Financial Forecasting

for Serious-Minded
Entrepreneurs (and
CFOs)
A powerful tool for driving growth, profitability, and
cash flow in your company

Rapid Learning Guide

By Philip Campbell, CPA

Business | Money | Freedom

Copyright  2016, Philip Campbell http://financialrhythm.com/

A Reliable Financial Forecast Will Help You
Survive and Thrive in Business

Thank you very much for downloading this Free Rapid Learning Guide. I’m excited to be
sharing it with you because I’m confident it will help make your business stronger
financially.

I am providing this information to you FREE of charge and with no

obligation on your part.

Why? In order to introduce you to one of the most powerful tools in business – a
reliable financial forecast. Most small to medium size businesses don’t have the
benefit of a seasoned, strategically oriented CFO. So they end up winging it when it
comes to creating the view through the financial windshield of their business. As a
result, they end up flying blind financially. They make some really bad decisions because
they are cruising along on the highway of business with a blindfold wrapped across their
eyes. The question isn’t whether they will be an accident. The question is how bad will
the crash be… and will they survive it.

I would like to help change that by teaching you how to put a reliable financial
forecasting tool in place.

My Sincere Goal

My goal is to have you implement the process I set out in this guide. It would be a failure
on my part if you read the guide, agree with the logic and rationale I teach, then were
unable to actually implement the process in your business.

To help achieve my objective I worked hard to keep the information simple and to the
point. Making financial information simple is actually hard work! One of my favorite
sayings goes like this: “It is a simple matter to make things complex, but a complex
matter to make things simple”. 

Copyright  2016, Philip Campbell http://financialrhythm.com/

I also worked hard to write this in the language every business owner can relate to. Here
is how one business owner described my approach to writing and teaching after buying
my online cash flow course: “Your course appealed to me mainly due to the fact that you
speak in laymen’s terms in a way that a non-financially trained person can understand.”

Let’s Get Going

I encourage you to use the tips and strategies in this Free Guide to put your business
back on the path to financial success. Take advantage of the lessons so many other
business owners have learned the hard way.

OK, are you ready to create the view through your financial windshield? You will be so
glad you put a reliable and repeatable financial forecasting process in place to help guide
you on your path to creating (and having) money in your business.

To your success,

Philip Campbell, CPA

Austin, Texas
Email: [email protected]
Web: www.FinancialRhythm.com
(Financial Rhythm is not a CPA firm)

Copyright  2016, Philip Campbell http://financialrhythm.com/

 Meet the Author

Philip Campbell is a CPA, financial consultant, and author of

the book Never Run Out of Cash: The 10 Cash Flow Rules You
Can’t Afford to Ignore. He is also the author of a number of
online courses including Understanding Your Cash Flow – In
Less Than 10 Minutes. His books, articles, blog and online
courses provide an easy-to-understand, step-by-step guide for
entrepreneurs and business owners who want to win
financially in business.

Philip's focus is on putting the structure and tools in place so

the financial side of your business is strong and provides the
insights you need to make money, improve cash flow, and grow your business
successfully.

His career began in public accounting where worked first in a local CPA firm then in an
international accounting firm in Houston, TX. Since 1990, he has served as a financial
officer in a number of growing companies with revenues ranging from $5 million to over
$1 billion.

Philip has been involved in the acquisition or sale of 33 companies (and

counting) and an IPO on the New York Stock Exchange.

What really sets Philip apart from the average financial person you meet is his passion
and excitement about helping entrepreneurs and CEOs create financial health, wealth,
and freedom. Philip believes strongly that growing a successful business makes it critical
that management has an achievable plan for always improving profitability and cash
flow.

In fact, early on in his career, he focused and “preached” so much about the importance
of cash flow that people now call him CASH.

Copyright  2016, Philip Campbell http://financialrhythm.com/

Now Philip Gets to Talk
I love everything about business. I love the whole concept of providing a valuable
product and service and making good money in return. That’s the essence of business. A
true win-win.

And most of all, I love helping entrepreneurs and business owners make sense of the
financial side of their business. I believe that making money is not only good. It’s smart.
And it is the only path to creating a company that takes care of its owners as well as its
employees and customers.

It was when I made the transition from working as a CPA in two public accounting firms
to working as a Chief Financial Officer (CFO) in the retail industry that I created the
financial principles I use every day now. Once I solved the problem of having the right
tools for the job, I realized how easy it is to take control of your profitability and cash
flow.

I was amazed at how much easier it was to run the business. I would say to myself
"Surely, I need to be worrying about the cash. I always did before." That was a big
turning point for me in my business career.

My Personal Commitment to You

I have been sharing these strategies and principles with hundreds of business owners for
years. I'm extremely excited now to have put this information together for you in a step-
by-step process. I passionately believe these principles will make a huge difference in
your life and in your business. In fact, I guarantee it.

At Financial Rhythm, I provide you advice and strategies that are:

 Presented in a language every business owner can understand and relate to. No
CPA jargon here.
 Focused on helping you take control of the financial side of your business.
 Intended to help you focus on what you do best - grow your business and make
more money.

Copyright  2016, Philip Campbell http://financialrhythm.com/

  Based on the proven rules and principles I use every day with business owners
small and large.
 Direct and to the point (no fluff).

The goals that are front and center for me at Financial Rhythm are to:

 Help you eliminate financial struggle.

 Provide a process you can follow that methodically makes your business stronger
financially.
 Reinforce your commitment to winning financially in business.
 Improve your profitability, cash flow and your net worth.
 Help you learn, grow and succeed in business.

Remember, creating a company that is strong financially is smart. I am here to help you
make that happen. Please email me if you have any questions at all. I would love to help
you in any way I can.

Copyright  2016, Philip Campbell http://financialrhythm.com/

Free Goodies, Tools and Downloads
I invite you to accept a free membership to the Financial Rhythm website. When you
join during the initial launch of the Financial Rhythm website, your membership will
always be free. That's my way of saying thank you for joining.
The member area is loaded with free goodies, tools, and downloads. All free for
members at Financial Rhythm. (Including the full Excel financial model you will
learn about in this guide.)
Just enter your sign up information and you'll get instant access to tips and strategies to
help make your business stronger financially. All at no cost and no obligation.
Making your business financially strong is not only smart, it's one of your most
important goals in business. That's not greed. That's just recognizing the reality of
business. Your business has to be healthy in order for you, your employees, and your
customers to survive and thrive.
Here are just two of the resources available to you when you start your free membership
today:

A 3-Part Plan to Breathe Financial Life Back Into Your Business

Too many companies today are careening along on the

highway of business as they wonder and worry about where
their business might end up financially. But that’s not
wise… and it’s certainly not fun.

What if you had a sensible plan, a roadmap, you could

follow that would guide you on your path to building a
strong, wealth generating business?

You would have the clarity of knowing what your next steps
are. You would have the confidence that comes from having
a simple system to follow. That's what this free rapid learning guide is all about.

It provides you with a step-by-step plan for managing and improving the financial
health of your company.

It's a 3-part, 10 step process that you can begin implementing today. And it is written in
a way that is simple and easy to understand and implement.

Copyright  2016, Philip Campbell http://financialrhythm.com/

Download Your PDF Copy of the 3-Part Plan

Cash Flow Made Simple

In this Rapid Learning Guide, I'll show you how

to understand your cash flow in less than 10
minutes, and I'll show you how to explain what
happened to the cash in your business last month (to
your spouse or business partner) in a 2-minute
conversation.

It's my brand new, surprisingly fast and common-sense

approach to understanding your cash flow.

When you truly understand your cash flow each month,

you unlock the door to an amazing new world. Financial
decisions become easier. You will feel a weight lifted
from your shoulders.

It even makes it easier to see what’s about to happen financially in your business. You
will feel a brand new sense of confidence and control. And best of all, it will free up your
time and so you can focus your unique abilities on what you do best in the business.

And it all starts with learning a simple approach to understanding and managing your
cash flow.

Download Your Rapid Learning Guide Now

If you are not already a member, sign up for free. There are lots of goodies and powerful
tools waiting for you on the inside. :-)

Copyright  2016, Philip Campbell http://financialrhythm.com/

“A business, like an
automobile, has to be driven
in order to get results”
- B C Forbes

Copyright  2016, Philip Campbell http://financialrhythm.com/

Introduction
The purpose of this Rapid Learning Guide is to give you a straightforward, easy-to-
implement guide to using one of the most powerful financial tools in business: a
reliable financial forecast.

Creating the forward looking view of financial performance is a surprisingly effective

way to transform the financial future of your company. It will:

 Help you drive growth, profitability and cash flow higher

 Create confidence and clarity about where your business is going financially
 Provide the roadmap for turning your vision and strategy for your business into a
crystal clear view of what success should look like financially
 Enhance confidence and credibility with lenders and investors so they provide
the capital and support you need to grow your business

In short, a reliable financial forecast will help you win financially in business.

How This Guide is Organized

I wrote a series of three in-depth articles on financial forecasting for a fantastic

organization that exists to help companies in the construction industry, the
Construction Financial Management Association (CFMA). I wrote the series on financial
forecasting for their first-class, members-only magazine called Building Profits.

In the three articles, I go step-by-step through the full financial forecasting process. It
includes a real-world example complete with the ability to download the example in an
XLS format. The download also provides you a forecasting template you can use to get
your own forecasting process up and running.

The articles are written for business owners and financial managers in the construction
industry. You will see the abbreviation CFM throughout the article. It is referring to
construction finance managers. You can just read “CFO” when you see that
abbreviation. The forecasting principles in each article apply to every
company, regardless of industry. Enjoy the articles.

Copyright  2016, Philip Campbell http://financialrhythm.com/

TURNING NUMBERS
INTO INSIGHT
AS THE ECONOMY STRENGTHENS, CONSTRUCTION
ENHANCE YOUR
FINANCIAL PROFESSIONALS HAVE AN EXCITING
OPPORTUNITY TO DEMONSTRATE FINANCIAL
INFLUENCE AND
LEADERSHIP, ADD VALUE, AND ENHANCE THEIR
INFLUENCE AND CREDIBILITY WITHIN THEIR
CREDIBILITY
ORGANIZATIONS.
Copyright © 2015 by the
Construction Financial
Management Association.
All rights reserved. This
article first appeared in
CFMA Building Profits.
Reprinted with permission.

