Real world experience 1. Jon Andrews had his controller prepare his company’s budget for 2009. It reflected sales of 4.5 million and a profit of 200K. The company asked us to convert their budget to forecasted cash flows and balance sheets.
During the assumption gathering phase of our process it was determined that the company’ commissions was to be 45% of collections. In reviewing the budget we noticed commissions at 45% of sales.
We prepared the forecasted cash flows and realized that collections were to be 5 million or 1 million greater then sales. Thus commissions should have been forecasted at 50% of sales not the 45% the company used. Using the 50% would put the company in a breakeven mode at best.
When told of this in the discussion phasing of our service process the company took immediate action to reduce commissions to 35% of collections. Bringing projected profits back to the desired 200K
For the small investment with us the company was able to avoid a major financial problem.
The company has now engaged us to prepare monthly comparatives and updates so management can always be looking ahead. Kind of like an Early Warning System of future cash flow problems.
Real world experience 2. The importance of a complete forecast.
Robert Alan and I were reviewing a forecast we had prepared for his company. It showed profits were looking great and cash flow was forecasted at better then expected.
Since our process automatically creates forecasted balance sheets we then reviewed them.|
What were the balance sheets telling us?
Receivables were forecasted at a level that was not realistic and payables seemed too high. The forecasted balance sheets were telling us the cash flow forecasts was wrong. Collections rate was too high and the payment of payables was too slow. Both of these items increased the forecasted cash flows and our jubilation of all that cash was not real.
After we adjusted the items, made a more realistic cash flow and the balance sheets looked reasonable the company was put on notice that some borrowing would be necessary in the not too distant future.
Without a complete forecast we would never have realized that the cash flow needed to be adjusted and the company would need future borrowings.
Real world experience 3. Carol Johansson was thinking about opening a new restaurant. She came to us to ascertain what it would take. We spent about an hour on a teleconference and got as much information as possible.
We crunched the numbers and presented her with forecast of the cash need for the first year of operations. She was amazed as to how little she would earn and how much cash she would need to start the business. She thanked us several times for preventing her from what she termed “a financial nightmare.”
