Data & spreadsheets · DCF Calculator
From Revenue Assumptions to Free Cash Flow: Building DCF Forecast Inputs
· How it works
dcf cash-flow valuation
A DCF calculator wants cash flows, not revenue. This post shows the chain from revenue growth and margins through tax, depreciation, capital spending and working capital to the free cash flow figures you actually type in.
A revenue forecast in hand and a calculator asking for cash flows — why the gap between the two is where most modelling effort goes
Revenue is not cash available to capital providers. Between the top line and free cash flow sit operating costs, tax and the reinvestment needed to sustain the forecast. That bridge is where business judgement enters. The DCF engine cannot recover missing economics from a revenue growth rate, so the forecast must be built before discounting begins.
Revenue to operating profit — applying growth and margin assumptions, and why margins should be justified rather than extrapolated
Project revenue and apply an operating margin to reach EBIT. Both assumptions need a reason tied to capacity, pricing or cost structure rather than a straight line copied from the latest year. A rising revenue line with an unsupported margin expansion compounds two optimistic choices before the cash-flow calculation has even started.
Tax on operating profit — computing tax on EBIT rather than net income, and why interest is left out at this stage
For FCFF, tax is applied to operating profit before financing, often described as after-tax EBIT. Interest is left out because FCFF belongs to debt and equity providers together; financing is reflected later in WACC and in the enterprise-to-equity bridge. Subtracting interest here and discounting at WACC would mix an equity claim into firm cash flow.
Adding back non-cash charges — depreciation and amortisation as accounting entries that do not move cash
Depreciation and amortisation reduce accounting operating profit without consuming cash in the current period, so they are added back after tax. That does not make them free resources: the assets they describe may need replacement, which appears in capital expenditure. Treating the add-back without corresponding reinvestment can overstate cash generation.
Subtracting reinvestment — capital expenditure and changes in working capital as the cash a growing business must set aside
Subtract capital expenditure and increases in working capital to reach FCFF. Inventory and receivables can absorb cash even when the income statement reports growth, while supplier financing can temporarily release it. A growing business that requires assets and working capital cannot turn every extra unit of operating profit into distributable cash.
Worked example — a five-year revenue line turned into five free cash flow figures, laid out so each line can be traced
In a hypothetical year, revenue of 1,000 at a 15% margin gives EBIT of 150. With a 20% tax assumption, after-tax EBIT is 120; adding 40 of depreciation, subtracting 55 of capital spending and subtracting a 15 working-capital increase gives FCFF of 90. Repeat the trace for each year before summarising its growth path.
What this does not cover — the calculator discounts the cash flows you give it; it does not build the forecast or pull financial statements
ToolAcre does not pull statements or construct this schedule. It requires positive starting FCF and models future years from a scalar rate, a per-year rate array or explicit stages. It therefore cannot accept the outline’s implied arbitrary five-number cash-flow series directly through the main model; translate the finished forecast into the supported starting value and growth path.
The forecast is yours to justify — how ToolAcre models a starting FCF through explicit growth assumptions
The original heading implied that finished yearly cash flows were typed into the calculator unchanged. The implementation instead compounds a starting FCF using visible annual growth assumptions. Reconcile that generated path with the detailed forecast, keep the detailed schedule as the source of truth, and remember that precise discounting does not validate the revenue or reinvestment case.