Dynamic Cash Flow Projections » Accumulate Info

The Purpose of Accumulating Info

In order to successfully create monthly financial projections, gather a variety of information. Obtain the most recent and up-to-date information as all projections of the future are grounded in the past.

Remember, garbage in will result in garbage out.

Keep in mind that this is a forecast and you will be making many assumptions about your company’s future performance. Then, give some thought to these assumptions. You need to have a reasonably good idea of where your company is headed financially.

This is a forecast, not a prediction.

You aren’t going to be rewarded for your projections being exactly right. The value lies in having a reasonably accurate picture of the future so that you can plan today to improve upon that.

Think of your effort like how a meteorologist forecasts weather conditions for the next week. Is it really valuable that they can project the exact high temperature several days from now, or that they can estimate it to within plus or minus 3 degrees? Is it valuable that they can tell you that it will rain 1.25 inches on a future day or that it is highly likely that it will rain for most of that day?

How Often To Accumulate Information

When you first build your Dynamic Cash Flow Projection model, you will spend some time collecting the necessary information.

But do NOT expect this to be the only time you collect new information for your projection model. This is NOT a budget.

As you obtain new data, update the projection model with this data to provide the ownership/management with the best view of how the company’s fiscal year is shaping up. External parties such as banks and potential investors will also want to know this information.

How To Obtain The Information

Thankfully, you can easily obtain historical and year-to-date financial statements using an accounting system. Accounting systems include PeachTree, QuickBooks, and Great Plains. Make all the future projections in a spreadsheet format. Therefore, your historical financial statements also need to be in a spreadsheet format. Each of the above three programs can export into an Excel format.

Step 1. Historical Financial Statements

Make sure that you get all 3 financial statements from the previous fiscal period and/or year-to-date into a spreadsheet format such as Excel

• Income Statement
• Balance Sheet
• Cash Flows Statement

Step 2. Format

Double check that the format is how you want it to be. Make any changes accordingly. The historical financial statement will serve as a template for how the financial projections will look. You will want your projection model to have the same format as your financial statements. It will be easier to “drop in” the actual monthly financial statement data when it becomes available.

It is important that you base your projections on realistic assumptions for the next twelve months. Be sure to include the effects of seasonality in your projections. If the summer months are typically strong sales months for you and the fall months are not, then make sure your projections reflect that. While, yes, you are not seeking to project exactly your financial statements for the next 12 months, you do want to put together a good forecast so you can prepare in advance for potential operational and liquidity problems.

Remember, you are not going to get extra points for projecting the actual performance exactly right. It is important that you focus on the “big picture” as it relates to revenue, cost of goods sold, and SG&A expense. If you expect sales to rise by 50% over the prior fiscal year, make sure your projected COGS and SG&A expense accurately reflect their levels with such a significant increase in sales volume.

It will also be important for your projections to reflect all activity at the company, and not just the minutiae of the income statement. If the company is going to spend on plant and equipment in the fiscal year, then make sure your projected balance sheet and cash flow statement contain this expectation.