Cash Flow For Dummies by John A. Tracy

Author:John A. Tracy
Language: eng
Format: epub
Publisher: Wiley
Published: 2011-09-30T00:00:00+00:00

Figure 9-1: A quarterly forecast for ACME Distribution, Inc.

Making the Most of Your Projections

The previous sections of this chapter focus on actually producing a business plan and corresponding projection as opposed to utilizing the projections as an active management tool. Just like any other piece of financial information generated from the company, the real key lies in management being able to understand the information and then act on it. Producing a plan and projection that are never fully utilized is simply a waste of everyone’s time. But with “Projection 101” under your belt, you can now turn your attention to working with more advanced forecasting techniques and concepts that can be utilized to achieve the plan.

The concepts presented in this section by no means require PhD-level thinking (like applying linear regression analysis to sales trends for the past 20 years). Rather, the goal here is to provide some additional forecasting tools, techniques, and strategies that can assist you in managing your business interests. We aim to enlighten you with forecasting strategies that provide the greatest value to your organization in terms of managing everyday challenges, stress, and growing pains.

Developing and utilizing financial projections should not be viewed as just an annual management process/function. Instead, forecasts should be managed proactively and adjusted as needed to adapt to changing business conditions. Staying actively connected and involved in the business planning process (including utilizing financial forecasts) is essential to remaining competitive in today’s economic environment.

Getting familiar with some useful terms

Before we jump into an actual financial projection model, we review some basic terminology to help you “speak the language” (that is, accountant-ese or finance-ese) a little bit better. The following list is by no means all-inclusive; it’s focused more on terminology that’s used when evaluating financial forecasts (based on forward-looking information) as opposed to terminology applied to evaluating periodic financial statements (for example, calculating the current ratio):

Break-even: The break-even point is the level of sales required to produce operating results with no profits or losses (that is, sales less costs of sales less expenses equals zero). For example, if a company has $50,000 a month in expenses and generates a gross margin on sales of 40 percent, it must generate $125,000 a month to break even. Or looking at the concept from the top down, sales of $125,000 would generate a gross profit of $50,000 (40 percent of $125,000), from which expenses are then subtracted, producing a profit of zero.

Burn rate: The burn rate is the rate at which cash is burned or consumed in a business. For example, if a company’s expenses are $100,000 per month and sales are $40,000 per month, it is losing, or burning, $60,000 per month. If the company has $600,000 in cash, then it basically has ten months left to operate.

Cap table: A cap table, or capitalization table, simply offers a summary of who owns what portion of a company and in what structure. Ownership structures are a very sensitive and important issue with third-party financing sources.

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