A MPBELL
I PC
L
HI
BY P
The challenge many CFMs face today is that they are too often The Monthly Financial Rhythm
seen as the company “historian” who is focused on what hap-
pened in the past as well as control and compliance. However, Just as a construction business moves in a rhythm or cycle, so
you can turn your role – and that of your accounting depart- does its financial management. As you can see in the illustra-
ment as a whole – into a valuable strategic asset on which tion on the next page, it’s about setting financial goals and
management relies. targets, monitoring forecasts and actual financial results, and
making adjustments in strategy and execution inside the busi-
You have an incredibly powerful tool in your toolkit: a reliable ness when results differ from the target or expectation.
financial forecast. Creating a forward-looking view of financial
performance is the secret for turning financial information A monthly rhythm orchestrated by the CFM provides financial
into valuable insight. Providing insight to your leadership feedback and improves decision-making within the company.
team helps you become part of making history rather than
Target
just recording it.
A target is a key financial goal that is derived from the com-
This article will show how to tap into the unique and exciting pany’s vision and strategy, and can change depending on
benefits that financial forecasting can unlock for you, your short-term financial goals. For example, one quarter might
company, and your career. have specific goals related to collecting receivables faster,
while another quarter might include a focus on increasing
project margins or reducing certain expense categories.
There are generally 3-5 targets at any time, and the mix of
targets/metrics may vary during the year.

January/February 2015 CFMA Building Profits

 provides actual results for the project against the plan so
THE MONTHLY FINANCIAL RHYTHM
that PMs and others can evaluate results and determine if
adjustments need to be made as the project moves toward
GOALS
completion.

Once the project is complete, management must evaluate

ADJUST TARGET whether the profit targets for the job came in as they were
forecasted/planned. That way, the bidding process can be
improved based on the lessons learned from each completed
contract.

This same financial rhythm is at work at the overall company

level as well.
INSIGHT FORECAST

Financial Forecasting
MONITOR
Notice how the monthly financial rhythm begins with the
financial goals and targets being defined and turned into a
financial forecast. The forecast at the overall company level
Monitor captures the financial expectations in the form of the key
Monitoring is about creating financial forecasts (expected drivers of performance as well as an income statement, bal-
financial results) and actual results (historical financials). The ance sheet, and statement of cash flows. Then, actual finan-
combination of the forecast and actual results must be con- cial results are created and compared with the forecast to
verted into insight (not just numbers or financial statements) turn the financial information into insight for management.
for the management team.
The problem is that, as accountants, we were taught that
Adjust our mission is to gather and record transactions so we can
Management then uses insightful financial information to create historical financial statements. The historical financial
determine whether the specific action plans and strategies statements show actual results for a specific period and pres-
being executed throughout the company are working as ent the financial position at a specific point in time (both of
expected. The management team is on board because they which are in the past). No doubt that is an important part of
understand the financial goals and related metrics being your role, but it’s putting the cart before the horse from a
tracked. You have helped them learn how to use the monthly business and financial management perspective.
financial information to compare the actions taken in the field
A person leading a construction business is trying to make
to the implications in the financial statements.
something happen. He or she has a plan for what the busi-
Now, management has a tight link between their plans and ness should accomplish and starts with expected financial
the actual financial results. Adjustments to strategies and results, not actual financial results. Historical financial infor-
tactics in the field can be made quickly when the financial mation only becomes insightful when it shows how actuals
information suggests something is not working as intended. compare with expected results.

Construction projects move in this same rhythm. To bid Enhance Your Influence & Credibility
on a project, the specific goals are evaluated and agreed Financial forecasting will change the way you are perceived by
upon. Then, financial targets are set to document the scope the leadership team in surprising ways. Each step in the fore-
and arrive at the price. As a project progresses, accounting casting process draws you into more value-added activities.

CFMA Building Profits January/February 2015

 TURNING NUMBERS
INTO INSIGHT

There are three phases to the process of creating a financial Let’s say your company is a commercial GC and one of man-
forecast. First, consider the company’s goals and strategies as agement’s goals is to increase gross margin from 13% to 18%.
well as its financial history. Next, begin creating the actual You look at the work-in-progress (WIP) schedule, and 18% is a
forecast – an expectation of what the income statement, huge stretch based on existing projects. You talk with the CEO
balance sheet, and cash flows will look like based on your and others on the management team about the details behind
assumptions about the near future. In the third phase, begin the strategy to increase gross margin to 18%. Is the company
using the forecast to help management make decisions. This planning to bid on different types of projects? Is it increasing
is where you turn financial information – both the forecast and prices? Will the company reduce subcontractor costs?
the actual results – into valuable insight.
These types of discussions will help to adjust either the goal
Here’s how the three phases unfold. or the action plans necessary to turn the improvement goals
into financial reality. Regardless, you will have led a forward-
Phase 1 – Understand the Vision & Strategy looking discussion with management that creates value for
them and the company.
One of the benefits of forecasting is that it makes you think
about your company’s vision and strategy. For example, what Phase 3 – Turn Numbers into Insight
are the three most critical goals or initiatives for the coming Now that you have the forecast up and running, it’s time
year? Is the company planning to grow slowly or aggres- to turn those numbers into insight for management. The
sively? Are there plans to bid on projects similar to the ones challenge is that now you have twice as many numbers to
in the past, or is the company moving into new markets or
new types of construction? Answering these types of strate-
gic questions forces you to “get out of the ledger” and talk to M E MO
management about the division’s goals or the department’s TO: MANAGEMENT
strategies. It requires you to talk to the CEO about his or her
vision.
THE GROSS MARGIN TARGET
The table below provides a summary view of gross margins
Now, you’re talking about the larger goals and direction of the on projects from last year as well as several recent projects and
business with management throughout the company. You’re outstanding bids.
thinking about the future rather than just the past. You begin
to piece together a much clearer picture of where the com- Overall margin on projects from last year (36 projects) 13.3%
pany wants to go. Your understanding of the company grows. Three highest project margins from last year 18.6%
You’re thinking more like a CEO, and the leadership team
Margin on the two most recently awarded projects 14.8%
begins to notice.
Margin on bids currently outstanding (10 projects) 15.5%
Phase 2 – Define What Is Likely to Happen
Financially The gross margin target/goal for the current year is 18%. This
As you formulate the forecast assumptions, you must link table shows we are making some progress in increasing gross
the goals and strategies of the business to what you think is margins from last year. The challenge we may face is the most
likely to happen financially. The intersection of the compa- recently awarded projects and the bids outstanding suggest we
ny’s goals and strategies and your conclusions about what’s may fall short of hitting our target of 18% this year.
actually going to happen is fascinating. You have to forecast Let’s include this on our agenda for next week’s financial review
profitability, cash flow, and financial position. You’re not so we can talk in more detail about whether the gross margin
forecasting what someone wishes would happen, but rather target of 18% for this year is in jeopardy or whether there are
what you believe will most likely happen based on your steps we can take to increase margins faster.
understanding of the business.

January/February 2015 CFMA Building Profits 4

 Five Rules for Creating a Forecast
FORECAST SUMMARY You Can Trust
(Amounts in Thousands)
Creating a reliable financial forecast does not have to be a
Last This This difficult process. It’s a matter of using a few basic principles
Year Year Year together with your intuition and knowledge about the busi-
(Actual) (Plan) (Forecast)
ness. Here are five rules for creating a forecast that you can
Revenues $6,250 $7,500 $7,000 trust.
Gross margin 23.4% 24.0% 23.0%
Forecasting Rule No. 1: Think Decision-Making,
Pre-tax income $813 $1,125 $800 Not Precision
Cash $875 $1,000 $500 One thing stopping you from creating a forecast is thinking
Accounts receivable $1,113 $1,000 $1,300 that you don’t know exactly what the future holds and what
Distributions to owners $325 $450 $600 will happen if your forecast is wrong. Transaction processing
Debt $2,500 $1,750 $2,500 and creating historical financial statements is about being
right. (Here, precision is your friend.) On the other hand,
forecasting is about improving the company’s ability to make
wise decisions. (Here, precision is your enemy.)
present – a full set of financial statements for the coming
months plus the historical financial statements. So, think
Let’s say your CEO told the bank and outside investors at
strategically; put yourself in management’s shoes. What do
the beginning of the year that the company’s plan was to
they think about every day? How can you distill the essence
increase pre-tax income to $1.2 million and reduce debt by
of your financial information into something that’s simple and
$750,000 this year. Results for the first half of the year came
easy for them to understand and digest? The information you
in better than budget and management is feeling confident.
provide should be viewed as an integral decision-making tool.
It’s mid-year and you are updating your forecast for the
The key here is to simplify, simplify, simplify...then simplify remainder of the year.
some more. Consider summarizing the top 3-5 insights when
you distribute the historical and forecast results. And, high- From a decision-making perspective, the question is whether
light the key drivers of performance so it clearly shows if the or not the company has a good chance of hitting the pre-tax
actual results are not aligned with the expected results. That income and debt reduction targets. If the company is likely to
way, management can quickly see the link between their hit the targets, then management should focus on continuing
areas of responsibility and the impact their actions have on to execute the existing plan. If the targets are in jeopardy,
the financial statements. then management needs to evaluate what’s not working and
make changes now to get back on track.
The sample memo on the previous page is an example of an
insight (a focus area) that might be included in what you After you review the WIP schedule and a summary of bids
send to management. Based on the prior example of a target outstanding, it becomes clear that the second half of the year
to increase gross margins from 13% to 18%, this memo would is likely to come in far below the first half. The forecast sum-
go with the monthly financial reporting package. mary above displays these results as compared to the prior
year and the plan for this year.
Although the financial reporting package would include all
the financial statement details for management to eventually Is a forecast always right? No. Is pre-tax income likely to
realize the gross margin target was in trouble, the summary come in at precisely $800,000? No. From a precision perspec-
simplified it, summarized it, and made it easy to understand tive, questions will arise. (How much might a specific project
and action-oriented. Sometimes it only takes a couple of go over budget? Which bids will actually turn into projects?
paragraphs to turn financial information into insight. Will there be employee turnover that could disrupt project

CFMA Building Profits January/February 2015

 TURNING NUMBERS
INTO INSIGHT

PROVIDING INSIGHT TO YOUR LEADERSHIP TEAM

HELPS YOU BECOME PART OF MAKING HISTORY
RATHER THAN JUST RECORDING IT.

completion dates and costs? Will a specific customer be able that can make the next 6-12 months vary from the historical
to pay its invoice by the due date?) The answers to these results. The WIP schedule is a great source of information
questions along with a host of other details will all impact (e.g., what revenues and cost of sales you can expect over
the precision of your estimate of pre-tax income and cash the next few months).
available for debt reduction.
Then, consider the types of outstanding bids. Are they
But what is very clear in the forecast is that there is a sub- targeted at construction projects similar to those in the
stantial risk of missing the pre-tax income and debt reduction past? Are they for smaller or larger projects? Are the gross
targets for the year. Based on the forecast, management’s margins consistent with current projects, or are they higher
attention is required to get the company back on track for the or lower?
second half of the year.
Think through how the business is changing and its likely
Chasing precision will only serve to cloud the message and impact on financial results and cash flow. Talk to PMs and
distract from the importance of getting the company back on others about what they are seeing in the market. Does
track to meeting its financial goals. customer activity seem to be picking up or slowing down?
Management and others inside the company are a wealth
As you create and use forecasts, think decision-making, not of information that will shed light on what’s changing and
precision. what’s about to happen.

