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SWAG Technique

SWAG Technique

During the Vietnam War era, the military coined the term SWAG – Scientific Wild-Ass Guess.

CBS released “The Uncounted Enemy: a Vietnam Deception” in 1982 which highlighted the US Army and their “manipulation” of facts and figures during the Vietnam conflict. CBS claimed that  General William Westmoreland and other military officers were conspiring to misrepresent information, resulting in America being convinced that we were losing the war.

After the news program was released, General Westmoreland filed a$120 million libel suit.

SWAG: Scientific Wild-Ass Guess

In the heat of battle, the military did not have access to facts, figures, graphs, or wifi connection to research what the actual answers were to questions posed by journalists – i.e. the tactics that the Vietnamese were using, the strength of the Vietnamese, how many Americans were down, or when the next shipment of goods was coming in. Because of this lack of hard information, the military gave estimates based upon what they thought was correct at the time.

CBS did not realize that the information they were given was based upon assumptions and reported it to the American public as fact.  Once they realized their mistake, they apologized to General Westmoreland. The libel suit was eventually dropped in 1985.

The lesson… Sometimes, you gotta use SWAG.  But, you better make sure your audience knows it’s SWAG.

So what does the US Army’s term, SWAG, have to do with being a financial leader?

Often, in business, we’re in the tough spot of needing to make a decision quickly without enough information.

“Tom, I need a flux analysis. Can you have it on my desk by the end of the day?”

“Uh…”

Sound familiar?

SWAG vs WAG

So, what’s the difference between SWAG vs WAG? WAG = Wild-Ass Guess. It has absolutely no thought behind it and can cause a multitude of issues down the line because it was simply something you pulled out of thin air.

“Sure, I can have it to you by the end of the day.”

What’s wrong with that statement?

  1. You didn’t think about the time required for the analysis
  2. You’ve already promised to have X, Y, and Z by to Bob by the end of the day as well

Avoid WAG at all costs!

As seen in the the libel suit, even SWAG can have negative consequences if not communicated that that’s what it is (a guesstimate). SWAG might sound like this:

“It’s possible that I can get you the Flux Analysis by the end of business day tomorrow. However, the likelihood is that it will take 3 days to complete, but no more than 5.”

There is never enough information available to make the right decision, but you can make a smart decision using the information you do have.

Offer a Range

People tend to understand that when a range is given, it is a best guess. There are so many factors that play into any estimate, including impressions, experience, and rough calculations among other things. A SWAG is not the best estimate, but rather the estimate with the most information at a given point in time.

For example, Houston, TX is known for its traffic. If your friend wanted to know how long it would take for you to go to the other side of town, what would your response be? (Notice the differences below.)

WAG: “It’ll take me 30 minutes because that’s a good estimate.”

SWAG: “Since it’s 4:00 and I’ve had experience with Houston traffic at rush hour, it will take me anywhere from 30-50 minutes for me to get to the other side of town. If there are any accidents on the freeway, then it may push me to over 60 minutes.”

Estimate: “According to my GPS, it will take me 41 minutes to get to the other side of town.”

By offering a range, you now have some wiggle room if things don’t go as planned. Figure out the low and high end and provide an explanation with your answer. Explain some assumptions as they could affect the different points in the range.

One area where SWAG is particularly important is with projections.  You will never have perfect information to make spot-on forecasts. Knowing your basic unit economics is one tool that you can use in conjunction with the SWAG technique.

(Do you know your economics in order to make a SWAG? Download the free worksheet here.)

Check Assumptions

Update your SWAG as soon as you get more information that would result in a more clear picture. If you are producing projections for the next 5 years, what assumptions are you making as you create the forecast?

SWAG TechniqueEconomy, customer demand, and international trade are three of the more volatile factors in a projection. Is the economy going to boom or is it going to continue to decline for 6 more months? Look at how that’s going to affect your customers. Keep an eye out for factors that are impacting your customer in a way that might have an effect on your company. Read the news. Embargoes, strikes, and natural disasters could have a massive impact on what your assumptions.

Check them and recheck them as more information comes in. Remember, it is okay to adjust your previous range and assumptions.

Manage Expectations

Think of ways you can validate your assumptions and form a more firm estimate. Not only will this give you more information to impact your company’s financials, but it will allow you to think through all the possibilities in order to give a range under certain assumptions.

