Budgets, forecasts, and cashflow presentation

Budgets, forecasts, and cashflow presentation

• 1.
  Budgets, Forecasts, andCashflow “A budget tells us what we can’t afford, but doesn’t keep us from buying it!”
• 2.
  By the Endof This Meeting: • Understand the difference between budgets and forecasts • Understand your role (CEO) in the financial management process • Understand: – Your business income needs – Forecasting annualized cash flow – Your retirement needs – Forecasting periodic cash flow • Know your next steps
• 3.
  Budgets Versus Forecasts Budgets Forecasts Create: Annually Annually Update: Quarterly Weekly / Monthly Purpose: Tells you where you Tells you where you are at want to go and where you will likely go given your current heading Best Used: Goal setting, Managing day to day incentives operations Who: Collaborative Limited group to allow for company / faster turn around times department / team effort Importance in Decision Making Less More
• 4.
  Budget Versus Forecast The“Budget” The “Forecast”
• 5.
  Budgets Versus Forecasts Update Frequency Budgets Forecasts Sales: Quarterly Weekly / Monthly Raw Materials / COGS: Quarterly Weekly / Monthly Labor: Quarterly Monthly Fixed Expenses (e.g. Rent): Annually Semi-Annually Variable – Predictable Cost: Quarterly Monthly / Quarterly Variable – Unpredictable Cost: Quarterly Weekly / Monthly Asset Purchases / Disposals: Quarterly Quarterly Debt Service: Quarterly Quarterly Equity Transactions: Quarterly Quarterly
• 6.
  CEO’s Role “In entrepreneurial companies, CEOs generally achieve success for reasons other than finance. Failure to understand the numbers can kill your company.” What: How: Ensure timely and accurate • Set meeting with finance team to review balance sheet, p&l 15 accounting and reporting days after month close. Periodically ask to see reconciliations to systems. each balance sheet account (e.g. how did this number get here?) • Require weekly cash reports produced by Monday 9:00 am. Identify the right numbers / • Profit – sales, gross margin, EBITDA key indicators to watch. • Liquidity – debt / equity, quick ratio, working capital • Operations – 3 – 5 KPIs Know how to read the key • Balance sheet – a snap shot in time financial documents. • P&L – what happened over a period of time • Cash flow – what happened to cash between two periods in time Manage cash flow. • Don’t confuse sales and profit with cash Use financial information to • See previous slides forecast the future.
• 7.
  Why Do YouNeed To Make More? 1. I want to provide a better lifestyle for my family today? (e.g. more vacations, college, new car) 2. I want to retire comfortably? 3. I want to leave something for my kids / legacy? 4. I just want to keep score (Donald Trump)?
• 8.
  What Do INeed to Make? - 1 Sales Budget Worksheet Monthly Household Payments Principal Home - Total Payment $ 2,200.00 Auto Loans $ 1,200.00 Credit Card Payments $ 1,200.00 Child College / Education / Retirement $ 5,150.00 Other Personal Debt $ 300.00 Total Monthly Payments $ 10,050.00 Annualized $ 120,600.00 Gross Income Requirements - Personal $ 402,000.00 Annualized / .3 Operating Company Ownership % 25% Company Income Required - Pre Debt, No Owner Salary $ 1,608,000.00 Company Debt Monthly Principle Payments - Long Term Debt $ 6,500.00 Monthly Lines of Credit Payments $ 1,200.00 Total Monthly Payments $ 7,700.00 Annualized $ 92,400.00 Total Income Requirement $ 1,700,400.00 Total Sales - Prior Year $ 3,000,000.00 Net Income - Prior Year $ 400,000.00 Officer Salaries $ 600,000.00 Extrapolated Net Income - Including Officers $ 1,000,000.00 Extrapolated Profit Margin 33.3% Increased Sales Required to Produce Necessary Profit $ 2,101,200.00 Growth Required 70.0%
• 9.
  Exercise 1 –What Do I Need to Make? • Take 10 minutes to complete exercise – ask BGW team members for help if you need to.
• 10.
  Annualized Cash Flow
• 11.
  Annualized Cash Flow It’s difficult to change operating results over a long time period – therefore forecasting cash flow can be simple. Study of operating performance of over 10,000 public companies over a period of 10 years demonstrates convergence to a “standard.” In addition, the relationship to operating performance and asset growth stayed constant.
