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Aldis Jakubovskis Ron Mueller Lynette Watson Missouri SBTDC ASBDC Annual Conference – San Diego 2011.

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Presentation on theme: "Aldis Jakubovskis Ron Mueller Lynette Watson Missouri SBTDC ASBDC Annual Conference – San Diego 2011."— Presentation transcript:

1 Aldis Jakubovskis Ron Mueller Lynette Watson Missouri SBTDC ASBDC Annual Conference – San Diego 2011

2 Agenda Financial projections spreadsheet tool; Developing and validating financial assumptions; How the clients can get the most benefit from the cash flow projection process

3 St. Louis SBTDC Cash Flow Projections Tool Location: Utilizing the functionality and flexibility of Excel; Advantages: Maximum adaptability to different business cases; Convenience of minimal data entry, focus on entering the assumptions vs. the dollar figures; Integrated worksheet that serves as a “hub” for user- created sheets (both “linked in” and “linked out”)

4 Maximum Adaptability Every business case is different (start-up vs. existing businesses, product based businesses vs. service based businesses, etc.); A good cash flow projections spreadsheet must have both (possibly contradictory requirements): Automate as much work as possible; Accommodate as much business-specific details as possible

5 Focus on Entering the Assumptions Whenever possible, the data is entered as assumptions rather than dollar figures; Examples: Loan amortization: interest rate, term, start date, original balance; Depreciation: useful life, current age, original cost; Operating capital; days A/R, days A/P, days inventory; Percentages: COGS, payroll tax Easier ‘what-if’ analysis

6 Integration and Linking Income statement, balance sheet and cash flow statement are fully integrated, guaranteeing mathematical and accounting correctness; Main ‘worksheet’ as a hub: User-created sheets can be “linked in”, (e.g., a detailed industry-specific revenue model); User-created sheets can be ‘linked out” (e.g., sheets formatted for print, sheets for break-even and ratio analysis, sheets for graphs) Worksheet protected and formula cells locked

7 Other Features Automatically set the start month; For convenience, the data entry rows in the income statement by default are set to allow the population of the whole row by entering a value in the first cell (this can be changed by the user as needed); Spreadsheet is originally set for 3 years on monthly basis; can be extended to any number of years by simply “select-drag-drop”

8 Developing Financial Assumptions Project cost and uses of funds: Start-up; Expansion; Business acquisition Revenue model; Monthly operating expenses

9 Sources of Information Previous performance results; Comparable businesses; Field research; Trade associations; Publications: RMA, Etc…

10 Validation of Assumptions Look for multiple sources to re-enforce and validate from different perspectives; Indicate the sources of information; Each industry has its own specific rules of thumb

11 Project Cost Develop itemized list: Purchase of long-term assets; One-time expenses (for start-ups); Working capital; Other? Identify sources of funds

12 Revenue Model One size does not fit all businesses – but… some industries have “cookie cutter” models: Restaurants; Professional services; Construction No need to reinvent the wheel

13 Geographic Differences Location impacts the revenues: States; Regions; Metro areas; Rural areas

14 Industry Differences Use industry standard information when available; Not all businesses within a sector (e.g., retail) are the same: Example: fashion boutique Service – what adds value?

15 Seasonal Differences Holidays More than just the Christmas season Tourist season; The benefit plan season; Know the seasonal factors: Dramatically impacts the revenue projections and cash needs

16 Revenue Model Must be Consistent With the Marketing Plan Demographic target and purchase frequency; Product/service positioning and pricing; Luxury or necessity; Competitive factors

17 Considerations for Collecting Payments Cash (% of revenues); Invoice with terms (% of revenues); Third party payers: Insurance companies; Federal/state agencies Discounts; Special offers and plans

18 Revenue Assumptions: Additional Considerations Business may have multiple profit centers (product/service categories or NAICS codes) Profit margins rarely the same for each center Business may have multiple locations with different financial dynamics E.g., one location may use old equipment or have less profitable customer base Use industry specific terms E.g., “Billings” not “Sales” for a medical practice

19 Growth Effects The rate of growth must take into account: Material requirements; Human resource requirements; Facility requirements; Capital requirements; Replacement of existing assets year two/three Start-up vs. existing – the ramp-up time

20 Monthly Operating Expenses Some expenses are more certain than the others; Allocate expenses evenly between months when there is no basis to do otherwise (for example, hard to assign repairs and maintenance to specific months); Provide detailed explanations for the major expense categories;

21 Don’t Overlook Certain Expenses Bank services charges Fees for debit/credit cards Contract services: Security; Snow and waste removal; Continuing education; Workman’s compensation insurance

22 Break-even Analysis and Debt Coverage Ratio Emphasize the benefits of understanding the break- even concept; Aim for slightly above break-even – can’t go wrong… Vast majority of industries have the profit before taxes in the 0-10% range Make sure the projections “cash flow” – safe DCR 1.3- 1.5

23 Some Numbers Are More Important Than the Others Look at your monthly sales, for example, if monthly sales are $20,000, don’t worry about a $100 expense – it is only 0.5%; Pay attention to major expense categories first – look at the BIG PICTURE, don’t get bogged down with minutia

24 Projections Have to be “Elegant” Have to be easy to understand; Use level estimates, if there is no reasonable basis for differences between months (when appropriate); Round estimated numbers to 1,000s, 100s, etc. – zeros indicate that they are estimates, and the number of zeros indicate the assumed accuracy of these estimates

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