Forecasting, Financing & Fast Tracking Your Business Growth

TABLE OF CONTENTS
TABLE OF FIGURES ............................................................................................................................................. 5
1 INTRODUCTION ......................................................................................................................................... 7
2 STRATEGIC VISION ..................................................................................................................................... 9

2.1 HAVE A VISION............................................................................................................................................11
2.2 WHY FORECAST? ............................................................................................................................................12
2.3 PROFILE OF SUCCESS.........................................................................................................................................14
2.4 MAKING FORECASTING EFFECTIVE .......................................................................................................................17
2.5 UNDERSTANDING CUSTOMERS ..................................................................................................................19
2.5.1 Market Segmentation ...........................................................................................................................19
2.6 REALISTIC ASSUMPTIONS ...........................................................................................................................21
2.7 GETTING STARTED WITH YOUR FORECAST ..............................................................................................................23

3. REVENUES ................................................................................................................................................28
3.1 PRODUCT SALES ..............................................................................................................................................30
3.2 PRICING ........................................................................................................................................................33
3.3 GEOGRAPHICAL EXPANSION ......................................................................................................................36
3.4 NEW PRODUCT REVENUES .............................................................................................................................38
3.5 ALLIANCES, PARTNERSHIPS, LICENSING AND DISTRIBUTION AGREEMENTS ..............................................39
3.5.1 Licensing ................................................................................................................................................40
3.5.2 Strategic Alliances ..................................................................................................................................41
3.5.3 Distribution Channels .............................................................................................................................41
3.6 FRANCHISING .............................................................................................................................................43
3.6.1 Being a Franchisor .................................................................................................................................43
3.6.2 Being a Franchisee .................................................................................................................................44
3.7 PROJECT MANAGEMENT ............................................................................................................................45
3.8 OTHER INCOME ..............................................................................................................................................47
3.8.1 Grants & Financial Assistance ...............................................................................................................47
3.8.2 Intellectual Property Income .................................................................................................................47
4. COSTS .......................................................................................................................................................49
4.1 COST OF SALE .................................................................................................................................................51
4.1.1 Refunds, Warranties and Guarantees ....................................................................................................52
4.1.2 Loyalty & Awards Programmes .............................................................................................................52
4.2 OPERATING EXPENSES / OVERHEADS ................................................................................................................54
4.2.1 Marketing ..............................................................................................................................................55
4.2.2 Marketing ‐ Market Research ...............................................................................................................56
4.2.3 Marketing‐ Marketing Effectiveness ..................................................................................................... 57
4.2.4 Competitive Intelligence .......................................................................................................................57
4.2.5 Marketing – Customer Retention ..........................................................................................................58
4.2.6 Marketing ‐ Branding ............................................................................................................................60

FORECASTING, FINANCING & FAST TRACING YOUR BUSINESS GROWTH

The definitive eGuide for developing company financial forecasts.
4.2.7 Information Technology – As A Revenue & Profit Driver .......................................................................61
4.2.8 Information Technology – As A Cost Of Doing Business ........................................................................62
4.2.9 Employee / Personnel Costs ...................................................................................................................63
4.2.10 Staff & Management Incentives (Commissions, Bonuses)................................................................66
4.2.11 Director / External Advisor Payments ...............................................................................................67
4.2.12 Other Operating Expenses ................................................................................................................67
4.2.13 Building Lease ...................................................................................................................................68
4.2.14 Insurance ..........................................................................................................................................69
4.2.15 Legal Costs .........................................................................................................................................69
4.2.16 Accounting Costs ...............................................................................................................................70
4.2.17 Taxes..................................................................................................................................................70
4.2.18 GST (General Sales Tax) ....................................................................................................................70
4.2.19 Income Tax........................................................................................................................................71
4.2.20 Other taxes .......................................................................................................................................72
4.2.21 Tax Planning .....................................................................................................................................73

5. BALANCE SHEET, WORKING CAPITAL & CAPITAL EXPENDITURE .................................................................74
5.1 BUSINESS CHALLENGES – MANAGING YOUR CASH FLOW .......................................................................................77
5.1.1 Managing Working Capital ...............................................................................................................77
5.1.2 Managing Receivables ..........................................................................................................................78
5.1.3 Managing Payables ..............................................................................................................................79
5.1.4 Managing Inventory..............................................................................................................................80
5.2 FUNDING WORKING CAPITAL AND GROWTH ....................................................................................................83
5.2.1 EQUIPMENT FINANCE – LOANS AND LEASING......................................................................................83
5.2.2 Factoring ...............................................................................................................................................85
5.2.3 Inventory Finance ..................................................................................................................................85
5.2.4 Production Finance ...............................................................................................................................86
5.2.5 Warehouse Finance...............................................................................................................................86
5.2.6 Vendor Finance .....................................................................................................................................86
5.3 BUSINESS GROWTH – INVESTING IN THE FUTURE .......................................................................................87
5.3.1 Capital Expenditure ...............................................................................................................................87
5.3.2 Manufacturing Challenges ....................................................................................................................89
5.3.3 Research & Development challenges ....................................................................................................89
5.4 LIMITS TO GROWTH – CAN YOU GROW TOO QUICKLY? .............................................................................91
6 FINANCING ..............................................................................................................................................92
6.1 DEBT ...........................................................................................................................................................95
6.2 EQUITY .......................................................................................................................................................98
6.2.1 Dividends and Retained Profits ..............................................................................................................98
6.2.2 Employee Shares & Options ...................................................................................................................99
6.2.3 Other Reserves .....................................................................................................................................100
6.3 HIGH GROWTH COMPANY’S – SPECIAL CONSIDERATION .......................................................................................102
7 REPORTING & ANALYSIS ............................................................................................................................... 104