Forecasting Rule No. 2: The Near Future Almost Forecasting Rule No. 4: Be Conservative
Always Looks Like the Recent Past Because we know the forecast will not be perfectly accurate,
One of the biggest mistakes CFMs make in creating a forecast the challenge is keeping it in the “ballpark” since a wildly
is to start with a clean slate – a blank spreadsheet to begin inaccurate forecast will hurt your credibility. Therefore, be
thinking about what the first month in the forecast will look conservative in your key assumptions.
like. The first step should be to drop in actual results for the
past 6-12 months. Have the revenues and expenses been com- Let’s say you are working on the profitability component of
ing as expected? Can you see a trend developing? Are you your forecast. Last year, the company generated $6.5 million
surprised by any of the numbers now that you are looking at of net income. This year, profits could reach $10 million if
the past six months of actual results next to each other? results continue the way they have been going. Being conser-
vative in your forecast of profitability means that you assume
In order to increase the reliability of the forecast, the histori- there could be some slips or slow downs before year-end. So,
cal facts and trends and the company’s goals and financial your forecast might guide the profit estimate down to around
targets must be considered together when you create the $9 million, which provides some room for error or surprise. It
forecast. recognizes that not every “at bat” results in a home run.

Forecasting Rule No. 3: Consider What Is Changing While your estimates will not be perfect, err on the side
Once you have a good view of what the financial results have of being conservative. That way the surprises are pleasant
been over the past 6-12 months, look at some of the factors rather than unpleasant.

January/February 2015 CFMA Building Profits

 INTO INSIGHT
TURNING NUMBERS
INTO INSIGHT

Forecasting Rule No. 5: Use the “Smell Test” Don’t Just Report Profits, Build Them
An important step in mitigating risk when creating a fore- At the beginning of CFMA’s Cash Management course, Steve
cast is to give it a serious reality check, what I like to call a
Lords starts by saying, “It is possible for a construction
“smell test.” You’ve created assumptions about profitability,
company’s Controller/CFO to generate more profit for the
the timing of collecting A/R, inventory and payables, capital
company than a PM does on a construction project.”
expenditures, borrowing or payments on debt, distributions
to owners, and a number of other important drivers of finan- It is a bold and spirited statement designed to jolt us out of
cial results. our traditional thinking as CFMs. We’re not PMs. We’re not
estimating the jobs before the bidding process. We’re not
Once you have a completed draft of the forecast, step back
out in the field making the day-to-day decisions on the job.
and look at the resulting financial statements. Are they con-
Yet, we can “generate more profit for the company than a
sistent with your general expectations? Are they in line with
PM does” on a project. How is that possible? It’s because we
actual results and the plan? Do they make sense given your
have the facts, we know the numbers, and we have a clearer
intuition and knowledge of the business?
view of what’s about to happen financially than anyone else
When forecasting a full set of financial statements, the real in the company.
bottom line is cash. So take a hard look at the resulting cash
balances for each of the forecast months, and look at both Right now is the ideal time to participate in the building of
the numbers and a graph of the resulting cash balances. profits, not just the reporting of results. And when the econ-
omy weakens, as it will surely do at some point in the future,
In the graph below, the actual cash balances for the past we need to be prepared to actively participate in protecting
six months and the forecast cash balances for the next six profits, not just delivering the bad news after the fact.
months are presented. Because every forecast assumption
you make ultimately impacts the cash balance, pay very Remember, your role is not just about providing a view of the
close attention to the forecast cash balances to ensure noth- past. It’s about adding real value and making a difference in
ing looks unusual. The smell test is a quick way to check that the company’s mission and ability to make money and grow.
nothing unexpected has made its way into your numbers. It’s about presenting financial information in a way that turns
numbers into insight. Financial forecasting is a great way to
CASH BALANCES jump-start that process. n
6,000,000
PHILIP CAMPBELL is a financial consultant based in
5,000,000 Austin, TX. He has been working closely with CEOs and
owners for more than 30 years.

4,000,000 As a consultant, Philip is focused on helping leaders keep

the accounting and financial side of their business strong
3,000,000 and providing the insights needed to improve cash flow,
get access to capital, and grow successfully.

2,000,000 He is the author of the book Never Run Out of Cash and
the online course Understanding Your Cash Flow in Less
1,000,000 Than 10 Minutes.

Phone: 512-944-3520
0 E-Mail: [email protected]
ACTUAL CASH BALANCE FORECAST CASH BALANCE Website: www.neverrunoutofcash.com

CFMA Building Profits January/February 2015

 KEYS TO BUILDING
A RELIABLE & REPEATABLE
FINANCIAL FORECAST
Copyright © 2015 by the Construction
Financial Management Association
(CFMA). All rights reserved. This article
first appeared in CFMA Building Profits
BY PHILIP CAMPBELL
(a member-only benefit) and is reprinted
with permission.

A RELIABLE FINANCIAL
It can transform your role as CFM
FORECAST IS as well as your ability to make an impact
at a strategic level and drive performance.
A POWERFUL TOOL
In “Turning Numbers Into Insight” (January/February 2015), I discussed how a reliable financial forecast can enhance
your influence and credibility as a CFM. In this article, I will explain:
• The definition of a reliable financial forecast
• The three keys to forecasting success
• The step-by-step process for planning, creating, and presenting a forecast

Reliable Financial Forecast – Defined

To fully understand this term, let’s break down the key components.

Reliable
This refers to the goal of providing a tool or process for strategic decision-making. In forecasting, reliability trumps
precision. Exhibit 1 a few pages ahead summarizes the five rules for creating a forecast you can trust. As the first rule
states, “Think decision-making, not precision.” Chasing precision when creating a forecast will distract your leader-
ship team from making strategic decisions.

Financial Forecast
The forecast is a living, breathing tool that is updated monthly. The
basic format should track with existing financial statements (income
statement, balance sheet, and statement of cash flows in the same
format as monthly financial reporting) for at least the next 18 months
to compare forecast results side-by-side with actual results.

It should also include data that is not already in the historical financial
statements, such as certain nonfinancial data as well as other drivers
and metrics.
The Three Keys to Success for the amount of revenues that would be recognized each
month over the remaining life of each project. Then, if you
Like a successful construction project, forecasting work
add those up, your monthly revenue forecast would be cre-
requires a strong foundation before the process can begin.
ated using the same approach as actual revenues. But this
The financial forecast is built on three key principles.
approach has more flaws than benefits.
Key No. 1: Think Top-Down, Not Bottom-Up
One Company’s Challenge
While creating historical financial statements is a bottom-up
For example, an engineering company was starting the
process of gathering and recording thousands of transactions
financial forecasting process. The company began discuss-
and reporting the results in the form of accurate financial
ing how best to forecast revenues and gross profit. Most of
statements, creating a financial forecast is a top-down exer-
its revenues were project related. Revenues bounced around
cise. You are connecting the company’s vision and strategy
from month to month, depending on how each project
to the likely financial implications of achieving that strategy.
was progressing and when new projects began. It had 35
Forecasting uses big-picture drivers and assumptions to cre- open projects, six about to start, and another five bids out.
ate a model of what the financial statements may look like Projects ranged from $3,000 to $225,000, and each one was
based on your knowledge and intuition. It’s about the strate- in a different phase of completion.
gic view and direction of where the company is going – not
The company reasoned that the most accurate way to esti-
the nitty-gritty details.
mate revenues was at the project level; otherwise, it couldn’t
In order to create a reliable financial forecast, keep financial support the forecast number. So, the company took the WIP
drivers and assumptions at the highest level possible. Given schedule and expanded it by adding columns for projected
the nature of a construction company and the intensity of revenues and gross profit by month for each project over
time and attention on the WIP schedule, this may seem the next 18 months. Then it added projects the company
counterintuitive. expected to start in the near future and ones it had bid on
and expected to win. From there, the company created the
Consider the many assumptions that go into creating a fully projected revenue and gross profit for each month.
modeled set of financial statements. In the income statement,
It was an impressive spreadsheet and tied nicely to the
you forecast revenues, cost of sales, operating expenses, and
monthly revenue forecast. But think about how many esti-
net income. On the balance sheet, you forecast monthly bal-
mates were in that schedule:
ances for cash, A/R, inventory, the balances in percentage-of-
completion-related accounts, property and equipment, A/P, • The timing and amount of possible change orders for
accrued liabilities, debt, and equity balances. A bottom-up each project.
approach to create those assumptions is overly complex and • The timing and amount of changes to expected gross
counterproductive. profit for each project.

To get a better understanding, let’s take a look at forecasting • The timing and amount of cost and completion estimates
revenues: What two numbers can be multiplied to get the for each project.
monthly revenue forecast? • The timing of new upcoming projects, the revenue and
gross profit estimates for each new project.
Let’s say your company uses the percentage-of-completion
• The timing of billings and monthly revenue, etc.
method (PCM) for recognizing revenue. In creating historical
financial statements, the WIP schedule drives the monthly The schedule covered 46 projects; the number of estimates
revenue number as a sum of revenues for each project. In fact, for a single month of revenues was at least 108.
the WIP schedule is a forecast of sorts because it includes a
forecast/estimate of expected revenues (and gross profit) The challenge wasn’t to answer the question: “What are the
over the life of each project. 108 different estimates we can use to arrive at a forecast
of revenues for one month?” It was to figure out what two
If estimates at the project level drive actual financial results, numbers can be multiplied to get the revenue forecast for the
then it would appear that you should just add an estimate month. Let’s look at the answer:

CFMA Building Profits November/December 2015

 RELIABLE
FINANCIAL
FORECAST

EXHIBIT 1: FIVE RULES FOR CREATING A FORECAST YOU CAN TRUST

Creating a reliable financial forecast does not have to be a difficult process. It is a matter of combining a few basic principles
with your intuition and knowledge about the business. Here is a five-step process for creating a forecast you can trust.

#1: Think Decision-Making, Not Precision

One holdup from creating a forecast is the fear of what will happen if your forecast is wrong. Transaction processing and creating
historical financial statements is about being right. (Here, precision is your friend.) However, forecasting is about improving the
company’s ability to make wise decisions. (Here, precision is your enemy.) As you create and use forecasts, think decision-making,
not precision.

#2: The Near Future Almost Always Looks a Lot Like the Recent Past
One of the biggest mistakes CFMs make in creating a forecast is starting with a blank spreadsheet to begin thinking about what
the first month in the forecast will look like. The first step should begin by using actual results from the past 6-18 months. Are the
revenues and expenses aligned with expectations? Is a trend developing? Are you surprised by any of the actual results?

#3: Consider What Is Changing

Once you have a good view of the financial results over the past 6-18 months, look at some of the factors that can make the next
6-18 months vary from the historical results. The WIP schedule is a great source of information (e.g., expected revenues and cost of
sales over the next few months).

