How to Create Financial Projections


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How to Create Financial Projections

  1. 1. Financial Forecasting Workshop NYU Stern School of Business November 4, 2009
  2. 2. <ul><li>AGENDA </li></ul><ul><li>Goal of accurate projections </li></ul><ul><li>Key Elements </li></ul><ul><li>Methodology </li></ul><ul><li>Sales Forecast </li></ul><ul><li>Key Sales Questions </li></ul><ul><li>Staffing Forecast </li></ul><ul><li>Key Staffing Questions </li></ul><ul><li>Operating Expenses </li></ul><ul><li>Balance Sheet Forecast </li></ul><ul><li>Cash Flow Forecast </li></ul><ul><li>What the Oracle President says about projections </li></ul><ul><li>About Beyond the Bottom Line </li></ul>
  3. 3. <ul><li>Predicts Cash Flow </li></ul><ul><li>Provides: </li></ul><ul><ul><li>A financial “Road-map” for the organization </li></ul></ul><ul><ul><li>Confidence to donors, sponsors and other stakeholders </li></ul></ul><ul><li>Sets goals for: </li></ul><ul><ul><li>Grant Proposals, Sponsors, Events </li></ul></ul><ul><ul><li>Timing for staff hiring, capital investment, program expenses, and fixed expenses </li></ul></ul><ul><li>Determines the amount of grant dollars or debt required </li></ul>Why Financial Projections are Important?
  4. 4. <ul><li>Assumptions that are realistic and achievable </li></ul><ul><ul><li>Accrual vs. Cash Accounting </li></ul></ul><ul><li>Projected financial statements </li></ul><ul><ul><li>Income Statement </li></ul></ul><ul><ul><li>Balance Sheet </li></ul></ul><ul><ul><li>Cash Flow </li></ul></ul><ul><li>Planning Period – 1 – 3 years (Year 1 by month; Years 2 -3 by Quarter) </li></ul><ul><li>Accurate Supporting schedules </li></ul><ul><ul><li>Sales Pipeline </li></ul></ul><ul><ul><li>Staffing and Outside consultants </li></ul></ul><ul><ul><li>Operating expenses (fixed and variable) </li></ul></ul><ul><ul><li>Mini schedules for Balance Sheet (A/R, A/P, Fixed Assets, Deferred Revenue, Taxes) </li></ul></ul><ul><li>Dashboards to summarize the critical financial and operating information </li></ul>Elements of a Successful Financial Model
  5. 5. <ul><li>Use the “Bottom Up” Approach </li></ul><ul><ul><li>Show more calculation lines instead of imbedding long formulas into cells </li></ul></ul><ul><ul><ul><ul><li>Line 1 Unit Rate Dollars </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Line 2 Quantity </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Line 3 Budget Dollars (Unit Rate $ times Quantity) </li></ul></ul></ul></ul><ul><li>Facilitate scenario planning by altering one or all variables </li></ul><ul><li>Link Worksheets </li></ul><ul><li>Make sure that all of your worksheets are print ready </li></ul>Methodology
  6. 6. <ul><li>Income Statement </li></ul><ul><ul><li>Revenue, by Source </li></ul></ul><ul><ul><ul><li>Net Asset Releases </li></ul></ul></ul><ul><ul><ul><li>Events </li></ul></ul></ul><ul><ul><ul><li>Sponsors </li></ul></ul></ul><ul><ul><ul><li>Current Year Grants </li></ul></ul></ul><ul><ul><ul><li>Interest Income </li></ul></ul></ul><ul><ul><li>Less: Operating expenses (Personnel, Variable, and Fixed, etc.) </li></ul></ul><ul><ul><li>Equals: Change in Net Assets (for non profits) or Net Income (for profits) </li></ul></ul>Income Statement Format