Utilizing the SWAG technique has its risks. General Westmoreland didn’t expect that giving a statement to a reporter would eventually result in a libel suit.  But some information is almost always better than no information.  SWAG can be a powerful tool if expectations are managed.

SWAG Technique

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SWAG Technique

Sources:

No Uncertain Terms by William Safire

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What You Should Know About Preparing a Forecast

Ready or not, it’s time to start the process of preparing your 2016 forecast.  While it may seem a bit premature, a walk down the aisle of your favorite home improvement store to check out their (already) prominently featured holiday displays tells the story.  Some of this can definitely be attributed to overzealousness to capture the consumer’s holiday dollar. But it drives home the point that 2015 is winding down. It’s time to start thinking about 2016.

3 Things You Should Know About Preparing a Forecast

So what should you keep in mind when preparing your 2016 forecast?  In the video below, Jim talks about 3 things you should know about preparing a forecast.

According to the video, the following 3 things are important when it comes to preparing a forecast:

Be Reasonable

If you choose to include pie-in-the-sky numbers in your forecast, then you’ll lose credibility. You won’t be able to excite your team about helping you achieve unrealistic goals.  If you paint too bleak a picture, you’ll lose motivation and won’t be able to effectively drive action toward goals.

Involve as Many People as Possible

While it’s true that the responsibility of preparing the forecast usually falls squarely on the shoulders of the CFO or Controller, it’s necessary for all departments to get involved in the process to create the most realistic plan possible.  Not only will you end up with better numbers, but sharing the ownership of achieving company goals spreads the burden to everyone.  People are more willing to be held accountable to numbers they understand and had a hand in producing.

Make it Dynamic

Now that you have the forecast prepared, you can put it in a drawer and forget about it, right?  Wrong.  In order to make all the time and effort you put into preparing the forecast worthwhile, it needs to be a living document.  Static forecasts are only realistic for a couple of months, at best.  Dropping in actuals and adjusting future estimates based upon conditions on the ground create a much better tool for running a business than one that ceased to be relevant months ago.

Check out our article Cash Flow Projections for more info on how to prepare a forecast.

If you need help creating an accurate forecast, then download our free Goldilocks Sales Method whitepaper to project accurately.

Preparing a Forecast

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Preparing a Forecast

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5 Ways to Prepare for Seasonality

four seasonsSeasonality can be brutal.  If your business is like ours, summertime is pretty slow.  The phones don’t ring, employees and clients are on vacation, nobody is available for appointments and not much happens in general.  Even if summertime is busy in your industry, chances are that there are other times during the year that business slows down noticeably.

5 Ways to Prepare for Seasonality

While a slower pace may sound like a dream if you’re coming off of a busy season, a slowdown can cause issues if not anticipated and planned for.  Employees out of the office can impact productivityCustomers unavailable for appointments and silent phones can mean fewer sales.   All of these factors can have a negative impact on profitability and cash flow.  Here are some steps you can take to prepare for these slow times and minimize their impact.

Consider Temporary Staffing

Some businesses do 75% of their work during 25% of the year.  This definitely makes resource management challenging.  Even if your company isn’t in an extreme situation such as this, utilizing temporary staffing can help smooth out seasonal bumps in productivity.  With staffing firms cropping up in more and more industries, the availability of temporary workers is on the rise.  While the short-term cost of these employees may be more than an in-house worker, the flexibility they provide is attractive to companies that aren’t able to carry the burden of excess staff during slow times.

Build Up Your Backlog

What happens to your sales pipeline shortly before quarterly sales bonuses get paid out?  Chances are, you see a sudden spike in closed sales.  What this seems to demonstrate is that our salespeople have some measure of control over the efforts to close their sales.  With this in mind, there are a couple of approaches you can take to ensure that there are enough sales to get you through the slow times.

First, try sitting down with your sales force with a calendar and map out your seasonality.  Awareness of the seasonal dips may be enough incentive to encourage them to build up their backlog prior to these dips.   Assuming that your sales staff will only be motivated by sales commissions, an alternative solution would be to set your bonus payout dates immediately prior to your slow times.

Keep an Eye on Your Inventory Levels

If your vendors experience the same seasonality as you do, they may not have the manpower to keep up with customer orders in a timely manner during their slow periods.  Hitting them with a last-minute rush order may not work out well and going to another vendor will likely yield the same results.  To avoid running out of key materials, make sure that items needed for planned production are ordered well enough in advance to allow for any seasonal slowdowns.