#4: Be Conservative
Because the forecast will not be perfectly accurate, the challenge is to keep it in the “ballpark” since a wildly inaccurate forecast
will hurt your credibility. Therefore, be conservative in your key assumptions to avoid unpleasant surprises.

#5: Use the “Smell Test”

To mitigate risk when creating a forecast, give it a serious reality check – what I like to call a “smell test.” You’ve created assumptions
about profitability, the timing of collecting A/R, inventory, payables, capital expenditures, borrowing or payments on debt,
distributions to owners, and a number of other important drivers of financial results. Remember, when forecasting a full set of
financial statements, the real bottom line is cash. So take a hard look at the resulting cash balances for each of the forecast months,
and look at both the numbers and a graph of the resulting cash balances.

Revenues = Number of Open Projects x Average Monthly Key No. 2: Design the Forecast for Your Audience
Revenue per Project A successful construction project begins with understanding
your customer’s vision of the finished project. The same is
A quick look at the company’s historical results showed sur-
true with your forecasting process. Spend some time think-
prisingly consistent average monthly revenue per project over
ing about:
the past 24 months, especially considering the wide variety
of projects open at any given time. And the number of open • Who will receive the forecast each month?
projects during each of those months was fairly consistent. • Who will make business decisions based on the forecast?
The two-driver forecasting approach proved that it was more
reliable and dramatically simpler. • What is most important to them?
• Are they operations oriented or financially focused?
Use your most recent WIP schedule, and certain project level
data for upcoming projects, to confirm that your forecast of • How do they benefit if the company is financially
revenues over the next few months passes the smell test. (See successful?
Forecasting Rule #5 in Exhibit 1.) And resist the urge to drive • What happens to them if the company struggles
your estimates and assumptions down to the project level. financially?

November/December 2015 CFMA Building Profits

In a larger company, the forecast audience is primarily the • Present both historical and forecast results in reports,
CEO and board of directors. Since the CEO is involved in the report packages, and exports
day-to-day business, the forecast must link the company’s • Be easy to update and maintain
vision and strategy to its financial goals and the likely implica-
tions of achieving those goals. The CEO will use the forecast to • Make monthly financial reporting simple and fast
make important decisions about strategy and how it is being • Display graphical views of data and trends (this is a
implemented throughout the organization. powerful feature for communicating insight)

The board of directors is generally not involved in the day- Forecasting tools fall into two categories: homegrown spread-
to-day operations of the business; it is focused on overseeing sheets and forecasting software. Creating a forecast tool can
and monitoring shareholder interests as well as evaluating work well in a company with spreadsheet “power users,”
management and its strategy for the company. The forecast analysts on staff to maintain the financial model, or an orga-
information the board receives should be highly summarized nization that prefers “roll your own” solutions to acquiring
and focus on the key drivers of financial results. In a smaller software from outside vendors. Spreadsheets can be fully
company, the same person might fill all of these roles, includ- customized and are relatively inexpensive to get started.
ing owner and/or lender.
However, spreadsheets are not ideal for a company in which
a complex legal entity consolidation is required to present
Understanding how each group (and each person within each
consolidated actual and forecast results, or one that is moving
group) will use and interpret the forecast is critical to how you
its system to a cloud-based solution with anytime, anywhere
develop and present it.
access to financial data. Spreadsheets can become clunky and
Key No. 3: Create a Repeatable Process difficult to maintain, involve a lot of manual input, and are
prone to human error.
Since the forecast will be updated every month with actual
figures based on current information, repeatability is very Forecasting software is specialized, dynamic, and built for
important to the forecasting process. mass amounts of data as well as the ability to import data
and perform complex reporting. However, it can be a costly
The software or tool you choose will impact the success of
solution that requires professional assistance and extra time
your forecasting process. The tool must include the underly-
to set up and maintain.
ing logic for forecasting (or modeling) a full set of financial
statements and perform a number of additional functions. It Building the Forecast
should at least:
As a CFM, your natural tendency may be to open a spread-
• Provide the ability to forecast with financial and sheet or software and start plugging numbers into a forecast;
nonfinancial data you want to see what the forecast is going to look like. But
• Import historical (actual) financial results that’s like sending equipment to a jobsite before the project

EXHIBIT 2: THE RECIPE FOR FINANCIAL FORECASTING

PLAN CREATE PRESENT

• Set the objectives • Gather financial & nonfinancial • Create a two-minute summary
• Decide on the historical data • Show historical & forecast

& future periods to present • Discuss where the business results side by side
• Identify the key drivers is going • Make the forecast part of your
(financial & nonfinancial) • Create the forecast Monthly Financial Rhythm

CFMA Building Profits November/December 2015

 RELIABLE
FINANCIAL
FORECAST
plan has been created. Also like a construction project, The company was growing and wanted to become a more
there are distinct phases to building a forecast: Plan, Create, metrics-driven organization. The forecast would help plan and
Present. (See Exhibit 2.) manage its different legal entities as well as the key drivers/
metrics of financial performance at the overall company/
Plan
consolidated level.
In this phase, you’ll plan and design the ultimate end product
and build a foundation that will support your forecasting The “easily updated and published monthly” part of the
goals. second objective was critical; the CEO had previously done
a forecasting exercise, but the result was too difficult to main-
Set the Objectives
tain and therefore provided limited benefits for only a couple
Write down the primary goals and objectives of the forecast months.
you’re about to create. Begin with the end in mind to help
define what success will look like once the forecast is complete. Decide on the Historical & Future Periods to
Present
For example, one company recently summarized its objec-
Consider how many months of historical financial statements
tives as follows:
to include in the model. When possible, two to three years of
1) Implement a reliable financial forecasting/projections historical monthly results is ideal since they provide insight
process. into the drivers of results, trends over time, month-to-month
2) Ensure the forecast can be easily updated and variation in results, etc. The results will also help assess where
published monthly. the company has been according to the actual numbers.

EXHIBIT 3: FINANCIAL CATEGORIES & FORECAST APPROACH

FINANCIAL STATEMENT CATEGORIES FORECAST APPROACH

INCOME STATEMENT
Revenues Number of Open Projects x Average Revenue per Project
Gross profit Gross Margin x Revenues
Operating expenses Estimates by expense category based on trend, budget, etc.

BALANCE SHEET
Cash The net impact of all other assumptions
Accounts receivable Days Sales Outstanding (DSO) x Revenues
Inventory Days Inventory Outstanding (DIO) x Cost of Goods Sold
Estimate based on growth and maintenance capital
Property and equipment
expenditure plans
Costs and estimated earnings in excess of billings
Percentage of the billings in excess of costs liability balance
on uncompleted contracts
Accounts payable Days Payable Outstanding (DPO) x Cost of Goods Sold
Billings in excess of costs and estimated earnings
Percentage of trailing two months of revenues
on uncompleted contracts
Estimates based on debt service requirements and
Third-party and related party debt (short-term and long-term)
borrowing plans
Owners’ equity related accounts Estimates based on investment and owner distribution plans

November/December 2015 CFMA Building Profits

Forecast periods should occur monthly for the upcoming (DSO), Days Inventory Outstanding (DIO), and other calcu-
12-18 months. While there are times when you may want lations will be added shortly.) The backlog report is also a
to forecast further into the future (e.g., when presenting a valuable tool used to inform the projection, especially when
long-term plan, raising capital, or attracting a lender), 12-18 compared to the historical trend.
months is sufficient for month-to-month decision-making.
Discuss Where the Business Is Going
Identify the Key Drivers (Financial & One of the benefits of the financial forecasting process is that
Nonfinancial)
it forces you to think deeply about your company’s vision
Identify key components of the financial statements that and strategy. For example, what are the three most critical
you will be forecasting. Since the forecast doesn’t consist of goals or initiatives for the coming year? Is the company plan-
actual transactions, consider the larger influences that will ning to grow slowly or aggressively? Are there plans to bid
drive expected results in the financial statements, such as: on projects similar to the ones in the past, or is the company
• Number of projects moving into new markets or new types of construction?

• Size of projects Answering strategic questions like these helps you think
• Gross profit margin on projects beyond the ledger and encourages conversations with man-
agement about its goals, strategies, and expectations.
• Current operating expense structure
• Company growth plans Create the Forecast

• Existing debt service requirements Now it is time to enter the assumptions that will create the
forecast results. You will draw on a unique blend of histori-
• Capital expenditure plans cal results and trends, your understanding of the company’s
vision and strategy, and your intuition about what is most
Next, consider what drives those balances at the highest
likely to happen financially.
level possible. Exhibit 3 on the previous page lists the finan-
cial statement categories along with suggestions for forecast- Exhibit 4 at right shows the format for the assumptions sheet
ing those balances. where most of the forecast assumptions will be entered
Create (actual results for the first six months of the current year are
shown in this example). Take a look each of the key drivers
In this phase of the forecasting process, you will insert
(a few pages ahead) used to create the forecast months.
historical financial and nonfinancial information into your
forecasting tool. Then, use information about trends and Once you’ve drafted your forecast, take some time to review
metrics in those results, together with information from your work. Here are some questions to consider:
management and others, and begin creating the assumptions
that will drive the forecast results. • Given my knowledge of the business and existing trends,
does the forecast make sense?
Gather Financial & Nonfinancial Data • Does it show the company as a net generator or net
Most accounting systems have a feature for exporting finan- user of cash?
cial statements that show each month in the range side-by- • When discussing the forecast results with the CEO,
side so that information can be easily imported or pasted will he or she be surprised by the overall plan for the
into your forecasting software or spreadsheet. I generally company’s financial future?
export an income statement and balance sheet for the his-
• When discussing the critical assumptions and key drivers
torical periods and rely on the forecasting tool to create the
used to create the forecast with the CEO, will he or she
statement of cash flows. agree that the assumptions and drivers seem reasonable?

Also, gather and incorporate the nonfinancial data. In Present

Exhibit 3, the only purely nonfinancial data element is the Presenting the forecast is more art than science. It’s about
number of open projects each month. Use your project man- how you turn the forecast into insight for your leadership
agement software or historical WIP schedules to gather that team; how you present the key insights will ultimately deter-
number for each historical period. (Days Sales Outstanding mine the success of your forecast.