3|Page
© 2007‐ 2008. Knowledge 2020 Pty Ltd. Please do not reproduce any of the text without prior permission, which
will often be granted. Contact markostryn@knowledge2020.com or visit online at http://www.forecastvision.com
The above text contains generic financial information that does not constitute financial advice.
Last revised: September 2008


7.1 CASH FLOW & CASH MANAGEMENT FORECASTING .............................................................................................105
7.1.1 Cash Flow & Investors ..........................................................................................................................107
7.2 RATIO ANALYSIS............................................................................................................................................108
7.3 VARIANCE .................................................................................................................................................109
7.4 SCENARIO ANALYSIS .................................................................................................................................111
7.5 SENSITIVITY ANALYSIS ....................................................................................................................................113
7.6 RISK MANAGEMENT .................................................................................................................................114
7.6.1 Business Risks.......................................................................................................................................114
7.6.2 Financial Risks .....................................................................................................................................114
7.6.3 Risk Management Framework ............................................................................................................117
8. ACQUIRING OR SELLING – VALUATION & OTHER CHALLENGES ................................................................ 118
8.1 INCREASING YOUR BUSINESS VALUE ........................................................................................................120
8.2 ACQUISITIONS ..............................................................................................................................................122
8.2.1 Vertical Integration ..............................................................................................................................123
8.3 DUE DILIGENCE .........................................................................................................................................124
8.3.1 Due Diligence – Organisational & Financial ........................................................................................124
8.3.2 Due Diligence – Market Opportunity ..................................................................................................125
8.3.3 Due Diligence – Legal, Technical & Manufacturing ............................................................................ 126
8.4 EXITING YOUR BUSINESS ..........................................................................................................................128

9 REVIEWING YOUR FORECAST .................................................................................................................. 129

4|Page



TABLE OF FIGURES
Figure 1 Company Stakeholders ..................................................................................................................................10

Figure 2: The Valuation Increases as the Company achieves its Milestones. .............................................................13

Figure 3: Porter's Five Forces Model ...........................................................................................................................15

Figure 4: Five Forces Model & Bread Producers .........................................................................................................16

Figure 5: Segmenting Your Market into Attackable Niches ........................................................................................20

Figure 6: Revenue Streams & Assumptions for an Airport .........................................................................................22

Figure 7: Front Cover to Aggregate Forecast ...............................................................................................................24

Figure 8: Linking Actuals from Accounting Software ...................................................................................................26

Figure 9: Overall Expenses ...........................................................................................................................................27

Figure 10: Expenses in Detail ......................................................................................................................................27

Figure 11: Forecasted Income Statement....................................................................................................................28

Figure 12: Revenues and Assumptions ‐ Charity ........................................................................................................32

Figure 13: Evaluating Growth Opportunities ..............................................................................................................37

Figure 14: Process for Assessing Alliance Opportunities ............................................................................................39

Figure 15: Process for Valuing IP ................................................................................................................................48

Figure 16: Fixed and Variable Costs ............................................................................................................................49

Figure 17: Strategies for Customer Retention ............................................................................................................59

Figure 18: Building a Financial Model to include new and existing Revenues ...........................................................60

Figure 19: Tax Modelling ............................................................................................................................................72

Figure 20: Forecasted Balance Sheet ..........................................................................................................................75

Figure 21: Equipment Lease & Own Options ...............................................................................................................83

Figure 22: Capital Expenditure Model ........................................................................................................................88

Figure 23: Calculating Gearing ....................................................................................................................................93

5|Page


Figure 24: Covenant Modelling...................................................................................................................................97

Figure 25: Financing a High Growth Business ...........................................................................................................102

Figure 26: Cash Flow Forecast Modelling .................................................................................................................105

Figure 27: Variance Analysis in Reporting ................................................................................................................110

Figure 28: Graphical Analysis of Scenarios ...............................................................................................................112

Figure 29: Average Business Value by Industry. SOURCE: BizExchange Index March 2008 Quarter Results .........119

Figure 30: Increasing Business Value ........................................................................................................................121

Figure 31: Organisational & Financial ‐ Due Diligence ..............................................................................................125

Figure 32: Due Diligence ‐ Market Opportunity .......................................................................................................126

Figure 33: Organisational, Legal, Technical & Manufacturing Due Diligence ...........................................................127

6|Page



1 INTRODUCTION
Entrepreneurship has its glamour. However behind the world of
intense negotiations, last minute deals and successful garage
visionaries are the less glamorous concepts that you must get right –
cash flow, working capital, pricing strategy etc.

This eGuide is all about financial forecasting. It addresses the truism
“failing to plan is planning to fail”. A forecast is simply a translation of
the vision and strategy of your company into financial numbers. Many
entrepreneurs and managers find this process tedious and
intimidating. External support is not always there for you. This eGuide is here to assist you.

Your company must be self‐sustaining over the short term and profitable over the long term. It
must generate sufficient cash to pay the bills and maintain increasing levels of sales.

I wrote this having spent many years working with fast growing dynamic Small & Medium
Enterprises. These dynamic companies continually faced the longer term financial challenges
which would help determine their success.

