Budgets, Forecasts, and Cashflow

“A budget tells us what we can’t afford, but doesn’t keep us from

buying it!”

By the End of 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

Budgets Versus ForecastsBudgets Forecasts

Create: Annually Annually

Update: Quarterly Weekly / Monthly

Purpose: Tells you where you want to go

Tells you where you are at and where you will likely go given your current heading

Best Used: Goal setting, incentives

Managing day to day operations

Who: Collaborative company / department / team effort

Limited group to allow for faster turn around times

Importance in Decision Making Less More

Budget Versus Forecast

The “Budget”

The “Forecast”

Budgets Versus Forecasts

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

Update Frequency

CEO’s Role

What: How:Ensure timely and accurate accounting and reporting systems.

• Set meeting with finance team to review balance sheet, p&l 15 days after month close. Periodically ask to see reconciliations to 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 / key indicators to watch.

• Profit – sales, gross margin, EBITDA• Liquidity – debt / equity, quick ratio, working capital• Operations – 3 – 5 KPIs

Know how to read the key financial documents.

• Balance sheet – a snap shot in time• 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 cashUse financial information to forecast the future.

• See previous slides

“In entrepreneurial companies, CEOs generally achieve success for reasons other than finance. Failure to understand the numbers can kill your company.”

Why Do You Need 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)?

What Do I Need to Make? - 1Sales Budget Worksheet

Monthly Household PaymentsPrincipal 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 DebtMonthly 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$ Offi cer Salaries 600,000.00$

Extrapolated Net Income - Including Offi cers 1,000,000.00$ Extrapolated Profit Margin 33.3%

Increased Sales Required to Produce Necessary Profit 2,101,200.00$ Growth Required 70.0%

Exercise 1 – What Do I Need to Make?

• Take 10 minutes to complete exercise – ask BGW team members for help if you need to.

Annualized Cash Flow

Annualized Cash FlowIt’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.

Annualized Cash FlowInputs 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)

Annualized Cash Flow - Example

Sales Growth – 70% - Negatives are Use of CashINPUTSCash - End of Last Year 150,000.00$ Tangible Assets - Last Year 275,000.00$ Planned Owner Draws - This Year 1,008,000.00$

Cash ForecastBeginning Cash 150,000.00$

Plus Net Income 1,700,400.00$ Less Owner Salaries (600,000.00)$ Less Asset Growth (192,610.00)$ Less Debt Service (92,400.00)$ Less Owner Draws (1,008,000.00)$

Ending Cash (42,610.00)$

From previous exercise

PY Asset * Growth Rate 70%

D’oh!

Exercise 2 – Annualized Cash Flow

• Take 10 minutes to complete exercise – ask BGW team members for help if you need to.

My Retirement Needs

• Inputs (Conservative Method – Net of Inflation)– Income Requirements (previous exercise)– Current Retirement Savings– Desired Legacy Amounts– Planned Retirement

My Retirement Needs4% - Net of Inflation

Annualized Income 402,000.00$ Income in Retirement 261,300.00$ 65% of AnnualizedRetire In 15 YearsAt Age 63EOL 95Retirement Years 32

My Income Needs 8,361,600.00$

Existing Retirement 400,000.00$ Investments + PropertyDouble In 18 Years 72 / 4%Future Value 733,333.33$ Existing + Growth

Current Contributions 35,000.00$ AnnuallyAnnualized 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

Exercise 3 – Retirement Needs

• Take 10 minutes to complete exercise – ask BGW team members for help if you need to.

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.

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).

Periodic Cash Flow

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 Uses

Use this number as the beginning point for the next week.

Example – Short Term – Each Week

Periodic Cash Flow

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.

Example – Long Term – Each Week

Tools / Next Steps

• Diagnostic Checklist• BGW Dashboard• Steroid Dashboard• Sustainable Growth Rate• Trailing 12 Months• Daily Cash Report• Z-Score• Executive Summary