CFMA Building Profits November/December 2015

 RELIABLE
FINANCIAL
FORECAST

EXHIBIT 4: ASSUMPTIONS SUMMARY

ABC Construction Company CURRENT YEAR

Actual Actual Actual Actual Actual Actual

Jan Feb Mar Apr May Jun

Net increase (decrease) in number of open projects 0 -2 3 2 -1 -2

Number of projects 15 13 16 18 17 15

Change in average revenue per project from same month prior year 10.1% 47.1% -11.2% -6.0% -17.8% -20.6%

Average revenue per project $142,592 $196,529 $138,358 $108,227 $108,864 $102,081
Sales $2,138,875 $2,554,881 $2,213,736 $1,948,087 $1,850,683 $1,531,217

Gross Margin 14.1% 16.1% 15.9% 12.8% 15.3% 14.9%

Days Sales Outstanding (DSO) 52.1 37.4 37.4 43.4 46.7 48.1

Average daily sales (last two months) $54,723 $78,229 $79,477 $69,364 $63,313 $56,365
Accounts receivable $2,850,865 $2,927,512 $2,971,787 $3,010,748 $2,955,228 $2,709,291

Days Inventory Outstanding (DIO) 5.3 2.7 2.1 1.8 2.8 4.1
Average daily cost of sales (last two months) $46,172 $66,347 $66,755 $59,341 $54,438 $47,843
Inventory $243,163 $178,857 $141,622 $107,647 $154,673 $193,765

Capital expenditures $(11,250) $0 $(18,752) $0 $0 $0

Days Payable Outstanding (DPO) 28.0 23.6 25.8 26.4 26.5 24.9
Average daily cost of sales and expenses $47,976 $68,364 $68,825 $61,363 $56,459 $49,923
Accounts payable $1,341,438 $1,610,436 $1,777,769 $1,622,104 $1,496,818 $1,244,285

Principal payments on short-term debt $(10,000) $(10,000) $(10,000) $(10,000) $(10,000) $(10,000)
Principal payments on long-term debt $(5,000) $(5,000) $(5,000) $(5,000) $(5,000) $(5,000)

Owner distributions $(100,000) $(100,000) $(100,000) $(100,000) $(100,000) $(100,000)

Billings in excess liability as percent of trailing two months of revenue 22.6% 17.4% 17.6% 18.6% 20.0% 21.3%

Trailing two months of revenue $3,283,398 $4,693,756 $4,768,617 $4,161,823 $3,798,770 $3,381,900

Billings in excess liability $742,741 $817,016 $841,526 $774,204 $758,720 $720,784

Relationship of costs and estimated earnings asset to the liability 28.0% 39.0% 40.0% 33.0% 33.0% 31.0%

Costs and estimated earnings asset $207,968 $318,636 $336,610 $255,487 $250,378 $223,443

Cash balance $975,032 $1,323,412 $1,523,480 $1,335,275 $1,176,083 $1,051,409

November/December 2015 CFMA Building Profits

 EXHIBIT 4: ASSUMPTIONS SUMMARY KEY DRIVERS

Net Increase (or Decrease) in Number of Projects Rather than estimating the amount of inventory purchased
Net Increase (or Decrease) in Number of Projects
during the month, multiply DIO by cost of goods sold to
Use the estimate of the net change in the number of open
Use the estimate of the net change in the number of open proj- estimate the ending inventory balance. Then the forecast
projects for each month. Even though the number of projects
ects for each month. Even though the number of projects for model can calculate how much was assumed to be purchased
for each month could be entered, you may want to see the
each month could be entered, you may want to see the change during the month.
change computed. (It is easier to think in terms of the net
computed. (It is easier to think in terms of the net change as the
change as the input variable.)
input variable.) Capital Expenditures

Change in Average Revenue Per Project This amount is used to estimate capital expenditures for each
Change in Average Revenue Per Project
from the Same Month Prior Year month, which are a function of management plans and
from the Same Month Prior Year
expectations for capital expenditures.
While the average monthly revenue per project will generally
While the average monthly revenue per project will generally
fluctuate, it can be a very reliable basis for forecasting. This
fluctuate, it can be a very reliable basis for forecasting. This Days Payable Outstanding
number is multiplied by the open projects for the month to
number is multiplied by the open projects for the month to get
get the revenue forecast. Days Payable Outstanding (DPO) is the number of days of
the revenue forecast.
expenses sitting in A/P. It is a good shortcut for forecasting
Gross Margin the A/P on the balance sheet each month. The model can then
Gross Margin
Generally, use a single gross margin estimate to drive gross adjust cash according to the change in payables for the month.
Generally, use a single gross margin estimate to drive gross
profit (and therefore cost of goods sold).
profit (and therefore cost of goods sold). Principal Payments on Debt
Operating & Nonoperating Expenses This is used to estimate principal payments on debt based on
Operating & Nonoperating Expenses
Operating expenses are not included in the assumptions existing debt service requirements as well as any additional
Operating expenses are not included in the assumptions sheet long-term plans for borrowing or paying debt down faster
sheet because those estimates will be entered for each
because those estimates will be entered for each expense line than the existing schedule.
expense line directly into the income statement.
directly into the income statement.

Days Sales Outstanding Owner Distributions

Days Sales Outstanding
Days Sales Outstanding (DSO) is the number of days of average Use a dollar amount to estimate owner distributions.
Days Sales Outstanding (DSO) is the number of days of average
sales sitting in A/R. It is a good shortcut for forecasting the A/R
sales sitting in A/R. It is a good shortcut for forecasting the A/R on Billings in Excess Liability as a Percent
on the balance sheet each month. Accounts receivable at the
the balance sheet each month. Accounts receivable at the end of of Trailing Two Months of Revenues
end of a month is a function of the balance at the end of the
a month is a function of the balance at the end of the prior month
prior month plus revenues minus collections. Because you are not rolling up numbers from a WIP schedule,
plus revenues minus collections.
a top-down approach is needed to estimate the balance in the
Rather than estimating the amount to be collected, using
Rather than estimating the amount to be collected, using DSO PCM-related
the PCM-related
balance
balance
sheet
sheet
accounts;
accounts;
using
using
a percent
a percent
of trailing
of
DSO multiplied by revenues is a reliable way to estimate
multiplied by revenues is a reliable way to estimate the ending revenues
trailing revenues
is a reliable
is a reliable
approach.approach.
the ending balance. Then the forecast model can calculate
balance. Then the forecast model can calculate how much was
how much was assumed to be collected during the month. This percent is heavily driven by what the historical financial
assumed to be collected during the month.
statements reveal about the relationship of this account to
Days Inventory Outstanding revenues.
Days Inventory Outstanding
Days Inventory Outstanding (DIO) is the number of days of
DIO is the number of days of cost of goods sold sitting in Relationship of Costs & Estimated Earnings
cost of goods sold sitting in inventory. It is a good shortcut
inventory. It is a good shortcut for forecasting the inventory Asset to the Related Liability
for fore-casting the inventory on the balance sheet each month.
on the balance sheet each month. Inventory at the end of a
Inventory at the end of a month is a function of the balance If you normally have an asset as well as a liability balance in
month is a function of the balance at the end of the prior
at the end of the prior month plus purchases minus cost of these accounts, use the relationship of the asset to the liability
month plus purchases minus cost of goods sold.
goods sold. to forecast this balance.

CFMA Building Profits November/December 2015

 RELIABLE
FINANCIAL
FORECAST
Create a Two-Minute Summary is a key part of your monthly financial rhythm. It should be
Creating a reliable forecast and effectively communicating updated every month with actuals and the forecast months
it to your audience starts with making the forecast results should be updated based on current information. In your
simple and easy to understand. Here is a helpful exercise monthly reporting package, use a cover memo or similar
that works especially well when implementing a forecast document to summarize the key insights from the forecast.
process for the first time.
The Next Step
Imagine you will sit down with your CEO tomorrow morn- As a CFM, you have an opportunity to make a difference
ing. In that meeting, you will have two minutes to convey at a strategic level. You can influence the direction of your
the essence of the forecast (key insights, implications, and company and play an exciting role in helping it grow and
assumptions) to him or her. The CEO will then step into succeed financially.
another meeting with the company’s key shareholders and
lenders to present his or her insight about where the com- A reliable forecast is one of your most powerful and valu-
pany is going financially. Your mission: Ensure the CEO can able tools. There is no better time than now to solidify your
share this insight with confidence and clarity. influence and credibility by turning financial information,
especially the forward-looking view of financial performance,
This exercise will force you to distill the insights and implica-
into real insight for your leadership team.
tions of the forecast down to what matters most so that you
can clearly identify and communicate the most important In my next article, I will walk through each step of the fore-
high-level drivers and assumptions. (See the example in casting process using a GC as an example, including potential
Exhibit 5 below.) obstacles and resistance, and specific steps to overcome them. n
Show Historical & Forecast Results Side by Side
Presenting financial results and financial statements for each
month side by side makes the trends and business direction PHILIP CAMPBELL is a CPA and financial consultant
based in Austin, TX. He has been working closely with
jump off the page for your audience. After the two-minute
CEOs and owners for more than 30 years.
summary, this is one of the first views of the detailed forecast
results provided to the CEO. Philip has served as a financial officer in a number of
growing companies with revenues ranging from $10
To clarify the forecast results, the CEO should see the forecast million to more than $1 billion. He has been involved in
periods together with actual results. Show the CEO what has the acquisition or sale of 33 companies and an IPO on
been happening, educate the CEO about the financial state- the New York Stock Exchange.
ments, and help him or her get comfortable with the assump-
He is the author of the book Never Run Out of Cash and
tions used to create the forecast.
the online course Understanding Your Cash Flow in Less
Than 10 Minutes.
Make the Forecast Part of Your Monthly
Financial Rhythm
Phone: 512-944-3520
Just as a construction project moves in a rhythm or cycle, E-Mail: [email protected]
so does financial management and forecasting. The forecast Website: www.neverrunoutofcash.com

EXHIBIT 5: TWO-MINUTE SUMMARY

Based on our growth plan for the coming year, we will need to raise $1.1 million to $1.3 million
in cash by June 30. The primary driver of the need to raise cash is the plan for launching a new
division in Texas. The expansion is forecast at $3.0 to $3.5 million driven primarily by the capital
expenditure and first-year operating losses.
In this example, there is one key insight because the expansion into Texas is a significant event. It will take about one minute to
communicate that summary. The remainder of the meeting with the CEO will be spent answering any questions he or she has
about the key assumptions and the conclusion. The number of questions the CEO has will be determined by the degree to which
your conclusions or insights come as a surprise.

November/December 2015 CFMA Building Profits

walking through
the financial

FORECAST
BY PHILIP CAMPBELL

Copyright © 2016 by the Construction

WALK THROUGH THE PROCESS Financial Management Association
(CFMA). All rights reserved. This article
first appeared in CFMA Building Profits

OF CREATING A RELIABLE & (a member-only benefit) and is reprinted

with permission.

REPEATABLE FORECAST
THE PREVIOUS INSTALLMENT OF THIS ARTICLE SERIES, WHICH APPEARED IN THE
NOVEMBER/DECEMBER 2015 ISSUE, DETAILED THE STEP-BY-STEP PROCESS FOR
PLANNING, CREATING, AND PRESENTING A RELIABLE AND REPEATABLE FINANCIAL
FORECAST. TO HELP YOU BETTER UNDERSTAND EACH STEP AND OVERCOME
POTENTIAL OBSTACLES AND RESISTANCE, THIS ARTICLE WILL WALK YOU THROUGH
A SAMPLE GC’S FIRST TIME CREATING A FINANCIAL FORECAST.

