Look to the future when estimating net cash flow

Description

Abstract: When valuing a business, historic financial performance is relevant only if the entity’s future performance will mirror the past. For many companies — such as those with negative historic cash flow, start-ups and merged entities — valuators may need to build more detailed cash flow estimates or rely on management’s estimates. This article defines equity and invested capital net cash flow, differentiates forecasts and projections, and explains how small differences in estimating cash flow can have significant impacts on value.