Get a Handle on Cash

During slow times, a business is likely to consume more resources than it produces.  To ensure that your business has enough liquidity to keep things running smoothly during seasonal dips, it’s important to manage cash carefully.  Here are a couple of cash management tips below. For more ideas, check out our free checklist, “25 Ways to Improve Cash Flow.”

Collect Receivables

If you and your customers are on the same sales cycle, chances are that they’ll be short-staffed at the same times you are.  Payment of payables won’t be high on the list when departments are running on a skeleton crew, so make sure that you’re current on collections before things slow down.

Prepare a Cash Flow Forecast

One of the most important steps you can take in managing cash is to prepare a cash flow forecast.  The forecast will tell you when cash will be tight. Then you can work with your banker to ensure that your company has the liquidity it needs.  On that note…

Keep Your Banker in the Loop

Chances are, you are not your banker’s only client.  They likely have many clients across several industries, so they don’t always know when business is slow for your company.  Rather than waiting for your banker to ask you why this quarter’s results don’t look as good as last quarter’s, reach out to them. Do this especially before business slows down to let them know what your projections look like.  While it may seem counter-intuitive to give your banker potentially bad news, your candor will give them confidence in you and make it more likely that they will work with you if you need it.  Besides, you’ve projected that things are going to improve, right?

Regardless of when your slow times fall, taking steps to prepare for seasonal dips can help minimize their impact on cash flow and profitability.  Now is the time to start to identify and address seasonal fluctuations.  After all, the holidays are just around the corner…

prepare for seasonality

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Pro-Forma Financial Statements

See Also:
Proforma Earnings
Balance Sheet
Cash Flow Statement
Free Cash Flow
Variance Analysis

Pro-Forma Financial Statements Definition

In accounting, pro-forma financial statements are hypothetical financial reports that show either forecasts of or alterations to actual financial statements. Pro-forma financial statements show the financial statements of a company in a hypothetical scenario that has not yet been realized or that represents a modification of the actual financial statements. Furthermore, pro-forma reporting is useful for showing what a proposed company would look like or for removing unusual or nonrecurring items from a financial report.

What is Pro-Forma?

What is pro-forma? In Latin, pro forma means for the sake of form. Additionally, pro-forma projections or pro forma reports are simply modified versions of actual financial statements that are made for the sake of showing what these documents would look like under certain hypothetical scenarios.

For example, if an entrepreneur has an idea for a company, and he wants to pitch the idea to potential investors, then he may want to draw up pro forma financial statements to show the potential investors what the company would look like once it’s up and running. In this case, the entrepreneur would create pro forma projections of the various financial statements and present them to the investors.

Or if a company incurs a major one-time cost that is not related to regular business operations, the company may want to show investors what the financial statements would look like without the affects of that major one-time cost. In this case, the company would include pro forma financial statements in its annual report.

Pro-Forma Financial Statement Example

Below is a very simple example of a pro forma income statement. Assume the company underwent a massive corporate restructuring that was very expensive. According to accounting regulations, the company has to include that restructuring charge on its income statement. Because the restructuring charge was so big, it wiped out the company’s income and the company showed a loss for that period.

However, this restructuring charge is a one-time extraordinary item, and is not part of the company’s normal business operations. So, in order to show investors and other interested parties what the company’s income statement would have looked like without that one-time restructuring charge, the company included a proforma version of the income statement in its annual report.

You will see the difference between the original income statement and the pro-forma income statement below. Then notice that removing the one-time restructuring charge turns the company’s loss into a profit. As you can see, the company may want investors and other financial statement readers to see the pro forma financial statement to understand why the company’s regular financial statement showed that the company took a loss during that period.

Regular Income Statement
Revenue                              $500,000
Cost of Goods Sold                    250,000
Restructuring Charge                  300,000
Interest Income                        50,000
Interest Expense                       25,000

Net Income (Loss)                    ($25,000)

Pro Forma Income Statement
Revenue                              $500,000
Cost of Goods Sold                    250,000
Interest Income                        50,000
Interest Expense                       25,000
Net Income (Loss)                    $275,000

Want to check if your unit economics are sound?  Download your free guide here.

Pro-Forma Financial Statements

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Pro-Forma Financial Statements

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Economic Indicators

See Also:
Consumer Price Index
Stagflation
Balance of Payments
What are the Twin Deficits?
The Feds Beige Book

Economic Indicators Definition

Economic indicators are macroeconomic data that describe the condition of an economy. So, use them to determine whether an economy is prosperous and expanding or troubled and contracting.