In this scenario, ABC Construction’s CEO/owner plans to recruit a number of

respected and experienced entrepreneurs, executives, and savvy members
of the financial community to join his Board of Directors. He wants to take his
company to the next level and believes that having people who have “been
there and done that” will be critical to his success in growing the company.
Current annual revenues are about $25 million and he wants to double that
number over the next three years.

One of the tools the CEO and Board of Directors will use to plan and monitor
the pace and progress of ABC’s growth strategies is a reliable financial fore-
cast. And, the CEO wants the forecasting process in place before recruiting
board members.

In this example, ABC’s CFM and I worked through the process to plan,
create, and present the company’s first financial forecast. The goal was to
make the process a “top-down” rather than “bottom-up” exercise – one that
required very little input or effort from others in the company.

Building the Forecast

Like a construction project, the three distinct phases of building a forecast
are Plan, Create, and Present. (For more on these phases, refer to page 34
of the November/December 2015 issue.)
EXHIBIT 1: INCOME STATEMENT EXHIBIT 2: BALANCE SHEET
ACTUAL ACTUAL ACTUAL DEC ACTUAL JUN
Jun YTD ASSETS Prior Year Current Year
Prior Year
Current Year

Current Assets
Number of projects 15 15 Cash $826,313 $1,051,409
Average revenue per project $1,602,864 $815,832 Accounts receivable 2,915,032 2,709,291
Inventory 188,045 193,765
Revenues $24,042,956 $12,237,479 Costs and estimated earnings in excess
245,177 223,443
Other 0 0 of billings on uncompleted contracts
Other current assets 23,376 23,376
Total 24,042,956 12,237,479 Total current assets 4,197,942 4,201,284

Cost of goods sold 20,411,717 10,411,917 Property

Machinery and equipment 249,927 279,929
Gross profit 3,631,239 1,825,562 Furniture, fixtures, and equipment 251,590 251,590
15.1% 14.9% Gross property 501,517 531,519
Less: accumulated depreciation (215,100) (250,200)
Operating expenses Net property 286,417 281,319
Employee wages and taxes 1,348,598 705,356
Rent 180,950 95,906 Total Assets $4,484,359 $4,482,603
Advertising and marketing 63,016 33,931
Insurance 147,606 79,370 LIABILITIES & EQUITY
Telephone and utilities 41,916 22,098
Travel, meals, and entertainment 33,744 18,169
Current Liabilities
Professional fees 53,223 28,469
Accounts payable and accrued liabilities $1,266,001 $1,244,285
Office expenses 35,246 18,978
Short-term notes payable 368,250 308,250
Depreciation and amortization 70,575 35,100
Billings in excess of costs and estimated
All other 65,003 35,001 earnings on uncompleted contracts 721,108 720,784
Total current liabilities 2,355,360 2,273,319
Total 2,039,877 1,072,378
Long-Term Debt
Operating income 1,591,362 753,184 Notes payable 1,114,245 1,084,245

Interest expense 93,900 42,900 Equity

Other expense (income) 0 0 Owner’s investment 500,000 500,000
Owner distributions (1,720,000) (2,320,000)
Total 93,900 42,900 Retained earnings 2,234,755 2,945,039
Total equity 1,014,755 1,125,039
Pre-tax income $1,497,462 $710,285
As percent of revenues 6.2% 5.8% Total Liabilities and Equity $4,484,359 $4,482,603

EBITDA $1,661,937 $788,284

CFMA Building Profits January/February 2016

 WALKING THROUGH
THE FINANCIAL
FORECAST

Since the CFM was a spreadsheet “power user,” we decided Plan

to create the financial model in Excel so that it could be Set the Objectives
updated monthly and would track the company’s existing
The objectives were heavily influenced by the CEO’s desire
financial statement format.
to create a tool to support a robust financial planning and
monitoring process for the Board.
The objectives were documented as:
EXHIBIT 3: STATEMENT OF CASH FLOWS
1) Implement a reliable financial
ACTUAL ACTUAL forecasting/projection process
to provide a clear view of likely
Jun YTD
Prior Year financial results in order to
Current Year
evaluate various growth plans
and strategies.
Pre-tax income $1,497,462 $710,285
2) Incorporate the forecast into
Depreciation and amortization 70,575 35,100 the monthly financial reporting
process for the Board.
Decrease (increase) in accounts receivable 15,520 205,741
These two objectives guided the
Decrease (increase) in inventory (21,039) (5,721) implementation. At the end of the
Decrease (increase) in costs and estimated project, we referred back to them to
(47,788) 21,734
earnings in excess of billings on uncompleted contracts ensure we accomplished the original
Decrease (increase) in other current assets 2,750 0 intent of the forecast.
(Decrease) increase in accounts payable and
(437,290) (21,716) Decide on the Historical &
accrued liabilities
Future Periods to Present
(Decrease) increase in short-term notes payable (120,000) (60,000)
The most recent financial statements
(Decrease) increase in billings in excess of costs
76,812 (325) are from June 30 of the current year.
and estimated earnings on uncompleted contracts
Eighteen months of actual financial
Net cash provided by operating activities 1,037,003 885,098 data and 18 months of forecast data
were included in the model to pro-
Cash Flows - Investing Activities vide a solid view of recent monthly
Purchase of property and equipment (71,134) (30,002) financial performance and extend
the forecast through the end of the
next calendar year.
Net cash provided (used) by investing activities (71,134) (30,002)
Exhibits 1, 2, and 3 at left show the
income statement, balance sheet, and
Cash Flows - Financing Activities statement of cash flows for the prior
Payments on long-term debt (60,000) (30,000) year and the six months ending June
Distributions to owners (1,325,000) (600,000)
30 of the current year. Exhibit 4 on
the next page shows the WIP sched-
Net cash provided (used) by financing activities (1,385,000) (630,000)
ule at June 30 of the current year.

The full Excel financial model for this

Increase (decrease) in cash (419,131) 225,096
article example, including the article
exhibits, monthly historical financial
Cash at beginning of year 1,245,444 826,313
statements, and monthly forecast
financial statements, are available at
Cash at end of year $826,313 $1,051,409
www.cfma.org/jf16forecast to help
your company adopt a similar process.

January/February 2016 CFMA Building Profits

Identify Financial & Nonfinancial Key Drivers by side. The Statement of Cash Flows logic was created in
Exhibit 5 at right shows the format for the assumptions sheet the financial model to generate that statement for both the
where most of the forecast assumptions will be entered. (The historical and forecast periods.
actual monthly results for the first six months of the current
The number of open projects per month came from ABC’s
year are shown.) The assumptions sheet brings the relevant
project management system and prior month WIP sched-
information and metrics together in one place. It will be used
ules, which were manually entered for each of the 18 months
to review actual results for each driver or metric and to enter of actual data.
assumptions for the forecast periods. The shaded rows are
the primary drivers that will be used to forecast. Operating Discuss Where the Business Is Going
expenses are not shown here; those estimates will be entered Luckily, ABC’s CFM was very involved in the business, had a
directly into the income statement. good handle on the market, and knew what kinds of projects
were in progress. Most of our discussions about the future were
Create with the company’s CEO. We talked about the general trend in
Gather Financial & Nonfinancial Data gross margins for new projects and his existing plans for bidding
ABC’s accounting system exported 18 months of income on projects outside of ABC’s specialty area (with much larger
statements and balance sheets, with each month shown side customers than with which it had previously worked).

EXHIBIT 4: CONTRACTS IN PROGRESS

CURRENT YEAR

Contract Total Contract From Inception to June 30 At June 30

Costs & Billings in

Estimated Excess of
Estimated Total Estimated Earnings Costs &
Gross Costs Percent Revenue Gross Billed Costs to in Excess Estimated
Revenues Profit Incurred Complete Earned Profit to Date Complete of Billings Earnings

Project 1 $1,554,605 $233,191 $145,356 11% $171,007 $25,651 $224,500 $1,176,059 $53,493
Project 2 745,690 149,138 387,759 65% 484,699 96,940 409,800 208,793 $74,899
Project 3 460,000 59,800 112,056 28% 128,800 16,744 164,000 288,144 35,200
Project 4 800,000 88,000 534,000 75% 600,000 66,000 695,000 178,000 95,000
Project 5 925,000 166,500 189,625 25% 231,250 41,625 185,000 568,875 46,250
Project 6 1,202,500 204,425 39,923 4% 48,100 8,177 - 958,152 48,100
Project 7 962,000 153,920 775,757 96% 923,520 147,763 1,005,000 32,323 81,480
Project 8 769,600 92,352 541,798 80% 615,680 73,882 725,000 135,450 109,320
Project 9 615,680 104,666 178,855 35% 215,488 36,633 246,800 332,159 31,312
Project 10 700,000 91,000 401,940 66% 462,000 60,060 500,000 207,060 38,000
Project 11 320,000 52,800 120,240 45% 144,000 23,760 184,675 146,960 40,675
Project 12 256,000 44,800 63,360 30% 76,800 13,440 133,873 147,840 57,073
Project 13 750,000 105,000 96,750 15% 112,500 15,750 58,306 548,250 54,194
Project 14 600,000 66,000 357,780 67% 402,000 44,220 500,486 176,220 98,486
Project 15 480,000 86,400 236,160 60% 288,000 51,840 368,745 157,440 80,745

$11,141,075 $1,697,991 $4,181,359 $4,903,843 $722,484 $5,401,185 $5,261,725 $223,443 $720,784

CFMA Building Profits January/February 2016

 WALKING THROUGH
THE FINANCIAL
FORECAST

EXHIBIT 5: CURRENT ASSUMPTIONS SUMMARY

CURRENT YEAR

Actual Actual Actual Actual Actual Actual

Jan Feb Mar Apr May Jun

Net increase (decrease) in number of open projects 0 -2 3 2 -1 -2

Number of projects 15 13 16 18 17 15

Change in average revenue per project from same month prior year 10.1% 47.1% -11.2% -6.0% -17.8% -20.6%

Average revenue per project $142,592 $196,529 $138,358 $108,227 $108,864 $102,081
Sales $2,138,875 $2,554,881 $2,213,736 $1,948,087 $1,850,683 $1,531,217

Gross margin 14.1% 16.1% 15.9% 12.8% 15.3% 14.9%

Days Sales Outstanding (DSO) 52.1 37.4 37.4 43.4 46.7 48.1

Average daily sales (last two months) $54,723 $78,229 $79,477 $69,364 $63,313 $56,365
Accounts receivable $2,850,865 $2,927,512 $2,971,787 $3,010,748 $2,955,228 $2,709,291

Days Inventory Outstanding (DIO) 5.3 2.7 2.1 1.8 2.8 4.1

Average daily cost of sales (last two months) $46,172 $66,347 $66,755 $59,341 $54,438 $47,843
Inventory $243,163 $178,857 $141,622 $107,647 $154,673 $193,765

