While financial projections are estimates of business transactions of the future, they are firmly based in the business realities of the past. In order to project how the company’s performance will look like tomorrow it will be important to review all the assumptions that went into shaping the events of today and yesterday.
The objective of the assumption page is to have an input page that serves as a reference for the financial projection. Done correctly, you only need to enter numbers once into the assumption page.
Make sure each number is entered into its own cell.
Then, just reference that particular cell any time a formula is entered. This allows you to easily see the effects of changes to your assumptions instead of wasting time trying to find which formulas it applies to and in which spreadsheet.
You may end up adding additional assumptions to the assumptions sheet. That’s ok. While you don’t want to make this model overly complex, you do want to enable yourself to change key variables quickly. Remember, when you are building the projection, you want it to reflect your best guess of where the business is headed and not just the rosiest possible scenario.
The point of implementing the Dynamic Cash Flow Projection in your company is to enable yourself to identify problems before they occur and taking steps to avoid those mistakes or lessen their impact. It will do your company no good to pretend a potential problem doesn’t exist simply because you can dream up some good looking numbers. In addition, it won’t help your credibility with external parties such as banks and investors if they find your projections are frequently too optimistic.
Documenting assumptions is a continuous work in process. Things will change all the time. Take certain assumptions away, while you will add others later. Expect to make frequent updates to this page.
Remember, this is a projection, not a budget.
You will be changing your assumptions to reflect current business realities as you progress through the fiscal year.
The assumptions page has inputs from all parts of the business. It may be necessary for the CFO/controller updating or creating the spreadsheet to go to various departments to get their input on various subjects:
As described above, it may be necessary to discuss future growth assumptions with a representative from different parts of the business. Look at the following questions you need to ask when documenting the assumptions.
Remember to enter in numbers into their own individual cells.