---
title: Knowing Future Cash Flow
description: It is our experience that it is easy for people to straight-line forecast and assume a constant rate of growth.
---

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# [Knowing Future Cash Flow](https://blog.itreconomics.com/blog/knowing-future-cash-flow)

 Written by [Alan Beaulieu](https://blog.itreconomics.com/blog/author/alan-beaulieu) | Oct 4, 2021 1:25:24 PM

“The ***future*** is ***unknowable*** because the ***future*** is dependent on many possibilities” ([Source](https://www.quora.com/Why-is-the-future-unknowable))

Company B is considering the purchase of Company A, and as a matter of course they estimate EBITDA based on a number of factors, including projected revenue. Here is where there is a definitive need for accurate near- to medium-term forecasting.

Based on the strength of this year, Company B believes that the acquisition target will see Sales climb by 15%, and EBITDA is estimated accordingly. The 2022 revenue figure becomes the basis for a revenue and EBITDA stream into the future. For our purposes, let us assume 2021 revenue of $20 million with EBITDA of 20% of sales for an estimate of $4,000,000. That forms the baseline for future years. It is our experience that it is easy for people to straight-line forecast and assume a constant rate of growth. A 15% annual growth rate with a constant 20% EBITDA yields the followed anticipated EBITDA result:

|   | **2022** | **2023** | **2024** | **Estimated EBITDA Total** |
| --- | --- | --- | --- | --- |
| *Revenue (in millions of $)* | $23.0 | $26.5 | $30.4 |   |
| *Anticipated EBITDA (millions of $)* | $4.6 | $5.3 | $6.1 | $16.0 |

 

There is a way to determine a probable annual growth rate with a high degree of confidence. The process includes ITR’s proprietary usage of rates-of-change in combination with specific high-correlation leading indicators. The analytically determined forecast portends growth rates of 5% for 2022, 4% for 2023, and 12% for 2024. The forecast yields the following results given the same results in 2021:

|   | **2022** | **2023** | **2024** | **Estimated EBITDA Total** |
| --- | --- | --- | --- | --- |
| *Revenue (in millions of $)* | $21.0 | $21.8 | $24.5 |   |
| *Anticipated EBITDA (millions of $)* | $4.2 | $4.4 | $4.9 | $13.5 |

 

A reduction of $2.5 million in the estimated future cash flow will naturally impact the terms of the purchase to the benefit of the purchaser. That benefit comes at the cost of a reliable look into the future, provided the source of the forecast has a reliable, proven track record. Our track record is [on our website](https://itreconomics.com/forecast-accuracy), and we are pleased to put it on public display.

If you’re considering a sale or acquisition, we recommend you work with an advisor like the professionals at [ButcherJoseph & Co.](https://www.butcherjoseph.com/) to help you see the potential benefits and considerations of any transaction type. As a firm specializing in the middle market, ButcherJoseph’s team of professionals has executed more than 200 transactions exceeding $15 billion in total value.

 

**Alan Beaulieu**  
President

[View full post](https://blog.itreconomics.com/blog/knowing-future-cash-flow)

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