Capital expenditures $(11,250) - $(18,752) - - -

Days Payable Outstanding (DPO) 28.0 23.6 25.8 26.4 26.5 24.9

Average daily cost of sales and expenses $47,976 $68,364 $68,825 $61,363 $56,459 $49,923
Accounts payable $1,341,438 $1,610,436 $1,777,769 $1,622,104 $1,496,818 $1,244,285

Principal payments on short-term debt $(10,000) $(10,000) $(10,000) $(10,000) $(10,000) $(10,000)
Principal payments on long-term debt $(5,000) $(5,000) $(5,000) $(5,000) $(5,000) $(5,000)

Owner distributions $(100,000) $(100,000) $(100,000) $(100,000) $(100,000) $(100,000)

Billings in excess liability as percent of trailing two months of revenue 22.6% 17.4% 17.6% 18.6% 20.0% 21.3%

Trailing two months of revenue $3,283,398 $4,693,756 $4,768,617 $4,161,823 $3,798,770 $3,381,900
Billings in excess liability $742,741 $817,016 $841,526 $774,204 $758,720 $720,784

Relationship of costs and estimated earnings asset to the liability 28.0% 39.0% 40.0% 33.0% 33.0% 31.0%
Costs and estimated earnings asset $207,968 $318,636 $336,610 $255,487 $250,378 $223,443

Cash balance $975,032 $1,323,412 $1,523,480 $1,335,275 $1,176,083 $1,051,409

January/February 2016 CFMA Building Profits

Create the Forecast Here are the key insights to focus on in the forecast,
Since this was a new process for ABC, the first few itera- which shows taxable income of $1.5 to $1.7 million
tions of the forecast focused on the next six months. Once in the current year and $2.2 to $2.5 million for next
we were comfortable with the results and insights, we could year:
then forecast the following year by month. 1) We have adjusted the distributions to owners
from $100,000 per month down to zero beginning
The key drivers used to create the forecast for the next six in August. We restart the owner distributions
months are on the next page. (For a better understanding in the forecast in March and assume a larger
of each aspect, refer to page 38 in the November/December distribution in December of next year.
2015 issue.) Exhibit 6 a few pages ahead shows the key
2) We assume that the previous plan to begin aggres-
assumptions for each of the next six months.
sively paying down debt is put on hold until July
As you create the forecast, it’s natural to want to begin shar- of next year. The assumption is we will pay debt
ing it. However, try to keep it “for your eyes only” – at least to down to zero by December of next year.
start. That means don’t sell the CEO or the leadership team
The negative assumptions about owner distributions
on the value of having a forecast, don’t talk to them about the
and debt are driven by the temporary cash shortfall
assumptions or specifics as you create the forecast, and don’t
created by the new customers. The new customers are
send the results of the forecast to them – yet.
large and we have not done business with them in the
Instead, spend a few months beta testing the forecast to past. From our experience, large customers typically
experiment with and learn from the process before rolling take longer to pay than our traditional customers. And
it out to the management team. Create assumptions at the the problem is usually more pronounced in the early
highest level possible to prove to yourself that you don’t months of a project. As a result, we have increased
need to forecast at the project level. Create the forecast for the DSO assumption and assumed that we will be paid
the next three months, then compare the actual results each slower than normal between October and April.
month. What worked well? Are you surprised at the difference
To prepare for follow-up questions from the CEO, a summary
between your forecast and the actual results?
of cash flow was created to highlight the monthly impact on
After running the forecast process for three months, you will cash. Exhibit 7 a few pages ahead is the Summary Cash Flow
become more confident and knowledgeable about the ben- for each of the next six months. It shows that the primary driv-
efits of forecasting and how best to create and present the er of negative net cash flow is the increase in A/R associated
results. You will learn firsthand where the land mines are to with the assumption that DSO will go up near the end of the
avoid. And, you will develop a better sense of the kinds of year as ABC brings on new, larger customers. This temporary
monthly and strategic decisions that the forecast can help slowdown in cash created the need to reduce the usual level
answer and influence. of owner distributions and only pay the normal debt service
requirements.
Present
Create a Two-Minute Summary Exhibit 8 a few pages ahead shows a graph of Days Sales
Here is the summary of the key insights and the primary Outstanding (DSO) for the next six months of the current
drivers/assumptions in the forecast created for the CEO: year. The move up to, and above, the 50-day level in the fourth
quarter is the key driver of the negative cash flow in the fore-
We have completed the financial forecast that covers cast (and the corresponding weaker cash balances).
the next 18 months of results. While profitability is
expected to be generally aligned with our expecta- Once the CEO was informed on what was likely to happen
tions, there are two important insights that we need after contracting with the new (and much larger) customers,
to discuss. Each one is influenced by our plans to win the discussion shifted to ways to mitigate the potential nega-
projects with a number of new, and very large, custom- tive impact on cash and handle a cash shortage if the actuals
ers over the next six months. came in worse than the forecast.

CFMA Building Profits January/February 2016

 WALKING THROUGH
THE FINANCIAL
FORECAST

FORECAST KEY DRIVERS

Net Increase (or Decrease) in Number of Projects Days Inventory Outstanding
The key assumption was that ABC would add one to two net DIO is the number of days of cost of goods sold sitting in
new projects each month. We estimated two for July and one inventory. ABC did not carry much inventory and was working
for each month of August through December. For ABC, the on several initiatives to reduce inventory further. The estimate
fourth quarter is traditionally slow; in the fourth quarter of the for each of the next six months was 3.0.
prior year, the number of open projects was flat. But in the
Capital Expenditures
upcoming fourth quarter, ABC expected to win some bids from
larger customers for projects outside of the company’s usual A dollar amount was used to estimate capital expenditures
focus. for each month.

Change in Average Revenue Per Project Days Payable Outstanding

from the Same Month Prior Year ABC’s DPO (the number of days of expenses sitting in A/P)
The average monthly revenue per project fluctuated in the did not vary much from month to month and was expected
actuals. The trend was toward increasing average revenue. to continue at recent levels. The estimate for the next six
For the next six months, we estimated a 3% increase in months was 25.0.
average revenue per project for each month.
Principal Payments on Debt
Gross Margin ABC was paying a flat amount each month to reduce principal
Overall gross margins did not vary widely in the actuals. The on debt, and those amounts were used as the estimates. The
estimate was 15% for July through September and 14% for management team had discussed plans to pay debt down more
October through December. The lower gross margin for the aggressively but these plans were not included in the assump-
fourth quarter factored in the new projects outside of its tions. (This assumption is discussed in the Present phase.)
normal project type that ABC expected to win.
Owner Distributions
Operating & Nonoperating Expenses It was assumed that owner distributions would stop in August.
Operating expenses were not included in the assumptions (See discussion in the Present phase.)
sheet because those estimates were entered directly into
the income statement section of the forecast model. The Billings in Excess Liability as a Percent
of Trailing Two Months of Revenues
estimates were based on a combination of actual results,
budget, and current expectations. Because numbers are not rolled up from a WIP schedule, a top-
down approach is needed to estimate the balance in the PCM-
Days Sales Outstanding related balance sheet accounts; using a percent of trailing reve-
nues is a reliable approach. This percentage had bounced around
A company’s DSO (the number of days of average sales sitting
from month to month. Based on recent actuals and expectations,
in A/R) will fluctuate based on the number and size of open
18% was estimated for each of the next six months.
projects and whether a specific customer is slow to pay its
invoices. Over the past 18 months, ABC’s DSO ranged from
Relationship of Costs & Estimated Earnings
the high 30s to the low 50s. Asset to the Related Liability

An estimate of 43 was used for the months of July through Over the past 18 months, the relationship of costs and esti-
September, and was increased for the months of October mated earnings to the related liability account (expressed as a
through December. The higher DSO estimate in the fourth percentage) varied from 22% to 40%; over the past six months,
quarter is related to ABC’s expectation that the new, larger the trend was in the mid-30s. We decided to use 32% as the
company projects will pay slower than its typical customers. estimate for the next six months.

January/February 2016 CFMA Building Profits

 EXHIBIT 6: FORECAST ASSUMPTIONS SUMMARY
NEXT SIX MONTHS
Forecast Forecast Forecast Forecast Forecast Forecast
Jul Aug Sep Oct Nov Dec

Net increase (decrease) in number of open projects 2 1 1 1 1 1

Number of projects 17 18 19 20 21 22

Change in average revenue per

3.0% 3.0% 3.0% 3.0% 3.0% 3.0%
project from same month prior year
Average revenue per project $112,572 $134,467 $147,582 $139,149 $123,379 $102,081
Sales $1,913,730 $2,420,414 $2,804,065 $2,782,982 $2,590,956 $2,245,785

Gross margin 15.0% 15.0% 15.0% 14.0% 14.0% 14.0%

Days sales outstanding (DSO) 43.0 43.0 43.0 50.0 50.0 55.0

Average daily sales (last two months) $57,416 $72,236 $87,075 $93,117 $89,566 $80,612
Accounts receivable $2,468,879 $3,106,136 $3,744,210 $4,655,873 $4,478,282 $4,433,680

Days inventory outstanding (DIO) 3.0 3.0 3.0 3.0 3.0 3.0

Average daily cost of sales (last two months) $48,829 $61,400 $74,013 $79,614 $77,026 $69,327
Inventory $146,487 $184,201 $222,040 $238,841 $231,079 $207,980

Capital expenditures $(25,000) - - $(15,000) - -

Days payable outstanding (DPO) 25.0 25.0 25.0 25.0 25.0 25.0

Average daily cost of sales and expenses $50,880 $63,485 $76,107 $81,716 $79,137 $71,446
Accounts payable $1,271,998 $1,587,121 $1,902,665 $2,042,889 $1,978,429 $1,786,157

Principal payments on short-term debt $(10,000) $(10,000) $(10,000) $(10,000) $(10,000) $(10,000)

Principal payments on long-term debt $(5,000) $(5,000) $(5,000) $(5,000) $(5,000) $(5,000)

Owner distributions $(100,000) - - - - -

Billings in excess liability as percent of trailing

18.0% 18.0% 18.0% 18.0% 18.0% 18.0%
two months of revenue
Trailing two months of revenue $3,444,947 $4,334,144 $5,224,479 $5,587,047 $5,373,938 $4,836,741

Billings in excess liability $620,091 $780,146 $940,406 $1,005,668 $967,309 $870,613

Relationship of costs and estimated earnings

32.0% 32.0% 32.0% 32.0% 32.0% 32.0%
asset to the liability
Costs and estimated earnings asset $198,429 $249,647 $300,930 $321,814 $309,539 $278,596