  7. 7. <ul><li>Well thought through assumptions for Who you are pitching and Why </li></ul><ul><li>Understand donor and grant maker funding trends </li></ul><ul><li>Review past events (attendance, sponsors, etc,), factor in current economic trends, and then develop your individual event forecast </li></ul><ul><li>Understand what other revenue sources your should pursue and Why </li></ul><ul><li>Gross Revenue = Use range of high and low average of Gross Revenue </li></ul><ul><li>Net Revenue = Gross Revenue discounted by a probability factor </li></ul><ul><li>Cash Flow Forecast Tip: </li></ul><ul><li>The most important first step is to create a list all of the probable and realistic funding sources. The next step is to have a solid understanding of your expense structures and range of expense dollar levels so you know how much you need to fund at a minimum. </li></ul>Sales Forecast
  8. 8. <ul><li>Selling Process </li></ul><ul><ul><li>Understand the donor decision making process </li></ul></ul><ul><ul><li>What is the “Sales Cycle” (how long does it take from the start of the application process to the receipt of the signed LOA) </li></ul></ul><ul><ul><li>What are the steps involved </li></ul></ul><ul><ul><li>Who needs to approve the grant on the donor end </li></ul></ul><ul><ul><li>How soon after the verbal approval will we get an Award letter </li></ul></ul><ul><ul><li>Make sure funding terms are explicit, either based upon date or a milestone deliverable </li></ul></ul><ul><li>Sales Pipeline </li></ul><ul><ul><li>By donor prospect </li></ul></ul><ul><ul><ul><li>Apply a probability of the likelihood that it will happen </li></ul></ul></ul><ul><ul><ul><li>Result = Expected Revenue. (that is the number that goes on your monthly income statement forecast. (See example) </li></ul></ul></ul><ul><ul><li>By Event </li></ul></ul><ul><ul><ul><li>Number of attendees and average ticket price </li></ul></ul></ul><ul><ul><li>By Sponsor </li></ul></ul>Key Questions for Sales Forecast
  9. 9. Sales Pipeline Example
  10. 10. <ul><li>Determine the staff required by </li></ul><ul><ul><li>Department or Program </li></ul></ul><ul><ul><li>And then by Title </li></ul></ul><ul><li>Determine the annual pay, and date of hire for each staff person. We need to track headcount separately and then calculate base pay from that </li></ul><ul><li>Calculate and link in cost of living increases, bonuses, etc . </li></ul><ul><li>Annual pay + Cost of Living + bonus = annual compensation </li></ul><ul><li>Payroll taxes = annual compensation times 10 % (estimate) </li></ul><ul><li>Other benefits = 5 - 8% of annual compensatio n </li></ul>Staffing Forecast
  11. 11. <ul><li>Annual compensation + payroll taxes + benefits = total compensation costs </li></ul><ul><li>Is any compensation to be deferred, or is any compensation contingent upon meeting milestones? </li></ul><ul><li>Cash Flow Forecast Tip: Base monthly compensation is usually paid twice per </li></ul><ul><li>month. If you use an outside payroll service, your payroll taxes will be withheld by </li></ul><ul><li>the provider when they process the payroll. Benefits could be paid the next month </li></ul><ul><li>along with related workers compensation and other insurances </li></ul>Staffing Forecast
  12. 12. <ul><li>Build vs. Buy (employees vs (1099) consultants)? </li></ul><ul><li>What are the Skill Sets Required? What’s the Timing to acquire skills? </li></ul><ul><li>How much will it cost? And how much can your business afford? </li></ul><ul><li>Who is available in the marketplace or labor pool? </li></ul><ul><li>Staffing Options: </li></ul><ul><ul><li>FTE (Full Time Employees) </li></ul></ul><ul><ul><li>Permanent Part Time </li></ul></ul><ul><ul><li>1099 / outside consultants </li></ul></ul>Key Questions for Staffing & Consultants