For example, a high unemployment rate and a contracting GDP are considered signs of a troubled economy, such as a recession. In comparison, high levels of consumer confidence and rising stock market indexes are signs of a prospering economy.

Economists, investors, and policy makers use economic indicators to discern the health of the economy. Then they try to forecast changes in the business cycle.

Types of Economic Indicators

There are three types of economic indicators: leading indicators, lagging indicators, and coincident indicators.

Leading Indicators

Leading indicators considered predictors of economic trends. Analysts use these data to try to forecast changes in the business cycle. Examples of leading indicators include the following:

Coincident Indicators

Coincident indicators fluctuate simultaneously with the business cycle and reflect the current condition of the economy. Examples of coincident indicators include the following:

Lagging Indicators

Lagging indicators appear after the completion of economic trends and changes in the business cycle. Use them to analyze the economy in retrospect or to confirm other economic data. Examples of lagging indicators include the following:

Economic Indicator Sources

The most reliable and closely-watched economic indicators are published by government or non-profit organizations, such as the Conference Board, the Federal Reserve System, the Bureau of Labor Statistics, and other organizations. These organizations issue economic data periodically.

If you want to track your economic indicators, then download your KPI Discovery Cheatsheet today.

economic indicators

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Economic Data Online

Economic indicator data can be found at the following websites:

Conference Board Index: conference-board.org/economics

Federal Reserve System: federalreserve.gov

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Budgeting vs Forecasting

See Also:
Forecasting
Comparison Analysis

Budgeting vs Forecasting

The budgeting vs forecasting process has been a good discussion between financial professionals. The argument of whether they serve the same purpose or if one is better than the other has lead to some interesting debates. The term has been used several times interchangeably. However let’s explore why this is incorrect by identifying the budget vs forecast difference. When it comes to planning and grading the company’s financial health, they are both tools that can be used by companies. Their managers to do just that. However, the proper way to use them both is in concert with one another and not particularly as a substitute for one another.

Budgeting

What is budgeting, definition-wise? It is the process used to compose a plan or create an estimate during a prior year or at the beginning of a current year to help manage and control the income and expenditures of the company for that year. Some have even defined a budget to be a road map or financial guide that recognizes the income of the company, while detailing the expense allowances with a not-to-exceed expectation for that given year. Now let’s examine the definition of forecasting to compare the differences between the budgeting and forecasting process.

Forecasting

Forecasting is another financial tool commonly used to help determine the financial status of a company. The meaning of financial forecasting is quite different from that of budgeting. Where the budget is used as a financial planner, the forecast uses this plan and compares it to the current financial direction of the company. They do this to predict where the company will end up by the end of that year. In other words, use the forecast to see if the company will meet or exceed the expectations from the budget allowing the managers and controllers to set future goals. They also use forecasts to identify trends that are used to grade the company’s financial position. They both seem to be very resourceful tools. Instead of comparing financial forecast vs budget, the more important discussion should be which tool is more effective.

Which is More Important?

So which tool in the financial forecast versus budget debate is more important? Let’s answer a few questions first. Can a business run productively without a budget, a plan of action for each year? Some do. However, to run a successful business without monitoring your financial status throughout the year to predict its financial grade by the end of the year can be very difficult. Budgeting can be a good tool to use to help plan the future of the business; however a greater predictor of future behavior is past behavior. The purpose of investing time to create a financial forecast is to predict the future based upon certain assumptions. In addition, use the past to defend those assumptions. Both tools are necessary for a business to be successful. In short, a budget sets the company’s goals while a forecast defines its expectations.

If you need help creating an accurate forecast, then download our free Goldilocks Sales Method whitepaper to project accurately.

budgeting vs forecasting

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Thirteen Week Cash Flow Report

Thirteen Week Cash Flow Report Definition

The Thirteen Week Cash Flow Report, defined as a method to forecast the cash flow needs of a company, is commonly used in businesses with complicated cash cycles. When active cash management is required, this tool is especially useful. This model is used best as a “big picture” tool to see how much cash is required on a forward rolling basis. However, having a clear sense of your working capital needs and when you need it gives added impetus to collect cash and/or to generate revenue.

