Margin forecasts. After forecasting revenues, the next step is usually to forecast margins the most common margin used when building financial forecasts is EBITDA margins. This is because depreciation amortization are usually forecast as separate line items as part of the calculations for property planting equipment and intangibles and also because depreciation amortization represents a large fixed cost for most businesses. Although analysts do sometimes instead forecast gross profit margins and selling general and admin expense. They will still usually want to exclude depreciation amortization from these forecasts. And therefore this approach is only viable if the company discloses how depreciation and amortization is split between cost of goods sold and selling general and admin. Also as we'll see later unless usually want to forecast revenues and margins at the divisional level. Since most companies only disclose revenue and operating profit but not gross profits by division this further limits an analysts ability to use gross profit margins in their forecasts. When forecasting margins, we usually start with historic margins, that's the latest reported margins and then adjust for the following items.

Firstly non-recurring income and expense. It's really important that the historic margins use to build our forecasts are clean numbers. As any non-recurring items of income and expense such as restructuring charges or profits from asset disposals will not recur regularly in the future. Therefore it's essential that we have spent time cleaning historic margins so that we have a robust number to build forecasts on. The only time that we would forecast non-recurring items is where management have provided specific guidance on these for example a restructuring program, which is expected to generate further costs in the next forecast year, and these would usually be allocated a separate line in our model. Geographic and product mix effects on the next item that might affect our forecast margin. Since mix effects were impact on forecast revenues, they will also impact on forecast margins. For example, if a company's expected to sell more high margin items and fewer low margin items. This will have a positive impact on both revenues and margins What is particularly important here is therefore that there is consistency in the mix of effects reflected in our revenue forecasts and the mix effects reflected in our margin forecasts. Competitive pressures and industry dynamics are the next item that might affect our forecast margins. For example, if the company operates in an industry that is maturing and becoming more competitive. This is likely to have a negative impact on margins in the next few years or it could be that this is an industry where demand for a particular product is booming. This could enable a computer to sustain or even expand their margins. One place that we can refer to for this is our market model or industry research.

Supply chain dynamics are the next item that might affect our forecast margins in particular this is concerned with how changes in major suppliers or major inputs will affect a company's input costs and therefore margins. For example, if there are supply constraints for a major component or materials this could cause price increases and have a negative effect on margins. However, the impact on margins will also be dependent on the extent which these cost increases could be passed on to customers, which in turn will depend on the competitive pressures in the industry and the level of differentiation of the product.

The mix of fixed and variable costs is the final item that might affect have forecast margins. Although this is the last item analyst it is often one of the most important considerations. Fixed costs are cost which tend not to vary with the company's productivity. For example head office costs tend not to change rapidly if revenues increase or decrease, whereas variable costs tend to vary in line with the company's productivity. For example cost of goods sold will usually increase in line with revenues. Fixed costs usually become more variable the longer the time horizon, for example staff costs are often treated as fixed costs over the next year but become variable thereafter. As companies will eventually hire or fire if productivity increases or decreases. However, it's also worth remembering that even fixed costs will respond to inflation pressures. So if inflation increases, so we'll fixed costs.