Most businesses use adequate to good Management Accounting packages such as MYOB, and
Quicken. These tools are perfect for audit and for a historical review of the enterprise, but do
not address future challenges. How are key expansion questions such as the following
answered?

• What is our company worth today? How can we increase its value in the future?
• How can we afford to fund our growth? How will our needs for ever increasing amount
of working capital be addressed?
• Should we purchase? Should we build / buy that new automation system or factory?
• Our new venture? Should we pursue the opportunity to develop and market a new
product range?
• Buy versus build? Should we invest in the capacity to produce key inventory ourselves
or outsource this?

7|Page



• Our acquisition plans? Will the anticipated future profit streams and the savings from
synergies justify the cost of acquisition?

The forecasting process is often one of iteration, where you can plan different ‘what if’ figures
model and assess the different outcomes. If you increase the sales budget, how many
additional sales people will you need to generate that level of extra sales? What will happen to
your cash flow in the months that it takes for the salespeople to reach peak performance?

Developing your forecast on a spreadsheet or custom building standalone or web‐based
software allows you more flexibility and complexity in trying out these different scenarios.

The different scenarios will also show the impact of relevant risk factors. How will interest
rates affect the demand for housing? What is the relationship between the amount of rain next
summer and my company’s ice cream sales?

I’ll make a couple more points before getting into the detail:

Firstly, there's no need to reinvent the wheel in regards to building your own forecasting
spreadsheets. There are a wide range of software packages and spreadsheets commercially
available. They vary in quality, robustness, price and applicability to your demands of your
particular company or industry. I have not specifically mentioned any in this booklet, but my
organisation would be delighted to understand more about your specific operating conditions
and talk you through your options.

Secondly, I’ve tried to cover as many different types of industry, position on the supply chain,
and way of doing business as I can within the limited space below. I haven’t managed to cram
in every variable for every company, but would be delighted to receive your feedback about
what needs to be addressed. The booklet is only in PDF soft copy at present, meaning that I can
update it whenever I need to. Hence your insights would be most welcome.

Happy reading and most important of all, good luck with your venture!

Mark Ostryn
markostryn@knowledge2020.com
September 2008

8|Page



2 STRATEGIC VISION
It is often said that there are four types of company:

• Those that make things happen.
• Those that watch things happen and respond.
• Those that watch things happen and don’t respond.
• Those that didn’t notice that anything had happened.

We’d all like to be in the first group, but no matter how visionary we are, much of our work is in
responding to other’s first moves. We’ve even got it wrong from time to time, and not
responded when we needed to!

This eGuide is all about planning to make things happen – having a strategy. We’ll also try to
help you with responding to market shifts – mainly by forecasting that they will occur and doing
some scenario planning (what if….?), some sensitivity analysis (if interest rates increase by x%
what will be the effects on sales?) and some risk management.

A business entity is simply a collaboration of resources that is must make the greatest possible
return on a flow of financial inputs provided to it.

• These inputs are DEBT, primarily from financial institutions and EQUITY from
shareholders.
• The company itself is a collection of productive resources – brainpower, technology,
manufacturing processes and intellectual property that must turn these financial inputs
into productive assets.
• The end financial output must represent either a greater or a more secure rate of return
than competing investment proposition that also require those debt and equity inputs.

Thus your company is only sustainable if, for a given level of risk:

• A holder of EQUITY in your company (i.e. a part‐owner) can get a greater return on that
investment compared with other investment opportunities
• A holder of DEBT in your company earns a market competitive rate of interest for
lending funds to your company.

Along the way there are also other stakeholders in the company that also need to be satisfied

9|Page



Figure 1 Company Stakeholders

While many of these stakeholders may not have a direct bearing on the performance
measurements generated by the company, their indirect impact may be substantial e.g.

• Requirement for environmental measures, sustainability etc.
• Requirement to look at the community impact of decisions to locate in a particular
city, provide employment to residents of that city
• Requirement to look at “financial dispersements” made by the company which may
not be “financial rational” to shareholders, but which may show the company as a
good corporate citizen e.g. charity donations etc.

10 | P a g e



2.1 HAVE A VISION

“You can analyse the past but you need to design the future. That is
the difference between suffering the future and enjoying it” Edward de
Bono

Forecasting is more than looking at what you achieved last year and extrapolating it forward for
the next few years. That’s called backcasting! Forecasting requires you to think about what
you want to be in the future, consider what it going to take to get you there, and think about
what how your industry, you customer and the world in general can change in the meantime.

How will the following global trends affect your customers and your processes and

Look how rapidly, new technologies and ideas are spreading. What will telecommunications
and the internet look like in ten years time?

How will substantially higher energy costs and green issues affect the way we all do business
and consume?

There are many, many of these big questions to ask: Globalisations of plagues and diseases,
restrictions on alcohol and “junk” food, wealth disparities between rich and poor people,
continued growth of China and India, increasing migration, evolution of cities, evolution in
genetic research, development in nanotechnology, changes in life expectancy, exponential
growth in innovations and inventions, changes to family life.

The list is endless. What will impact on your business?

11 | P a g e



2.2 WHY FORECAST?

As forecasts are invariable inaccurate or even wrong, is it worth going through the forecasting
process?

You must have a set of financial projections, a numerical statement of what you want your
company to achieve. Additionally, lenders need to see a strong likelihood of repayment; angel
investors and venture capitalists will calculate what they think is the value of your venture.