When used in conjunction with the daily cash report, this tool is also helpful. Think of the 13-Week Cash Flow report as giving you the strategic big picture needs, while the Daily Cash Flow Report provides a more tactical level measure of the firm’s cash position.

Thirteen Week Cash Flow Report: Meaning

The 13 week cash flow report is used to project cash flow expectations into the coming weeks. When you have a strong understanding of this report, it creates the foundation to make valuable models. There are several key areas of information that you will need to obtain, including beginning cash balances, estimated cash receipts, estimated payroll and taxes, estimated operating expenses, note/lease payments, payments on LOC-ML and payments on old A/P.

(Managing your cash flow is vital to a business’s health. If you haven’t been paying attention to your cash flow, access the free 25 Ways to Improve Cash Flow whitepaper to learn how to can stay cash flow positive in tight economies. Click here to access your free guide!)

Thirteen Week Cash Flow Report: Modeling

In a Thirteen Week Cash Flow Report, modeling the proper information is essential to creating meaningful statements. First, collect information to assure that numbers, concepts, and processes are added to the report with regard to the regular business operations. Keep in mind that an accounting firm will have a completely different thirteen week cash flow forecast than an e-commerce store.

Second, financial information must be input in the proper places in the report. Incorrect reporting leads to useless statements, so the maker must take great care to avoid mis-entry or confusion.

Lastly, monitor and update the report consistently. Without constant attention and changes, the report quickly becomes outdated and useless.

Accumulate Information for Thirteen Week Cash Flow Projection

Garbage in … is Garbage Out. The integrity of your forecast will depend on your ability to obtain solid information on forthcoming cash receipts, operating expenses, payroll and other cash disbursements such as notes and old A/P.

There are several key areas of information that you will need to obtain information, including the following:

  • Beginning cash balance
  • Estimated cash receipts
  • Note/lease payments
  • Estimated payroll and taxes
  • Payments on LOC-ML
  • Estimated operating expenses
  • Payments on Old A/P

Input Financial Information

After you have gathered information, key in the information into the spreadsheet. Make sure you are keying the information into the correct week. Depending on the number of disbursements or cash receipts of your company, you may want to consider separate tabs that list out all the associated receipts and disbursements for each week. You can then sum up all the disbursements or receipts and link them to the summary page.

(NOTE: Want the 25 Ways To Improve Cash Flow? It gives you tips that you can take to manage and improve your company’s cash flow in 24 hours!. Get it here!)

Monitor & Update

After you have input your estimated forecasts, you will want to monitor and review against actuals. As each week passes, you may want to consider dropping in the actuals into the spreadsheet. Actual cash receipts and cash disbursements can be tied to the Daily Cash Report.

Thirteen Week Cash Flow Report: Example

For example, Stanlee is the head bookkeeper for a retail boutique. Because the work environment is more relaxed and his efforts carry more effect on the business, Stanlee appreciates working with small vendors.

This week, the company owner decided to deepen her understanding of financial statements for business. So she asked Stanlee to create a Thirteen Week Cash Flow Report. Stanlee sits down to prepare these statements.

Stanlee begins by accumulating proper information. He starts by looking through quickbooks, bank statements, business credit card statements, and a few other forms. With these, Stanlee finally has the background he needs to create the report. He then moves forward data entry.

Stanlee begins inputting information for the 13 week cash flow analysis. He starts by looking at end of period cash balances in the bank, credit card payments due, and anything else that effects cash flow. After Stanlee enters this information fully, he checks his work to ensure completion.

Monitor the Statement

Next, Stanlee monitors the statement. Then after finishing, he takes some time to look at the report. At the end of the 13 week period, he discovers that the company cannot complete payment of all accounts payable. This worries Stanlee. So, he takes a few more moments to create a potential plan of action. He then resolves that if the store owner, a woman with impeccable credit, opens an additional business credit card she will be able to meet her cash needs. As a result of the increased sales volume due to opening of the spring season, the owner will be able to pay back the credit card balance before having to make a payment.

What could have been a major catastrophe is now a simple matter. In conclusion, the owner of the boutique thanks Stanlee, gives him a nice bonus, and decides to always have a Thirteen Week Cash Flow Report on hand. For more ways to improve your cash flow, download the free 25 Ways to Improve Cash Flow whitepaper.

thirteen week cash flow report

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thirteen week cash flow report

See Also:
Cash Flow Statement
Cash Flow After Tax
How to Develop a Daily Cash Report
How to Prepare a Flash Report
Cash Cycle

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