Cash balance $1,254,188 $1,165,844 $1,133,264 $560,804 $813,697 $731,685

CFMA Building Profits January/February 2016

 WALKING THROUGH
THE FINANCIAL
FORECAST

That discussion focused on three steps: Show Historical & Forecast Results Side by Side
1) Do everything possible to influence the speed of The financial model was set up to easily present the monthly
payment so invoices are paid in accordance with forecast next to the monthly actual results. It could be shown
the contract terms. on a calendar year basis or a trailing (or forward-looking)
The primary insight here was that the company 12-month basis. This is an impactful way to make trends and
would focus on expediting rather than collecting direction obvious to the reader. One of the added benefits
A/R with the new customers. Management and of this approach is that management becomes more knowl-
accounting would meet with new customers long edgeable about the financial statements and therefore more
before the first invoice was issued in order to learn likely to pay closer attention to the numbers and trends each
exactly how the customer’s approval and payment month.
process worked.
Make the Forecast Part of Your Monthly Financial
The goal was to adhere to the new, larger customers’ Rhythm
established A/P process and provide everything they
This final step in the process is what creates lasting value
needed and in the format required; thus, ABC could
in the company. An updated forecast was included in the
help invoices move through the A/P process without
monthly reporting package every month going forward. The
delay.
process was created so the last actual month was loaded and
2) Meet with the bank in the coming weeks to walk the forecast months updated with new information.
the lenders through the forecast and make them
aware that ABC may need to draw on the bank line The cover memo in the monthly reporting package included
between November and February. If ABC did draw a paragraph on key changes in the forecast. And, specific
on the line, it expected to pay the loan back in full comments were included each month about how the com-
by April. pany was doing on the two key focus areas with respect to
3) Closely monitor financial results (especially A/R and cash: the impact of a higher DSO on owner distributions and
cash) in the coming months and meet regularly to ABC’s ability to pay down debt faster. Shortly after receiv-
review the steps being taken to mitigate the negative ing the monthly reporting package, the CEO and the Board
impact of a higher DSO. could quickly see what mattered most.

EXHIBIT 7: SUMMARY CASH FLOW

Forecast Forecast Forecast Forecast Forecast Forecast

Jul Aug Sep Oct Nov Dec

Beginning cash balance $ 1,051,409 $ 1,254,188 $ 1,165,844 $ 1,133,264 $ 560,804 $ 813,697

Pre-tax income 97,205 171,818 227,962 195,551 167,234 117,461

Accounts receivable 240,412 (637,257) (638,073) (911,663) 177,591 44,602
Accounts payable 27,713 315,123 315,543 140,224 (64,460) (192,272)
Distributions to owners (100,000) 0 0 0 0 0
Debt (15,000) (15,000) (15,000) (15,000) (15,000) (15,000)
All other changes, net (47,551) 76,973 76,988 18,428 (12,473) (36,803)

Net cash flow 202,779 (88,343) (32,580) (572,460) 252,892 (82,012)

Ending cash balance $ 1,254,188 $ 1,165,844 $ 1,133,264 $ 560,804 $813,697 $ 731,685

January/February 2016 CFMA Building Profits

WALKING THROUGH
THE FINANCIAL
FORECAST

Overcoming Obstacles & Resistance 4) If your CEO is leery about the value of forecasting,
gradually begin talking about the financial future
It is smart to prepare for potential obstacles – especially if of the business with him or her. Ask how he or she
you are implementing the process for the first time. Common defines financial success for the company and for
challenges and questions include: its owners. Engage his or her curiosity (and knowl-
• I have a hard time getting timely and reliable information edge) about what is about to happen financially.
from PMs and management that I need to create and
update the forecast each month. Playing a More Strategic Role as CFM

• What happens to my credibility if my forecast is wrong? A CFM has an opportunity to play a more strategic role in
creating a bigger and brighter financial future for the com-
• My CEO doesn’t see the value in having a forecast.
pany. Building a reliable and repeatable forecast will help
Here are some tips to combat such resistance: you and your leadership team:

1) The secret to a successful start is to begin the • Define where your company is going financially
forecasting process “for your eyes only” for the (and where the CEO wants it to go);
first three months. You will be surprised how this • Expose the dangers and opportunities that lie ahead;
one step will knock down almost every obstacle
• Create a road map to get the company there successfully
you might encounter.
and on time; and
2) Avoid the tendency to gather assumptions at the
• Monitor the financial pace and progress on the journey
lowest level and roll them up. That way you won’t
to success.
need to ask PMs to provide specific data. Create
your own assumptions at the highest possible level Providing a clear view of the business is an important step
based on your bigger picture discussions with
in adding value as a CFM. And it all starts with a reliable
management, your intuition, and your knowledge
financial forecast. n
of the business.
3) Summarize the results of your forecast at a high Note: The full Excel financial model for this article example,
level – and use a range to guide the forecast user including the article exhibits, monthly historical financial
away fromExhibit 8: DSO
a single byFor
number. month
example, “I expect statements, and monthly forecast financial statements, are
pre-tax income for the year to come in between $1.7 available at www.cfma.org/jf16forecast to help your com-
and $2.0 million.” Consistently speak in terms of the pany adopt a similar process.
strategic impact of forecast results and where the
company is headed financially.

PHILIP CAMPBELL is a CPA and financial consultant

EXHIBIT 8: DAYS SALES based in Austin, TX. He has been working closely with
OUTSTANDING BY MONTH CEOs and owners for more than 30 years.

Philip has served as a financial officer in a number of

60 55 growing companies with revenues ranging from $10
50 50
50 million to more than $1 billion. He has been involved in
43 43 43 the acquisition or sale of 33 companies and an IPO on
40 the New York Stock Exchange.
DSO

30
He is the author of the book Never Run Out of Cash
20 and the free report A 3-Part Plan to Breathe Financial Life
Back into Your Business.
10
0 Phone: 512-944-3520
Jul Aug Sep Oct Nov Dec E-Mail: [email protected]
Forecast Website: financialrhythm.com

CFMA Building Profits January/February 2016

Download the Financial
Forecasting Model
I hope you enjoyed the step-by-step process for creating a reliable financial forecast. I
worked really hard to make sure each article provides value for you and shows you the
path to putting this powerful tool to work in your company.
I have included the full financial model in the free member area. Click here to download
the Excel financial model including the article exhibits, monthly historical financial
statements, and monthly forecast financial statements.
Feel free to make changes to adopt a similar process in your company.

Copyright  2016, Philip Campbell http://financialrhythm.com/

Understanding Your Cash Flow
– In Less Than 10 Minutes

The online course Understanding Your Cash Flow – In Less Than 10 Minutes
goes deeper into the Cash Flow Focus Report and the process. I walk you through each
step of the process while you watch, listen, read and try it yourself using your own cash
flow numbers. It is very affordable. And there are also coaching options available where
I help you get up and running fast.

It’s a fantastic way to learn the process.

Here's What You Get When You Purchase the Course Right Now

When you buy now, you get instant access to the course materials so you can get started
right away (or save the materials for a time that is convenient for you). You get:

1. The video presentation of the course. This is a screencast that you can
watch and listen to on your favorite device. I walk you through the step-by-step
process and show you how to understand your cash flow in less than 10 minutes a
month.

Copyright  2016, Philip Campbell http://financialrhythm.com/

 2. The course workbook. This is a downloadable workbook to help you get a fast
start with the course material. It has all the examples and everything you need to
complete your first Cash Flow Focus Report.
3. The Cash Flow Focus Report. You get the links to download the PDF or
spreadsheet version of the Cash Flow Focus Report. 10 minutes a month with this
unique and simple tool and you will wonder how you ever got by without it.
4. The slides from the presentation. You can download a document with a
copy of each slide from the presentation so you can go back to any specific
example or portion of the recorded presentation.

I take off my CPA hat and I speak in the language every business owner can relate to. No
jargon. No stuffy financial rambling. Just a simple, common sense approach that only
takes 10 minutes a month.

Here is how one business owner describes the benefits of the course.

“I googled cash flow projections and found your website online and it appealed to me
mainly due to the fact that you speak in laymen’s terms in a way that a non-financially
trained person can understand.

The fact that you said you can understand your cash flow in less than 10 minutes a
month was also a big reason I bought it. And the fact that you acknowledge that most
accountants and CPA’s speak in terms that the normal owner cannot understand and
that you would be able to put things in understandable terms really got me.

The monthly cash flow focus report was the best feature for me because learning to do
it helped me understand my cash flow statements and the biggest drivers of cash flow.

Another significant benefit is the definitions of cash flow drivers and descriptions of how
a negative or positive sway in cash within those drivers affects cash flow. Being able to
see at a quick glance monthly what happened to your cash using the focus report is a
huge benefit. ”
Click here to learn more about the course.

Copyright  2016, Philip Campbell http://financialrhythm.com/

Download the Book - Never Run Out
of Cash
Remember to grab your free PDF of my book Never Run Out of Cash: The 10 Cash
Flow Rules You Can’t Afford to Ignore. You can grab it in the free member
area. The book teaches you the 10 cash flow rules that will transform the way you
manage your business forever.

You will see your business in a whole new light after you learn these principles and put
them into action. Here are just a few of the skills and techniques you will learn:

 The 4 secrets for creating cash flow projections you can trust.
 How you can use the Peace of Mind schedule to create an almost magical feeling
of control.
 The simple process for ensuring your cash balance is accurate.
 How to dramatically increase the quality of your business decisions.
 How the Peace of Mind schedule fills the enormous gap that the standard
financial statements create.
 How to recognize and understand the cash flow "timing differences" in your
business.
 How to use the "Smell Test" and the "90% Test" to create an amazingly accurate
estimate of what your cash balance will be six months from now.
 How to avoid falling into the trap of worrying about your money.

I’m super-excited to be sharing it with you.

You can get your paperback or digital copy of the book at these
online retailers.
Amazon paperback or Kindle | Barnes & Noble paperback and
Nook
iTunes (available on iPhone, iPad or iPod touch) | Google Play

Grab your copy NOW. You’ll love it.

Copyright  2016, Philip Campbell http://financialrhythm.com/

Need Help Getting Started?

I’d be happy to help you get started with financial forecasting. Just email me and I will
be glad to learn more about what you are trying to accomplish.

Every business is in a little different phase of its financial life. And every business owner
has very pressing problems they want to solve.

But one thing is certain, every business must succeed financially. There really is no other
option.

As I say in my book Never Run Out of Cash, “Either you do the work or have someone
else do it”. That is the formula for getting things done. In this case, it’s the formula for
making your company strong financially.

Let me know if I can help you in any way.

To your success,

Philip Campbell, CPA

Austin, Texas
Email: [email protected]
Web: www.FinancialRhythm.com
(Financial Rhythm is not a CPA firm)

PS – I’d love to hear from you if you find any misspellings, errors, or anything that you
feel needs to be fixed. If you find it… I’ll fix it. 

Copyright  2016, Philip Campbell http://financialrhythm.com/