These figures will be used by the investor to calculate the potential future value of your
company based on a valuation technique such as multiples of earnings or profits or discounted
cash flow. If they are convinced that your framework has been scrupulously prepared using
best available information, they will have more confidence to invest in your company.

The process of generating these figures also adds reality to your expansion plans. For example,
if you want to open up a production facility in China you will need to research and allocate the
costs for doing so. Having performed that financial analysis, you will be in a better position to
assess alternatives such as outsourcing manufacture instead.

A supplier of funds will also see where you are more financially vulnerable and where you are
most likely to require financial injections. You may find that you do not require all of the $5m
invested upfront and by having it staged over time you have the opportunity to obtain a higher
valuation for your company as you move through from start up to expansionary phase.

The following real life model has a series of performance milestones that the company is
forecasted to achieve, prior to them receiving additional funding at the pre‐negotiated price
per share

12 | P a g e



Figure 2: The Valuation Increases as the Company achieves its Milestones.

In short, while no investor is expecting you to get your future projections "correct", the thought
process discipline required to do the projections in the first place alerts you to potential
opportunities or threats that you may not have otherwise considered.

13 | P a g e



2.3 PROFILE OF SUCCESS

Successful growth companies will share many of the following characteristics:

• Proprietary technology, owned by the company. This acts as a barrier to entry,
preventing other players from coming into the market. That way margins can remain
higher, and there is less need to discount price in the face of competition.
• Entrepreneurs with a great track record – i.e. previous successful ventures.
• Large and growing potential market for the product or service. Typically with a forecast,
the demand curve will start off slowly as the product or service establishes itself as
“needed” by its target market. Earlier versions may be slower sellers, and the company
has to adjust its operating cost base in order to fulfil growing demand. Here, working
capital pressures can be at their greatest.
• Good potential sales and sustainable margins. This can be through ownership of
Intellectual Property or proprietary know‐how.
• A tendency for the company to remain innovative and on the cutting edge of technology
• A proven market need for the product, established through researching and testing the
market
• A sustainable competitive advantage with high barriers to entry for potential
competitors.
• A greater possibility for strategic alliances to leverage the strengths of other companies

An excellent framework for assessing where your company is in relation to its competitive
environment is Porters Five Forces Model. Developed by Michael Porter, the model describes
five forces that determine the competitive intensity and therefore the attractiveness of a
market. These forces are continually changing and such continual changes also require that
you continually reassess your marketplace.

14 | P a g e



Figure 3: Porter's Five Forces Model

To illustrate this, imagine the competitive forces of a bread producer:

• Their bargaining power with their customers – the supermarkets and catering firms.
• The impact of health trends on the types of bread they produced.
• The changing cost of raw materials such as grain and transportation charges.
• Bread substitutes. What else can people eat for lunch apart from sandwiches?
• The impact of local bakeries and local franchises on total demand.

This and other factors can be mapped to the following diagram:

15 | P a g e



Figure 4: Five Forces Model & Bread Producers

Prior to forecasting the number for your own venture, you may want to review the key forces
that will affect your industry over the next five years or so, using the Five Forces framework.

16 | P a g e



2.4 MAKING FORECASTING EFFECTIVE

Following in from this, consider the following:

• Do you know how marketplace trends will affect your company over the short and
longer term?
• Have you established your company’s goals and priorities for the next financial year, and
beyond to the next three to five years?
• Have you set financial targets for the next financial year?
• Do you have a method for measuring your company’s performance against your goals,
priorities and financial targets?
• Does your management team know your company’s goals and financial targets for the
next financial year, and what they need to do to achieve them?
• How frequently will these targets be reviewed?
• What incentives do the key managers have to achieve these targets?

"Planning differs between budgeting and forecasting in intent. While
the budget is used to control, the forecast is used to predict, the plan
sets out desired outcomes and expectations usually over a longer‐
term period. In essence plans are used to affect change." PA
Consulting Group

There are several major steps to ensure that the forecasting approach is effective and that the
results are credible:

• Forecasts imply a plan so your team should be familiar at least with the aims of their
own functional or strategic area. Issues such as confidentiality which may preclude full
openness should be ironed out prior to a session.
• Parameters and assumptions such as the size of the market, major production or
product changes, expected sales growth, exchange rates and so on should be set early
and disseminated uniformly to form the basis of the plan.
• The sales budget should be the first part to be tackled, as it reflects the economic and
competitive forecasts and shapes all of the other component parts of the budget. All

17 | P a g e



other budgets should be developed consistently with the sales volumes. Manufacturing
production targets, stock levels and product support are all dependent.
• Once the forecast has shaped up, your cash flow forecast is needed to assess
affordability. This will ensure that the forecast when finalised is consistent with broad
financial parameters and does not, for example, assume unrealistic borrowing
requirements.
• Effective forecasting requires good communications throughout your organisation. The
budgeting component may move up and down the organisation and sanity checks
between senior managers of the various divisions may be required before all changes
are agreed.
• Once agreed, the final figures need to be reviewed and confirmed that at a corporate
level the return on assets / investment is sufficiently high. If not, consideration needs to
be given to cutting costs, selling more or increasing efficiency.

