2. What is all this for?
• Avoiding problems
• Paying bills on time (including tax)
• Working out what investment you need to succeed
• (forecast with and without investment)
• Working out what this investment is worth to you
• Working out what you can afford to pay for that investment
• Dividends
• Interest
4. Forecast - simple
Element Year 1 Year 2 Year 3 Year 4 Year 5
Revenue 1,000 2,000 3,000 4,000 5,000
Cost of Sales 500 1,000 1,500 2,000 2,500
Gross Profit 500 1,000 1,500 2,000 2,500
Costs 450 650 750 850 950
EBITDA 50 350 750 1,150 1,550
Free cash (150) 0 550 1,500 2,850
Nice steady growth, opening one new branch a year, reinvesting cash to grow, clearly sustainable
5. In the forecast pack
1. Forecast
1. Profit and Loss
2. Balance Sheet
3. Cash Flow Statement
4. Equity capital table
5. Forecast enterprise (or project) value
2. Deviations from forecast
1. Historic management accounts
2. External financial and economic information for context
3. Narrative to tell the story
6. Why isn’t profit the same as cash?
• Operating activities and working capital
• Debtors
• Creditors
• Stock and WIP
• VAT, NI and PAYE
• Returns on investments, servicing of finance and equity dividends paid
• Taxation
• Capital expenditure and financial investment
• Fixed assets, and other acquisitions and disposals
• Management of liquid resources & Financing
7. How to forecast
Make your model work from EXTERNAL DRIVERS
• Know your sales funnel and sales drivers
• Link them to internal processes and activity
• Know your internal assumptions, cost and drivers
• Build up from real activities
P.S.
• You can also forecast individual products, investment in equipment …
8. What are others looking for
• Revenue, margins, reinvestment, cashflow
• Trends
• Growth rates
• Some key ratios
• Margins
• Liquidity ratios
• Returns on investments
• Ability to pay dividends
• Ability to pay interest on loans
• Resilience ratios
9. So, do we need a big spreadsheet?
Please, don’t.
• Use prebuilt forecasting tools
• Xero
• Sage
• Quickbooks
• Or pay someone else to do it for you
10. Walk before you run
As you get better at this, look at proper ‘grown up’ models
• Sensitivity analysis
• Scenario analysis
• @RISK
• Monte Carlo Simulations
• Production and stock modelling
• Timing and variances in timing