Question

Hye, i'm sure anyone here must done the projection before. I want to know, when we want to do forecasting, do we need to adjusted the historical nominal value into the real value first to capture the trend?

Answer 1

Assuming that you are talking about Income Statement/Balance Sheet forecasting, if it is not a high inflationary environment, the period in consideration is relatively short (<3 years) and sales and expenses are more or less constant throughout the period, converting nominal to real value is not very necessary as money values should average out.

Answer 2

Ok, but then in projection period, do i need to incorporate company specific growth (based on historical value - which is in nominal value) plus the inflation rate?

Answer 3

If inflation is stable, you can just stay with nominal numbers and your projections will incorporate inflation. If inflation is unstable, convert your nominal historical numbers to real numbers first. Then, incorporate the current expected inflation into your projections.