | Which plausible changes most affect the result? |
A practical example
Growth that consumes cash first
An illustrative business may forecast higher sales but need more stock and equipment to deliver them. That investment can reduce near-term cash even while profit rises. A useful DCF makes those requirements visible and tests what happens if the sales arrive later than expected.
Your next move
Discuss the assumptions in your valuation
Bring the forecast and the assumptions you are least confident about. We can help frame the valuation discussion around the evidence that matters.
Discuss the assumptions in your valuation