18 | P a g e



2.5 UNDERSTANDING CUSTOMERS

An important aspect of forecasting is in understanding the makeup of customers who purchase
your products. One key issue for planning is – are they profitable? Consider the types of
products they purchase and the services that they may require with them. Consider also the
implications of negotiating a volume deal over time with a large company.

Will the discounted price, plus all of the free priority support and service offering they may
require, make Big Company overall a viable customer?

And what if Big Company doesn’t renew or repurchase in the future. Might you have lost the
focus or even the contact of smaller customer companies?

2.5.1 MARKET SEGMENTATION
Importantly, you will also need to consider what customers you effectively wish to target.
Some target markets can be addressed more profitably than others. As a general rule, you can
segment your market by dividing up your total market into a series of niches, and reviewing
each niche (below) in order to rank the priority levels that you will address those markets.
Some niches may never be cost effective, as it will cost you more to service them than the
revenues you can expect from them.

Take the potential market for a product such as a device to test water quality at the water
source rather than back at the laboratory. There are several different niches that the product
can be sold into, but the company has limited resources and cannot attach all niches
simultaneously.

19 | P a g e



Figure 5: Segmenting Your Market into Attackable Niches

Management and advisors have determined that given limited personnel, promotional; budget
and R&D funds, it would be best to concentrate on two specific niches (1.3 and 2.1) initially,
before attempting to grab the wider market.

20 | P a g e



2.6 REALISTIC ASSUMPTIONS

Your forecast should document all assumptions used when you created this view of the market.
Some of these assumptions may be controllable e.g. the per capita take up of a new medical
device over time, and some uncontrollable, such as the future price of a barrel of oil.

Taking the Australian car industry as an example, the total population of Australia is 21million
and car ownership is at around 12 million. To forecast the total sales of a particular car brand,
you would take into account:

• The growth of total population of Australia in the forecasting period.
• The number of people under 17, or those in the upper age bracket ineligible to drive.
• The trend in car ownership per household.
• The trends in type of car (sedan, convertible, 4WD) likely to occur.
• The trends in public transport available.
• The costs of car parking in major cities.
• The reputation of the particular brand and model of the car
• Relative running costs of that model compared with competing models

And a whole host of other factors.

It can often be informative to map out each of the key revenues and costs of your business, and
place alongside them all of the assumptions that you have made. For example, an airport will
have several revenue streams, each of which will depend on a range of future assumptions that
you will have input. Some of these assumptions are general and will be made across a range of
revenue streams (e.g. total passenger or freight traffic, which in turn will be partially based on
general economic health), and some will be specific to a particular revenue stream e.g. the
viability of Tax Free shops may depend on future adjustments to the consumption tax both in
Australia and overseas in the future.

A mapped out list of assumptions may look something like this:

21 | P a g e



Figure 6: Revenue Streams & Assumptions for an Airport

22 | P a g e



2.7 GETTING STARTED WITH YOUR FORECAST

Before you calculate and type in your first numbers, you have to consider a series of issues
pertaining to your forecast. These include:

CUSTOM SOFTWARE OR EXCEL SPREADSHEET?

The market for purpose built financial software is expanding, both as downloadable software or
software‐as‐a‐service, where you log on to a provider via an internet connection. Amongst
spreadsheets, typically Excel® based, you may choose to build your own from scratch (with its
inherent time consuming challenges) or purchase ready made forecasting spreadsheets. The
merits and pitfalls of each option call for another booklet worth of discussion!

If you wish to consider alternatives to spreadsheets as a platform for your forecast, you may
also want to review:

• Software based pre‐built financial models that require you to simply input your forecast
data.
• Pre‐built financial models accessible on demand via the internet (software as a service)
• And for large companies, a range of ERP, Business Performance and Business
Intelligence tools

TIME SPAN OF FORECAST

How long do you want to forecast forward for (in years)? This answer will depend on what you
want from your forecast. If you want to do a discounted cash flow for a valuation, or if you
want to track the longer term performance of return on your assets, you’ll probably want to do
at least five years. If you are about to commercialise a gold mine, it will be more like thirty
years! Conversely, if your concern is running out of money and you want to track your end of
month, or even end of week bank balance, you’ll need to focus on one year or less.

LENGTH OF EACH PERIOD

When you’ve decided how many months or years forward you wish to forecast, consider then,
an ideal number of columns that are useful for your business and are not time consuming or
unnecessary for you to fill in. A 60 column spreadsheet (monthly forecast for five years) is
unnecessarily large, unwieldy to view on your screen and the monthly figures will likely become
meaningless as your move toward the distant future.

COMPANY STRUCTURE

23 | P a g e



How will you sub‐divide your forecast as to make it meaningful without overburdening yourself
with data? Assume you have 10 product groups with a total of 700 SKU’s and sales offices in 10
territories in Australia and another 20 worldwide. Will you try and incorporate all of this data
on a single spreadsheet? Will you create separate spreadsheets and feed in the macro data
into a master spreadsheet? How will you make allowance for future products or territories?

The following company has a model for each division (see the worksheet tabs) and the front
cover simply aggregates the data from these worksheets:

Figure 7: Front Cover to Aggregate Forecast

Issues such as how the various financial statements, produced by your company, its subsidiaries
and other wholly or partially owned trading entities consolidate. This is further complicated by
inter‐company trading and borrowings, minority interests and joint ventures.

