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Agenda
Thepurposeandbenefitsofbudgetingandfinancial

projections;
Financialprojectionsspreadsheettool; D l i d lid i fi Developingandvalidatingfinancialassumptions; i l i

AldisJakubovskis LynetteWatson MissouriSBTDC

ASBDCAnnualConference SanDiego2011

Howtheclientscangetthemostbenefitfromthecash

flowprojectionprocess

PurposeandBenefitsofBudgeting andFinancialProjections
Settinggoalsfortheowner; Benchmarking howacompanycanbeexpectedto

WhatisTypicallyIncludedInthe Projections
Usuallyprojectionsshouldincludeaminimumof3

years,atleast1yearonamonthlybasis;
Shouldincludethefullsetoffinancialstatements: IncomeorP&L; Balancesheet; Cashflowstatements AllfinancialstatementsmustRECONCILEamong

performrelativetoindustrynorms; Educationalvalue understandingthevalueofcash Ed i l l d di h l f h flowdynamics; Givesthefinancialinterpretationtoyouroverall businessplan; Bankerswantthem knowwhatbankersexpect

eachother;
Supplementarysheetsthatexplaindetails; Documentyourfinancialassumptionsandsources

St.LouisSBTDC CashFlowProjectionsTool
Location:

FocusonEnteringAssumptions
Wheneverpossible,thedataisenteredasassumptions

www.missouribusiness.net/sbtdc/docs/fin_proj.xlsx
UtilizingthefunctionalityandflexibilityofExcel; Advantagesofthetemplate: d f h l Convenienceofminimaldataentry,focusonenteringthe assumptionsvs.thedollarfigures; Maximumadaptabilitytodifferentbusinesscases; Integrated worksheetthatservesasahubforuser createdsheets fin_proj.xlsx Appendix1

ratherthandollarfigures;
Examples: L Loanamortization:interestrate,term,startdate, i i i d originalbalance; Depreciation:usefullife,currentage,originalcost; Operatingcapital:daysA/R,daysA/P,daysinventory; Percentages:COGS,payrolltax Easierwhatifanalysis

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FocusonEnteringAssumptions: Examples

MaximumAdaptability
Everybusinesscaseisdifferent(startupvs.existing

businesses,productbasedbusinessesvs.servicebased businesses,etc.); Agoodcashflowprojectionsspreadsheetmusthaveboth thefollowingfeatures(possiblycontradictory requirements):

Automateasmuchworkaspossible; Accommodateasmuchbusinessspecificdetailsaspossible Theproposedapproachallowstocustomcreatesheetsand

linkintooneintegratedandstandardizedsheet;
Thespreadsheetcanbeexpandedtomorethan3years

relativelyeasily

SettingUptheOpeningBalance
Oneofthemostdifficulttaskswhendeveloping

ShowtheFinancialNeedWhen ApplyingForaLoan
Showhowthecashpositionisaffectedbythe

projections settinguptheopeningbalance; Startupvs.existingbusinesses:

Categorizestart upcosts: Categorizestartupcosts: Investmentintangible(equipment,improvements,etc.)or intangiblelongtermassetsthatcanbedepreciatedoramortized; Otherassets:nondepreciableornonamortizable(deposits); Workingcapitaland/orinventory; Onetimestartupexpenses(incorporationcosts,grandopening advertising,etc.) gointoRetainedEarningsasanegative number Openingbalancesforexistingbusinesses reconcilethetime

gapandcriticallyassessthemostrecentbalancesheet

additionalfinancing forexample,occasionallywhen theworkingcapitalloanbeingsoughtistakenoutof theprojections,thecashbalanceisstillpositiveand theprojections thecashbalanceisstillpositiveand sufficientlylarge; Lookatthemonthwiththelowestcashbalance that willhelptodeterminetheworkingcapitalneeds; Whatissufficientlowestprojectedcashbalance? 1 week,10days,1month,3monthsofoperating expenses

HowtoChoosetheStartTimeFor theProjections

DevelopingFinancialAssumptions
Projectcostandusesoffunds: Startup; Expansion; B i Businessacquisition i ii Revenuemodel; Monthlyoperatingexpenses

Currenttime? Beginningofcalendaryear(Jan1)? Beginningofoperations(sales)ortradeseason? Expecteddateofobtainingfinancing(3060daysin Expecteddateofobtainingfinancing(30 60daysin thefuture)? Otherconsiderations?

