How do you forecast the next few years of cash without pretending to know the future?

Now the leap every DCF makes: projecting cash forward. This is where people either get disciplined or get delusional. The goal isn't to be right about 2031 — it's to write down a reasonable, defensible path and know exactly which assumptions you're making.

Two or three drivers, not fifty

You don't forecast every line of the income statement. A useful forecast rests on a handful of drivers:

• Revenue growth — how fast do sales grow each year?
• Margin — what fraction of revenue survives as free cash flow?
• The horizon — how many years do you forecast explicitly before handing off to a terminal value (next unit)?

Multiply revenue by margin each year and you have a free-cash-flow forecast. Simple on purpose — a model with fewer, honest levers beats a baroque one full of guesses dressed as precision.

A five-year sketch

Start from a normal free cash flow of €350. Suppose you assume growth of 8% a year for five years:

• Year 1: €350 × 1.08 ≈ €378
• Year 2: ≈ €408
• Year 3: ≈ €441
• Year 4: ≈ €476
• Year 5: ≈ €514

There's your explicit forecast: five numbers, each traceable to one assumption. Anyone can challenge "why 8%?" — and that's the point. The model is arguable, which makes it honest.

Anchor growth to reality

Two discipline rules keep a forecast sane:

• Fade toward the economy. No company grows 30% forever; growth rates should trend down toward something like overall economic growth over time. A forecast that stays sky-high for a decade is a red flag.
• Check the past and the peers. If a company grew 5% for years, assuming a sudden 20% needs a reason — a new product, a new market — not just optimism. Look at history and competitors as a reality check.

In the data

Data services publish growth figures that look like shortcuts. Here are Apple's:

The quarterly revenue growth is one quarter against the same quarter a year earlier, so a single strong quarter can put it far above anything the annual history supports. The two estimates beside it are analysts' consensus for earnings per share, not revenue, and reach two years out at most. The anchor for a five-year forecast is the annual revenue series, one figure per fiscal year.

Try it now

1. Read the quarterly revenue growth in the table above and write it down as a candidate forecast. You will disprove it in the next step: hold the number and see how far above the annual history it lands. Note too what the two EPS estimates beside it are measuring, and how many years out they reach. Neither answer is the one a five-year forecast needs.
2. Build the real anchor from the annual series. Six fiscal years of revenue, newest first:

Compute the compound annual rate from the oldest year in the table to the newest, which is five years of growth, then subtract it from the quarterly figure you held from step 1. That gap is what a single strong quarter is worth as a forecast, measured rather than asserted. 3. Pick a single growth assumption for the next five years and, from the normal free cash flow you settled on last lesson, sketch the five forecast numbers on paper. 4. Sanity-check the number against a large peer before you commit to it. Microsoft's revenue over the same span sits in the lower half of this table; its fiscal years end in June:

If a company grew 5% for years and you assumed 20%, the assumption needs a reason — a new product, a new market — not optimism. 5. Say out loud the one assumption doing the heavy lifting: "I'm assuming ___% growth because ___." If you cannot finish that sentence with a reason, lower the number.