COLLABORATION

Are you producing this forecast alone or will parts of it be delegated to other individuals. If it’s
the latter, will you be dividing it up into several sections or will more than one person be
working on a particular section. Will your forecasting platform allow for version control or
multi‐user inputs? Would you prefer that rights to edit the data are restricted, and a certain
sub‐group can only have access in view mode?

USABILITY

Aligned with collaboration, on a slightly different subject, will other people who have not been
involved in the construction of your forecast be able to intuitively understand your forecasting
model if you weren’t there to guide them? Along with documenting the assumptions that you
made when producing the figures, you will need to make abide by certain rules so that the logic

24 | P a g e



and process behind the model is transparent. This will range from including a Table of Contents
in the forecast; to shading input cells yellow (normally) to differentiate them from calculate
cells.

DEALING WITH COMPLEXITY

Producing a thorough forecasting model may be much more complex that you will have give
allowance to. Consider some of the following challenges:

• The phasing in of receipt and payment of Sales Taxes such as GST and their impact on
cash flow.
• Taking account of the time span between receiving an order, completion, delivery,
invoicing and payment for the goods and services.
• The capacity to produce meaningful working capital estimates when so many variables
have to be factored in.
• Applying depreciation and amortisation estimates to tangible and intangible assets.

Accept the fact that these financial forecasts you produce will be a simple approximation, and
resist the urge to try and make certain parts of the forecast unnecessarily detailed (coffee
supplies in the staff room) when others can only be a simple approximation (extrapolated 20%
growth in revenue between 2012 and 2013).

HISTORICAL DATA

You’ll need to have an up to date set of financial statements with sufficiently detailed
background information behind them to get started. The key detail may also relate to trends in
sales across product lines and seasonal fluctuations. Details of this data may help you detect
and programme in growth trends. You’ll also need to know the detail behind your current
status of payables, receivables, loans and other balance sheet items, as they will form a part of
your near term forecast.

Also you will need to factor out (or in) the following:

• Historical items of income or expense that were unusual, non recurring or unlikely to
have any influence within the forecasting period.
• Revenue that was derived from assets no longer operating within the company.

INTEGRATION WITH YOUR ACCOUNTING SOFTWARE

25 | P a g e



Will you want to integrate a feed of the ACTUAL financial performance into your forecasting
spreadsheet / software? This would:

• Save manually rekeying to input your actual financials.
• Provide comparisons between your actual financials and what you had previously
forecast.

Some forecasting packages provide a mapping function so that you can link Excel outputs from
your accounting software into your forecasting software

Figure 8: Linking Actuals from Accounting Software

DESIGN AND USABILITY

If you are opting to build your own forecasting spreadsheet, make sure that it is well designed,
easy to manipulate, well documented and understood by other users. Design tips include:

• Modularise the model into different sections with summary sheets that bring together
the various components.
• Ensure that you can support a simple sensitivity analysis, looking at the effects of a
change in one variable on the financials.
• Show clearly which cells are input cells and which cells are calculated by the software.
• Document your assumptions separately.
• Do not hard code variables into a formula. P (price) and Q (quantity)

Here’s an example of the need to modularise your model into different sections in order to not
have one overly complex summary sheet.

You may have a summary sheet of overall operating expenses:

26 | P a g e



Figure 9: Overall Expenses

But feeding in to that total Administrative Expense, there may be a sheet where these expenses
are broken down into their individual components – salaries, leases, office equipment etc. This
sheet in itself may also be a summary of what has be calculated at a lower level. For example,
the staff costs would have been calculated by a lower level sub‐sheet:

Figure 10: Expenses in Detail

27 | P a g e



3. REVENUES
Forecasts begin with your analysis of the revenue potential of your company’s products and
services.

The first, key financial statement is the Income Statement, often known as a Profit and Loss.

The forecasted income statement is a summary of all of the expected revenues and expenses
incurred during the forecast period. These includes the sales of major items, their cost of sales,
operating expenses, a portion of the capital costs of operating the company, interest and tax.

Figure 11: Forecasted Income Statement

This statement takes account of when revenues and costs were earned or incurred, not when
payment and receipts were made. Making a profit here, does not necessarily mean that your
company won’t go broke. In business, cash is king and survival is only guaranteed if either your
inflow of cash is greater than your outflow, or that you have the means to fund a

28 | P a g e



haemorrhaging company through external funding. We’ll discuss the all important cash flow
statement in Section 7

Looking through each of the components of the Income Statement.

29 | P a g e



3.1 PRODUCT SALES

The sales revenues for each product / service line are a major component for the forecast.
Everything else is geared around your company’s ability to exploit its sales potential.

This is an easier process if you have historical sales data and the industry is relatively stable,
compare to if you are a trailblazer launching a new product into a new market.

One approach to forecasting product and service revenues for more difficult markets to assess
is to look at the size of the addressable market in the next period, evaluate what the relative
shares of competitors will be and then multiple units sold by price.

Key factors affecting the sales volumes include:

• Previous year’s sales – is there a trend?
• Sales trends in the overall market
• New promotions, sales initiatives or other marketing drives
• New product launches

30 | P a g e



• Overall changes in the economy
• Changes in consumer tastes
• Seasonal trends – ice cream sales in summer compared to winter
• Changes in competitive strategy
• Varying competitor scenarios

If you have multiple product lines, services, divisions or geographical locations, you’ll naturally
be forecasting each as a separate line item. It is important to forecast each of the product lines.
Consider also what the effects are on sales of one product line on another product line:

• One product may be complementary to another in which case there is a direct
relationship between one and the other. As one increases, so does the other.
• Increases in sales for one product may negatively affect the sales of another product
• The sales of two lines of product may both increase as a result of outside factors – sales
of gym memberships generally increase at the beginning of the year after people make
New Year resolutions.

