Tag Archives | projections

Why Do Most Financial Projections Fail?

Do you know the number one reason most financial projections fail? It is because sales are over estimated!

This time of year we are busy working with clients preparing projections for the next year. What we find is it is very difficult for clients to do an accurate financial statement projection if they can’t project sales. Working with companies to project the top line of the financial projections is the hardest part. Once you have the top line the rest of the projections fall into place based on historical numbers.

So how do you project sales? We generally start off with last year’s sales numbers. We ask ourselves do we think they are going to increase or decrease? If so, then by how much? We determine by product line how much sales we need to be profitable. We look at recent sales trends and review them with the sales team. Finally, we prepare a backlog schedule with identified sales on a monthly basis. The greater the backlog identified, the greater the accuracy!

When projecting sales it is important to be reasonable. You should strive to “under promise and over deliver”. Often the management teams strives to set the bar high for goal setting purposes. You don’t want to shoot yourself in the foot with your banker if you miss you projections by a wide margin! It is better to come in a little above your projections rather than quite a ways below your number.

What has been your experience in projecting sales?





Creating a Flash Report

The finance function of an organization can contribute significantly to a company’s operating success. The key is how the financial leadership communicates with sales and operating staff.

A proven tool to enable this communication is the flash report, or dashboard.

The flash report details the organization’s liquidity, productivity, and profitability. It is meant to be a current summary of the company’s performance as a whole, as well as how the efforts of the company’s individual departments tie to productivity and profits.

The flash report differs significantly from the standard monthly financial statements. It’s purpose is to show a company’s leadership where they are, and where they are headed, as opposed to where they have been. It highlights strengths, weaknesses, as well as trends in each.

Does your organization use a flash report? If not, why not?

Creating a flash report has never been easier.

Now’s the time for your company to look forward. Set up a flash report today!


The 13 Week Cash Flow Report

13 Week Cash Flow Report: Definition

The 13-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. This tool is especially useful in a situation where active cash management is required. The 13 Week Cash Flow Model is used best as a “big picture” tool to see how much cash is required on a forward rolling basis. 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.

This tool is also helpful when used in conjunction with the daily cash report. It is helpful to 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.

13 Week Cash Flow Report: Meaning

For a 13 week cash flow report, meaning the report used to project cash flow expectations into the coming weeks, a strong understanding creates the foundation to make valuable models. There are several key areas of information that you will need to obtain: 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.

The 13-Week Cash Flow Report should be used in the active cash management of the company. The tool should be updated and reviewed on a weekly basis by the CFO/Controller.

The thirteen week cash flow model should be prepared and updated by the CFO/controller. The CFO/controller should be the one to setup and prepare the template. Information to populate the template will most likely reside with the persons in Accounting and HR.

Maintenance and updating should be done on a weekly basis.

More at WikiCFO.com


Capital Budgeting Methods

“Most small to medium sized companies have no idea how to approach capital investments. They treat it as if it were an operating budget decision rather than a long-term, strategic decision that will impact their cash flow, efficiency of their daily operations, income statement, and taxable income for years to come. They need your help understanding the importance of and then making the right capital budgeting decisions.

Capital budgeting decisions relate to decisions on whether or not a client should invest in a long-term project, capital facilities and/or capital equipment/machinery. Capital budget decisions have a major effect on a firm’s operations for years to come, and the smaller a firm is, the greater the potential impact, since the investment being made could represent a substantial percent of the firm’s assets….”

More at WikiCFO.com


Durability Bias in Business

Durability bias is the tendency of people to project recent trends or occurrences into the future. If it happened in the past then it must happen in the future. The term is often used in behavioral science and forecasting.

How does durability bias apply to business? Often business professionals project short term trends into the future. They believe that the recent good times will last forever, conversely, they also believe the bad times will go on indefinitely!

The stock market is a good example of durability bias in action. When the market is booming you start seeing books titled, “Dow 20,000”, hitting the bookstores. People started buying stocks and an euphoria took over. Last fall the opposite happened. Stocks started dropping and soon we were in a financial crisis.

For the past six months the stock market has gone from maximum pessimism to the beginnings of optimism. Stocks have risen 21% in the past six months and over 39% since the low on March 9th. Right now the durability bias is on the downside, however, as these gains continue the bias will shift to the upside.

So what is your durability bias telling you? Are you running your business as if the tough times are going on forever or are you investing in your people and infrastructure to take advantage of the recovery?


Forecasting and Your Business

Do you manage your business looking backward or forward? Are you preoccupied with looking at how last month compared with the budget instead of where your business is headed? While examining actual performance against the budget can be a very useful approach to identifying areas of improvement in your organization, it can also take your focus away from planning for your future business needs.

It is important to develop and maintain a running forecast model of your business, one that incorporates trends (in sales, COGS, and overhead) as well as other information (addition of a significant new customer, loss of a substantial current customer, anticipated large changes in raw material prices and/or other expenses, or a new building lease, for example). This will help you estimate your upcoming needs for cash and give you the time to adequately prepare.

You need to have an income statement model which projects sales based on expected items or services sold and the prices received, as well as expected gross and net margins. This should tie to a projected balance sheet and statement of cash flows. You should also consider a running working capital forecast as well as a capital expenditure forecast.

Being able to anticipate future capital needs months in advance can go a long way to improving your company’s performance by allowing you the time to seek out the best terms (in cost of capital as well as other terms). Such a forecast will help you establish credibility with prospective lenders and investors as well as provide an easy means of communication with them.


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