Budgeting and Forecasting Software
THREE ITEMS NEEDED FOR AN EFFECTIVE FORECAST
I have noticed over the years that budgets or forecasts prepared by a company’s internal staff tend to illustrate profit and loss without a cash flow or balance sheet forecast. They usually prepare a report that shows sales—less costs and expenses—profit, and that’s all. This is where budgeting and forecasting software makes the difference.
Not too long ago, I was asked to assist a company in the potential buyout of one of its competitors. My client was doing about $70 million in sales. It was a large and profitable company. I assumed the management of such a large company would be quite sophisticated on the financial side of the business and have some sort of budgeting and forecasting software. So I set up a meeting with their CFO.
I started the discussion, “Let me make sure I understand the purpose of the merger. You believe that there will be substantial efficiencies in payroll and cost reductions. And the merged company will be in a good position financially to pay down the additional millions of dollars in new debt needed to complete the transaction?”
The CFO’s response was quite positive. “Have you prepared any P&L and/or cash flow forecasts as to what the anticipated cash flow requirements will be after the merger?” I asked.
“No,” was his quick response.
Needless to say, I was quite surprised that no information was prepared to make certain they could sustain such a potentially large transaction. My immediate advice to the president of the company was to have the forecasts prepared so as to reveal any potential cash flow problems they might encounter as a result of the merger. He agreed.
So why didn’t the CFO prepare them? The answer is simple. It’s too difficult and time consuming and they did not have access to a solid budgeting and forecasting software.
We were engaged to put together the forecasts. It took us about five hours. Two hours by my assistant and three for me. My three hours included a meeting with the CFO to get some additional assumptions. How were we able to complete them so fast? We used my secret weapon. The budgeting and forecasting software I created.
The three reports needed for effective budgeting and forecasting are:
1. The twelve-month profit and loss. This report will let management know in advance if anticipated financial activities will produce a profit or not. It will also serve as a guide during the year as to whether expenses are under control or not. It is also great for looking at future tax requirements.
2. The twelve-month cash flow. This is the report that will let management know well in advance how much cash they will need and when they will need it.
3. Forecasted balance sheets for each month of the forecast. This report is the most neglected and is extremely important in the forecasting process. It tells you whether the other reports are realistic or not.
Several years ago, I was meeting with a client preparing a P&L and cash flow forecast. The company was profitable and had excellent cash flow. We sat in the client’s conference room working on the forecast. When we completed the preparation, we were quite pleased as to the forecasted profit and amazing cash flow prospects. Everything was going to be terrific.
After reviewing the reports, we began to study the forecasted balance sheets. We both quickly realized there were major problems. The accounts receivable balances were forecasted lower than they had ever been. Payables balances were larger than they should have been, and inventory was forecasted too low. Basically, the balance sheet made no sense at all.
Then it hit me like a ton of bricks. The balance sheet was telling us that the forecast was wrong. Obviously, the assumptions used to develop the cash flow were way off. Collection on accounts receivable balances was too rich, and the payment of the payables was not enough. The balance sheet was the barometer as to the efficacy of the other reports. If it made no sense, the other reports were wrong.
THREE ITEMS NEEDED FOR AN EFFECTIVE FORECAST
I have noticed over the years that budgets or forecasts prepared by a company’s internal staff tend to illustrate profit and loss without a cash flow or balance sheet forecast. They usually prepare a report that shows sales—less costs and expenses—profit, and that’s all. This is where budgeting and forecasting software makes the difference.
Not too long ago, I was asked to assist a company in the potential buyout of one of its competitors. My client was doing about $70 million in sales. It was a large and profitable company. I assumed the management of such a large company would be quite sophisticated on the financial side of the business and have some sort of budgeting and forecasting software. So I set up a meeting with their CFO.
I started the discussion, “Let me make sure I understand the purpose of the merger. You believe that there will be substantial efficiencies in payroll and cost reductions. And the merged company will be in a good position financially to pay down the additional millions of dollars in new debt needed to complete the transaction?”
The CFO’s response was quite positive. “Have you prepared any P&L and/or cash flow forecasts as to what the anticipated cash flow requirements will be after the merger?” I asked.
“No,” was his quick response.
Needless to say, I was quite surprised that no information was prepared to make certain they could sustain such a potentially large transaction. My immediate advice to the president of the company was to have the forecasts prepared so as to reveal any potential cash flow problems they might encounter as a result of the merger. He agreed.
So why didn’t the CFO prepare them? The answer is simple. It’s too difficult and time consuming and they did not have access to a solid budgeting and forecasting software.
We were engaged to put together the forecasts. It took us about five hours. Two hours by my assistant and three for me. My three hours included a meeting with the CFO to get some additional assumptions. How were we able to complete them so fast? We used my secret weapon. The budgeting and forecasting software I created.
The three reports needed for effective budgeting and forecasting are:
1. The twelve-month profit and loss. This report will let management know in advance if anticipated financial activities will produce a profit or not. It will also serve as a guide during the year as to whether expenses are under control or not. It is also great for looking at future tax requirements.
2. The twelve-month cash flow. This is the report that will let management know well in advance how much cash they will need and when they will need it.
3. Forecasted balance sheets for each month of the forecast. This report is the most neglected and is extremely important in the forecasting process. It tells you whether the other reports are realistic or not.
Several years ago, I was meeting with a client preparing a P&L and cash flow forecast. The company was profitable and had excellent cash flow. We sat in the client’s conference room working on the forecast. When we completed the preparation, we were quite pleased as to the forecasted profit and amazing cash flow prospects. Everything was going to be terrific.
After reviewing the reports, we began to study the forecasted balance sheets. We both quickly realized there were major problems. The accounts receivable balances were forecasted lower than they had ever been. Payables balances were larger than they should have been, and inventory was forecasted too low. Basically, the balance sheet made no sense at all.
Then it hit me like a ton of bricks. The balance sheet was telling us that the forecast was wrong. Obviously, the assumptions used to develop the cash flow were way off. Collection on accounts receivable balances was too rich, and the payment of the payables was not enough. The balance sheet was the barometer as to the efficacy of the other reports. If it made no sense, the other reports were wrong.