Then factor in all of the potential revenue streams that could accrue to your company in the
coming years? These may be new revenue streams that you currently do not enjoy, including:

• Existing products into new market
• Complementary products
• Packaged bundles of product
• Upgrade revenues
• Support revenues
• Training revenues
• Service revenues
• Consulting revenues
• Licensing revenues

This is equally applicable in not‐for‐profit organisations where several revenue streams may
accrue. One interest exercise may be for you to map each of the potential sources of revenue,
along with their assumptions. For a charity this may include:

31 | P a g e



Figure 12: Revenues and Assumptions ‐ Charity

When considering future revenues, it is important to keep a running total of the installed base
of total users of your product or service. They may require service, upgrades or support at any
time in the future. They would also be a great prospect for future company offerings, provided
they are satisfied with their current products. So

• How many people are out using your product (installed base)?
• What is the propensity for customers (in % terms of installed base) to seek out
additional products, services or support?
• Can you increase the frequency of purchases for each customer? Or, the value of each
purchase made.

Total Revenue is simply price per unit x number of units sold. This can be increased in one of
three ways:

• Increasing the number of customers
• Increasing the value of each sale
• Increasing the volume of each sale.

32 | P a g e



3.2 PRICING

Price is a key business driver and a proper pricing policy can assist growth more than either
increases in volume or cost reductions. Depending on your industry and your company’s
strength within it, you may have the capability to set price. If not, you still may have the
capacity to create your own niche (perhaps through sustainable product differentiation) in
order to obtain economic profit. The introduction of 3,4, and now 5 bladed shavers have
allowed producers such as Gillette to charge enormous price premiums on what was once a low
margin industry.

Here are some alternative pricing strategies. Consider which you would want to apply to what
products or services you sell or intend to sell and how you’re pricing policy may change over
time:

PRICING DESCRIPTION ADVANTAGES DISADVANTAGES
APPROACH
Cost Plus Standard margin Easy to calculate and Doesn’t take market
above cost administer conditions into account.
Price may be lower than
what many consumers
are prepared to pay.
Market Based Sets price to Higher profit margins. Determine the value that
capture the full Flexibility to reduce as each customer places on
value that competitive conditions change each of your products
customers place across each geographical
on your product territory.
Penetration Setting price low Opportunity to grab market Risk of competitor
Pricing to gain market share rapidly and hence deliver retaliation, and that the
share or achieve those economies. product is successful at
volume and Damage to competitors the low price point.
economies of
scale.
Skimming Price high to High initial margins from Locking out a market
maximise margin cashed up customers. unprepared to pay this
from those price.
customers willing Competitor me‐too’s
to pay the most.

You will also want to consider the impact of discounting your price on your Gross Margin over
time

33 | P a g e



DISCOUNT PRICING IMPACT
OVERVIEW
(1) If your present margin is:
20% 30% 40% 50%
(2) And you reduce price
by 10,20, or even 30%:
(3) Then to produce the same gross
revenue your sales volume must
increase by:
10% 100% 50% 33% 25%
20% ‐ 200% 100% 67%
30% ‐ ‐ 300% 150%

If a company is operating on a 30% gross profit margin and introduces a 10% discount sale (10%
discount on gross revenue), the company would need to generate an additional 50% in sales to
maintain that 30% profitability level.

This is optimistic at the best of times: 50% more sales, half as much again! Even more startling,
at 25% discount strategy (25% discount on gross revenue at 30% margin); sales would have to
increase by an enormous 500% to maintain that profitability. This would be unheard of and
illustrates how ill advised such a discount would be.

More broadly, does a particular customer’s sales volume justify the discounts, rebates, or
promotion structure you provide to that customer?

Conversely, if you adopt a premium pricing strategy

PREMIUM PRICING
IMPACT OVERVIEW
(1) If your present margin is:
20% 30% 40% 50%
(2) Then you increase price by
10,20% or even 30%:

(3) Your sales could decline by the
amount below before your gross profit

34 | P a g e



is reduced
10% 33% 25% 20% 17%
20% 50% 40% 33% 29%
30% 60% 50% 43% 38%

This shows the amount by which your sales would have to decline following a price increase
before your gross profit would be reduced below its present level. For example, at the same
40% margin, a 10% increase in price could sustain a 20% reduction in sales volume. Less work
for more return!

Finally, if competitive pressures are forcing you to evaluate your current pricing, consider some
of the following options for offering “a better deal” to certain customers:

• Discounts on volume.
• Time dependent promotional bonuses.
• If selling through channels, marketing allowances and co‐operative advertising
• Alternate payment terms e.g. discount on early payments.
• Bundling multiple products.
• Money back guarantees

All of these initiatives would need to be included in a forecast.

35 | P a g e



3.3 GEOGRAPHICAL EXPANSION

New markets may be alluring whether you are considering increasing sales, improvements in
operational cost‐ effectiveness or new international customers, but your forecasting process
need to rigorously assess their cost benefit. This is particularly so in the sales start up phases
where it may be expensive to establish a brand and a suitable distribution channel in a market
that may have little awareness of your products and services.

In short, does my international expansion add value to the company or does it simply just grow
my top line revenue figures?

