When one attempts to forecast future numbers in terms of personal operating income or personal net income, one needs to know the growth rate in his personal finance. So, what are the variants of growth rates?
We need to project our personal finance numbers for various reasons. Maybe, you would want to know what your profits in future would be? Or, you might want to know your returns on an investment in a future period. You might want to know your asset turn in a future period of time, or your personal interest cover that requires your personal operating surplus in a future date, and so on.
Forecasting future income
One of the easier ways of doing this is just arriving at the average growth rate in the past few years. For instance, one might like to know the growth rate in his personal operating income if the growth rate in the post-tax operating income were 20%, 15%, 25%, 18% and 20% in the past five years. Then, we could say that his five-year simple average growth rate in operating income is 19.6%.
The other way of computing the growth rate is using the compounded growth rate method.
Fundamental growth rates
Historical growth rates may not be quite as useful in predicting the future. We may employ the fundamental growth rate in arriving at the forecasted income for an individual.
Growth rate for forecasting operating income: The growth rate in operating income can be computed by multiplying the return on invested capital (RoIC) by the personal re-investment rate. The RoIC is computed by dividing the after-tax operating income by the amount of invested capital. Invested capital is the sum of book value of equity and debt capital. Here, current liabilities are not considered in the computation of debt capital. Re-investment rate is computed by dividing the re-investment requirements by the after-tax operating income. Re-investment requirements are the sum of net investment in long-term assets and the positive change (i.e., increase) in working capital requirements.
Growth rate for forecasting net income: The growth rate in net income can be computed by multiplying the equity re-investment rate