Forecasting With a Broken Base
You are building a 12-month base-case forecast for a specialty retailer to support a working-capital line. Historical revenue: $100M last year, growing ~5%/year. But two things complicate the base: (1) the most recent year included a one-time $8M bulk sale to a single customer that will not repeat, and (2) the company opened 4 new stores mid-year that will contribute a full year next year (management estimates +$6M incremental). Gross margin has been 32%, but the new stores run at 28% due to introductory pricing. Inventory is purchased ~90 days ahead of sales. The company wants a line sized to peak inventory needs.
1. Build a normalized revenue base and a next-year revenue forecast, being explicit about each adjustment.
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Step 1 - Normalize the base. Strip the non-recurring $8M bulk sale: normalized last-year revenue = $100M − $8M = $92M.
Step 2 - Apply organic growth. 5% on the normalized base: $92M × 1.05 = $96.6M. (Do not apply 5% to the inflated $100M - that compounds the one-time item into the base.)
Step 3 - Add full-year new-store contribution. The 4 stores were only partial-year in the reported figures; the incremental full-year effect is +$6M: $96.6M + $6M = $102.6M.
Forecast revenue ≈ $102.6M. Key discipline: separate (a) recurring organic growth, (b) one-time items to remove, and (c) known step-changes (store maturation) to add. Mixing these - e.g., growing the $100M by 5% and then adding $6M - overstates the base by ~$4M and inflates every downstream number, including the line size.
2. Estimate the peak inventory-driven borrowing need, accounting for the margin mix shift and the 90-day purchase lead time.
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Blended gross margin. Assume new stores are ~$6M of the $102.6M forecast (≈5.8%). Blended margin ≈ (94.2% × 32%) + (5.8% × 28%) ≈ 30.2% + 1.6% ≈ 31.8% - slightly below the historical 32%.
COGS ≈ $102.6M × (1 − 0.318) ≈ $69.9M (vs. ~$68M at the old 32% margin - the mix shift adds ~$2M of COGS).
Inventory need with 90-day lead time. If the company holds roughly a quarter of annual COGS to cover the lead time and buffer: $69.9M / 4 ≈ $17.5M average inventory, with a peak higher (seasonal build, say 1.3× average ≈ $22.7M).
Sizing the line: the peak borrowing need ≈ peak inventory less any permanent working capital/equity funding and less non-inventory sources. If, say, $8M is permanently funded by equity and payables, the peak line need ≈ $14–15M, plus a cushion (10–15%) for forecast error → recommend ~$16–17M. Document the margin-mix assumption, because a further shift toward lower-margin stores erodes the cushion.