When considering expansion the forecast needs to evaluate the prioritisation of country’s (size
and accessibility) and an entry plan for each including company expansion, acquisition or
partnering with a local provider.

When forecasting product revenues, you need to consider and evaluate the following

• Determining the total customer base or market size.
• Segmenting the market to identify what portion should be targeted by your product or
service.
• Expected penetration of the product or service into the market segment.
• Competitive environment.
• Respect for intellectual property and legal infrastructure.
• Expected price per unit.
• Expected distribution margin when selling through wholesalers, retailers or agents.
• Relative pricing of incumbent suppliers.
• Consumer affordability.
• Regulatory approvals for foreign product.
• Transportation costs.
• Local labour costs.
• Political & other risks (legal, currency, corruption, bureaucracy, IP protection).

A local provider can be valuable when preparing an entry strategy, particularly if they have a
privileged market position, brand recognition and access to powerbrokers, resources,
transportation or distribution systems.

In short there are four major ways that you can sell products in overseas markets

36 | P a g e



• Branch office – Gives control of the business, but establishing the infrastructure may be
expensive
• Distributor / Local Agent – Low risk and low investment, but distributor may not give
your products much attention, while taking a proportion of your margin.
• Joint Venture – Partner has already established infrastructure and risks / costs are share,
however you must be prepared to give up some control of the operation
• Online – May be cost effective, but it’s hard to get noticed.

One of the first steps in considering the internationalisation of a venture would be to map out
all of the issues that need to be researched, prior to making any substantial decisions on the
above. A large English language provider of eShopping websites would be likely to produce
something like the following when initially considering growth opportunities in China:

Figure 13: Evaluating Growth Opportunities

37 | P a g e



3.4 NEW PRODUCT REVENUES

Forecasting the revenue potential of new products is more problematic than with existing
products as you have no past history of sales figures to project from.

Some considerations include:

• Does the customer have to change behaviour?
• Does purchase decision maker have to define a new budget for the item?
• Are the technology standards of the product being universally adopted?
• Will the product create other costs or complications for the customer?
• Will there be obsolescence costs created by the customer changing their current way of
doing things?

Once the new product has launched:

• How quickly will sales ramp up?
• What are the costs of bringing this product to market?
• How much will it cost to achieve adequate exposure in the market?

The commercial viability for any new product needs to be established early in the new product
development programme. Aside from the bottom line financial impact, consider the following:

• Will it encourage customers to buy other products as well?
• Can the development act as a catalyst for improvements in overall manufacturing
efficiency and quality?
• Can new intellectual property be generated or new manufacturing techniques
exploited?

38 | P a g e



3.5 ALLIANCES, PARTNERSHIPS, LICENSING AND DISTRIBUTION
AGREEMENTS

There are a wide range of alliances that can be formed using your or others unique know how,
location, technology and intellectual property. These alliances can help you increase your
revenues and profitability without the risk that “going direct” would assume. Broadly speaking
such alliances and partnerships include: joint ventures, marketing alliances, licensing
arrangements, selling/distribution agreements, channel partnerships and software agreements.

These alliances and partnerships may give you a competitive advantage, create barriers to entry
and help you reach customers more efficiently.

The MindMap diagram below looks through the process timeframe for considering a
partnership / alliance, through the evaluation of benefits, negotiation process and exit
provisions. The process starts at 1 and runs clockwise to 9.

Figure 14: Process for Assessing Alliance Opportunities

39 | P a g e



The alliances pathway may actually be a more flexible, less resource intensive and lower risk
method of achieving your goals than a merger or acquisition.

3.5.1 LICENSING
Licensing is the capacity to exploit other parties IP, processor technology in return for agreed
fees.

Licensing can generate a revenue stream by giving permission to others to sell your products or
integrate your technology or know how into their products or services.

This revenue stream may potentially be lower risk as many of the costs of market entry may be
removed. In addition, the licensee may incorporate their own know‐how into the final solution
that may be well targeted at their customer base.

Licensing works by transferring technology to a licensee and fees can be generated through
royalties, management assistance etc. These royalties can be either from upfront payments,
running royalties or a combination of both.

It is also possible to negotiate multiple non‐exclusive licenses or minimum guaranteed license
revenues

From a business and forecasting perspective, the following needs to be considered:

• Is the license exclusive or nonexclusive?
• How long should the license be granted for?
• What is the size of the market and market penetration?
• Without the license, what is the investment required for manufacture?
• Does the market already exist or must it be created?
• Without the license, how much will it cost to establish sales channels?
• What is the prospective return on investment?
• What are the nature and extent of competition to be expected?
• What is the market life for the licensed technology?
• What kind of lead time will the license afford?
• What technical help, know‐how, or show‐how is provided?
• Without the license, what would it cost to “reinvent the wheel”?
• Will we create a new market or reduce production costs?
• Are profit margins in the industry sufficiently high?
• How do we wish to get paid?
• Can the licensee sub‐license?

40 | P a g e

Forecasting, Financing & Fast Tracking Your Business Growth

Forecasting, Financing & Fast Tracking Your Business Growth

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Viewers also liked

Viewers also liked (6)

Similar to Forecasting, Financing & Fast Tracking Your Business Growth

Similar to Forecasting, Financing & Fast Tracking Your Business Growth (20)

More from Venugopal Rao Pendyala

More from Venugopal Rao Pendyala (9)