Chartered Financial Analyst (CFA) Practice Exam Level 2

What is the first step in creating a pro-forma company model?

1. Estimate COGS

2. Forecast Sales

3. Calculate EBITDA

4. Build Cash Flow Projections

The correct answer is: Forecast Sales

The initial step in creating a pro-forma company model is to forecast sales. This is crucial because sales forecasts drive many other components of a financial model. Accurate sales projections form the foundation upon which a company’s financial performance is built. Once sales are estimated, it becomes easier to calculate variable costs such as Cost of Goods Sold (COGS) and determine EBITDA, as these figures are often expressed as a function of expected sales. Additionally, sales forecasts influence cash flow projections, as they provide insights into expected revenue inflows. Without a sales forecast, it would be challenging to model the company's financial health accurately, as various financial metrics and ratios hinge on expected revenue streams. Therefore, the forecasting of sales serves as the cornerstone for developing a comprehensive and coherent pro-forma model.