Our next step is to forecast working capital on the balance sheet. Working capital is typically forecast using historical working capital items as percentages of sales or COGS, as applicable. You should use LTM sales and COGS figures, as well as working capital items from the LTM date. Note that we have explicitly stated whether we are using percentages of sales or COGS for each working capital item we are forecasting. Be very careful to use the proper method when entering the equations in your spreadsheet (i.e. don't use Ctrl+d to propagate the equation at the top of the selected range of cells downward).
Use the spreadsheet below as a guide to which method (e.g. percent of sales or percent of COGS) to use. It should be intuitive why we chose to forecast accounts receivable as a percent of sales, and inventory as a percent of COGS, for example. Once we have forecasted these working capital items, we link our balance sheet directly to these cells. Note that we have also calculated the change in net working capital, since this figure will be used later in cash flow calculations.