  13. 13. <ul><li>Rent (use 200 SF/person) and benchmark rental space in your market </li></ul><ul><ul><li>Example: 10 people * 200 SF = 2,000 SF * $ 30/SF = $ 60,000 annual rent </li></ul></ul><ul><li>Budget Items based upon headcount (vary up/down based upon staffing levels) </li></ul><ul><ul><li>Office supplies </li></ul></ul><ul><ul><li>Telephone </li></ul></ul><ul><ul><li>Desks, chairs and phones </li></ul></ul><ul><ul><li>Insurance </li></ul></ul><ul><ul><li>Laptops & printers </li></ul></ul><ul><li>Cash Flow Forecast Tip: Rent is usually paid within the 1st 10 days of the month and all other costs can be paid usually within 30 days, or the next month after purchase. </li></ul>Operating Expenses
  14. 14. <ul><li>Assets </li></ul><ul><ul><li>Cash </li></ul></ul><ul><ul><li>A/R (Accounts Receivable) </li></ul></ul><ul><ul><li>Prepaid Expenses </li></ul></ul><ul><ul><li>Fixed Assets </li></ul></ul><ul><li>Liabilities </li></ul><ul><ul><li>A/P (Accounts Payable) </li></ul></ul><ul><ul><li>Accrued expenses </li></ul></ul><ul><ul><li>Deferred Revenue </li></ul></ul><ul><ul><li>Debt or lines of credit </li></ul></ul><ul><li>Net Assets </li></ul><ul><ul><li>Unrestricted </li></ul></ul><ul><ul><li>Temporarily Restricted </li></ul></ul><ul><ul><li>Permanently Restricted </li></ul></ul>Balance Sheet Forecast
  15. 15. <ul><li>Option 1 - Traditional Cash Flow </li></ul><ul><li>Beginning Cash </li></ul><ul><li>Plus: CASH INFLOW (Collections and Other income) </li></ul><ul><li>Less: CASH OUTFLOW (Expenses and Taxes) </li></ul><ul><li>Plus or minus: FINANCING (Investment proceeds, bank debt proceeds, Capital expenses) </li></ul><ul><li>Equals Ending Cash </li></ul><ul><li>Create Mini schedules for Balance Sheet for any item where activity in one month has an effect in a following month (A/R, A/P, Capital, Deferred revenue, Income Taxes, Sales Tax ) </li></ul>Cash Flow Forecast
  16. 16. <ul><li>Option 2 - Statement of Cash Flows </li></ul><ul><li>Starts with Net Income </li></ul><ul><li>Cash provided by Operations </li></ul><ul><li>Cash Flows from investing activities </li></ul><ul><li>Cash Flows from financing activities </li></ul><ul><li>Adds up to Net Increase (Decrease) in Cash and should agree with the ending cash balance </li></ul>Cash Flow Forecast
  17. 17. <ul><li>“ If it’s not in the numbers, I don’t care how strategic it is, it doesn’t play out.” </li></ul><ul><li>from Safra Catz, President of Oracle (Fortune magazine 9/28/09) </li></ul>
  18. 18. <ul><li>Beyond TBL’s work has centered around demonstrating and guiding Founders, </li></ul><ul><li>CEOs and Boards on how to grow their enterprises in a deliberate, strategic </li></ul><ul><li>manner, often involving managing or structuring accounting and financial </li></ul><ul><li>operations, and implementing specific courses of action to improve the bottom </li></ul><ul><li>line. The solutions cover the full lifecycle, from start up to exit, and enable </li></ul><ul><li>companies to align their financial strategy with their business strategy. </li></ul>What We Do
  19. 19. <ul><li>OFFICES LOCATED IN: </li></ul><ul><li>WASHINGTON DC NEW YORK CITY SAN FRANCISCO, CA </li></ul><ul><li>John Gillespie, President </li></ul><ul><li>703.527.2825 </li></ul><ul><li>[email_address] </li></ul>Thank you! National Headquarters: 2200 Wilson Boulevard Suite 406 Arlington VA 22201 703.527.2825 2009. All rights reserved. BeyondTBL,, LLC