• 12.
  Annualized Cash Flow Inputs Where / How Net Income % • Use historic averages from profit and loss statements. Sales Growth % • Use sales budgets adjusted for historic performance. Opening Balance Sheet • Cash • Operating Assets (e.g. A/R, Fixed Assets) • Debt Service Requirements • Planned Equity Transactions (draws)
• 13.
  Annualized Cash Flow- Example Sales Growth – 70% - Negatives are Use of Cash INPUTS Cash - End of Last Year $ 150,000.00 Tangible Assets - Last Year $ 275,000.00 Planned Owner Draws - This Year $ 1,008,000.00 Cash Forecast From previous exercise Beginning Cash $ 150,000.00 Plus Net Income $ 1,700,400.00 Less Owner Salaries $ (600,000.00) Less Asset Growth $ (192,610.00) PY Asset * Growth Rate 70% Less Debt Service $ (92,400.00) Less Owner Draws $ (1,008,000.00) Ending Cash $ (42,610.00) D’oh!
• 14.
  Exercise 2 –Annualized Cash Flow • Take 10 minutes to complete exercise – ask BGW team members for help if you need to.
• 15.
  My Retirement Needs •Inputs (Conservative Method – Net of Inflation) – Income Requirements (previous exercise) – Current Retirement Savings – Desired Legacy Amounts – Planned Retirement
• 16.
  My Retirement Needs 4%- Net of Inflation Annualized Income $ 402,000.00 Income in Retirement $ 261,300.00 65% of Annualized Retire In 15 Years At Age 63 EOL 95 Retirement Years 32 My Income Needs $ 8,361,600.00 Existing Retirement $ 400,000.00 Investments + Property Double In 18 Years 72 / 4% Future Value $ 733,333.33 Existing + Growth Current Contributions $ 35,000.00 Annually Annualized $ 525,000.00 Future Value $ 787,500.00 Total Planned $ 1,520,833.33 GAP $ (6,840,766.67) Gap to Close w/Biz Value
• 17.
  Exercise 3 –Retirement Needs • Take 10 minutes to complete exercise – ask BGW team members for help if you need to.
• 18.
  Business Value –Close the Gap • General Rule of Thumb: – COGS w/Physical Materials - .4 - .7 X Sales (lower multiple of net is lower, higher multiple if net is higher) – Services - .7 - 1 (lower multiple of short term contracts, higher multiple of long term contracts) – Technology – 1 – 2 X Sales • Take Today’s Value Versus GAP value to understand required growth • EX: $5m value today, gap $2m. Gap / Multiple = required sales growth.
• 19.
  Periodic Cash Flow •Annualized data tells you the annual picture, but doesn’t tell you “when” or account for seasonality. • Start small, then increase duration (e.g. a payroll cycle to 90 days).
• 20.
  Periodic Cash Flow Example – Short Term – Each Week Week 1 Week 2 Week 3 Week 4 Sources: Beg Cash Cash from the end of the prior week. Collections Use A/R turns or actual A/R to project. Uses: Payroll / Labor Use historic / planned data. A/P Use actual A/P. Rent Use actual – if not in A/P. Debt Payments Use actual – if not in A/P. Equity (Draws) Use historic / planned data. Sources Less Use this number as the beginning point Uses for the next week.
• 21.
  Periodic Cash Flow Example – Long Term – Each Week Month 1 Month 2 Month 3 Sources: Beg Cash Cash from the end of the prior month. Collections Use A/R turns or actual A/R to project month 1 and 2. Use Month 1 (or prior month) sales to predict Month 3. Uses: Payroll / Labor Use historic / planned data. A/P Use actual A/P for Month 1, 2. Use historic operating margin for month 3. Rent Use actual – if not in A/P for month 1. Use historic / planned for month 2, 3. Debt Payments Use actual – if not in A/P for month 1. Use historic /planned for month 2, 3. Equity (Draws) Use historic / planned data. Sources Less Uses Use this number as the beginning point for the next week.
• 22.
  Tools / NextSteps • Diagnostic Checklist • BGW Dashboard • Steroid Dashboard • Sustainable Growth Rate • Trailing 12 Months • Daily Cash Report • Z-Score • Executive Summary