Theproposedspreadsheetallowstosetthefirstmonth

(includesboththemonthofprojectionsandthe calendarmonth)

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ProjectCostandUsesofFunds Startup
Forstartupsclearlyindicateownersinvestment

ProjectCostandUsesofFunds OngoingBusiness
Fundstypicallyneededforadditionalworkingcapital

usually20%ofthetotalprojectcost(notoftheloan amount); Categorizethestartupcosts(asdiscussedbefore); Categorizethestart upcosts(asdiscussedbefore); Onetimestartupexpensesvs.recurring whyitis important; Makenecessaryadjustments forexample,clientswill include3months,orevenayearsworthofsalaries; Estimatedprojectcosts clientexample(Appendix2)

(NOTTOCOVERLOSSES),oradditionalequipment orimprovements; Ideally,showbalancebeforeandafterthenewfunding Ideally showbalancebeforeandafterthenewfunding isimplemented;orinthecaseofrefinancing theold andthenewloans; Potentialproblem frequentlyclientsbookkeeping doesnotrepresentthebalancesheetaccurately

ProjectCostandUsesofFunds BusinessPurchase
Trytoputweightontangibleassetsvs.goodwill; Workingcapitalneedstobeestimated costabovethe

DevelopingRevenueModel
Traditionalapproach(Appendix3&4): UnitspermonthtimessalespriceminusCOGSforeach productcategory Industryspecificmodels(Appendix5); y p ( pp 5); Businesseswithmultipleproduct/servicelines: Mathematicalrevenuemodeling(Appendix6&7): Whenappropriate? Potentialbenefits Sometimesneedtobuildamodelwithveryspecific

purchaseprice;
Sellersfinancingdesirable; S ll fi i d i bl Factorinallthechanges revenueflow,expenses,new

debtservice

features

RevenueModelMustbeConsistent WiththeMarketingPlan
Demographictargetandpurchasefrequency; Product/servicepositioningandpricing; Luxuryornecessity; Competitivefactors

DevelopingRevenueModel

InclassExercise: RealWorldExample R l W ld E l
(Appendix8)

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ProjectingExpenses
Costofgoodssold:applicableincertainindustriesby

ProjectingExpenses(cont.)
Someexpensesaremorecertainthantheothers; Allocateexpensesevenlybetweenmonthswhenthere

convention; Fixedvs.variable;semivariableandstepwise expenses; Focusonkeyexpensecategories;dontstruggleover expensesthatconstituteonlyafractionofapercentage pointofsales; Mayinclude510%contingency

isnobasistodootherwise(forexample,hardtoassign repairsandmaintenancetospecificmonths); Providedetailedexplanationsforthemajorexpense categories

SomeNumbersAreMore ImportantThantheOthers
Lookatyourmonthlysales,forexample,ifmonthly

BreakevenAnalysisand DebtCoverageRatio
Emphasizethebenefitsofunderstandingthebreak

salesare$20,000,dontworryabouta$100expense it isonly0.5%; Payattentiontomajorexpensecategoriesfirst look Payattentiontomajorexpensecategoriesfirst attheBIGPICTURE,dontgetboggeddownwith minutia

evenconcept;
Aimforslightlyabovebreakeven cantgowrong V Vastmajorityofindustrieshavetheprofitbeforetaxesin j i fi d i h h fi b f i the010%range Makesuretheprojectionscashflow safeDCR1.3

1.5

ProjectionsHavetobeElegant
Havetobeeasytounderstand; Uselevelestimates,ifthereisnoreasonablebasisfor

SourcesofInformation
Previousperformanceresults; Comparablebusinesses; Fieldresearch; Tradeassociations; Publications: RMA, Etc

differencesbetweenmonths(whenappropriate); Roundestimatednumbersto1,000s,100s,etc. zeros R d i d b indicatethattheyareestimates,andthenumberof zerosindicatetheassumedaccuracyofthese estimates; Exampleofprojectedincomestatement,balance sheet,andcashflowstatement(Appendix9)

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ValidationofAssumptions
Lookformultiple sourcestoreenforceandvalidate

ClientCounselingProcess
Startup/existingbusinesswithlimitedfinancial

fromdifferentperspectives; Indicatethesourcesofinformation; Eachindustryhasitsownspecificrulesofthumb E hi d h i ifi l f h b

acumen
Lotsofhandholding N dt k Needtokeepitassimpleaspossible it i l ibl Helpthemunderstandwhatnumberstheyarelooking

forandwhy
Assistinthecreationofthefinancialprojectionsand

narrativewiththenumbersprovided.
Explaintothemindetailwhatthenumbersmeanand

howtopresentittothebank.

ClientCounselingProcess
BusinessOwnerwithintermediateoradvanced

BankPresentation
Makesurethenumber/projectionsmakesense. Financialprojectionsshouldincludeanexplanatory

financialacumen
Workwiththemtoidentifystrengthsandweaknessesin

theirfinancialstructureandtodevelopstrategiesto addresstheirspecificneeds. Assistthemwithfurtherunderstandingofratioand industryanalysis. Helpthemutilizetheirfinancialstooperatetheir businessproactivelyversusreactively. Utilizetheirhistoricalfinancialstoassistinthecreation offinancialprojections.

narrative.
Th fi Thefinancialprojectionsshouldinclude: i l j i h ldi l d IncomeStatement BalanceSheet CashFlowStatement SourcesandUsesofFunds PersonalFinancialStatement

BankPresentation
Haveasolidunderstandingofwhatisbeingpresented

Thankyou!
Aldis Jakubovskis 100NTuckerBlvd,Ste530 St.Louis,MO63101 3142411591 jakubovskisa@missouri.edu LynetteWatson 260BrownRd St.Peters,MO63376 6369703000 watsonly@missouri.edu

tothebank. HaveaPlanBinmind. Bedetailedinwhatyouneedandexplainwhy.Askfor B d il di h d d l i h A kf themoney.