Doing Projections in SurvivalWare – Part 5: Other Cash Flow

This is part 5 of a 5 part series on how to create a cash flow projection using SurvivalWare and the generic financial model that comes with it. 

  1. Getting familiar with the Forecast Tool
  2. Sales and Expenses
  3. Debt Service and Investment
  4. Working Capital
  5. Other Cash Flow

 Other Cash Flow

 

What happens in a financial projection model is that you use various techniques to forecast each and every item on the Income Statement and Balance Sheet (except for cash).  The model figures out what the level of cash has to be each month in order for the balance sheet to be in balance.  The integrity of the model is kept intact by calculating two checks:

 

(1)   Is the balance sheet in balance?  (i.e. Total Assets = Total Liabilities and Equity)

(2)   Is your ending cash balance each month consistent with the beginning cash balance and Net Cash Flow?

 

In the previous sections, we have forecasted all the income and expense items for the Income Statement, and the major items on the balance sheet (Accounts Receivable, Inventory, Accounts Payable, Debt, and Fixed Assets).  This last section ties up the loose ends by giving us an opportunity to forecast what happens to the minor players on the balance sheet.

 

Most of the items in this section are of the type “Incr/(Decr)” or “(Incr)/Decr.”   Most accountants will recognize these terms from traditional Cash Flow statements.

 

Incr is an abbreviation for “Increase.”

Decr is an abbreviation for “Decrease.”

 

The parentheses are used to indicate what type of cash flow occurs when there is an Increase or Decrease.

 

“Incr/(Decr)” means that this line item is calculated as a POSITIVE number where there is an increase in the underlying account from one month to the next, and a NEGATIVE number when there is a decrease.  Cash flow items associated with Liabilities fall into this category.  Suppose for example that the balance of Customer Deposits jumps from $5,000 one month to $8,000 the following month.  This is an Increase in a liability account of $3,000.  “Incr/(Decr) – Customer Deposits” would show a positive value of $3,000 for that month.  In real life this means that a customer has put down a deposit of $3,000 that month, and you now have the cash.

 

“(Incr)/Decr” means that this line item is calculated as a NEGATIVE number where there is an increase in the underlying account from one month to the next, and a POSTIVE number when there is a decrease.  Cash flow items associated with Assets fall into this category.  Say you have a Notes Receivable from a business partner of $12,000 as of the end of June.  This means the business partner owes your company $12,000.  If you advance another $5,000 in July, the balance owed will increase to $17,000.  But because this consumes your cash, the $5,000 shows up as a NEGATIVE number when you look at a cash flow statement.

 

For the “Other Cash Flow” section of the cash flow projection, you enter the CHANGES to these balance sheet items as the way of forecasting the balance each month into the future.  It is important to get the sign right.  Positive cash flows (an increase in a Liability or a decrease in an Asset) are entered as positive numbers.  Negative cash flows (a decrease in a Liability account or increase in an Asset) are entered as negative numbers.

 

When you enter numbers in this tab, you can quickly flip to the Balance Sheet tab to see the impact of your assumptions.

 

Of course, the first step is to eyeball what happened in the past. 

 

In the sample data , notice that the account “Other Current Assets” just bounces around a bit, and you might see a change of $2,000 or $3,000 from one month to the next.  Here is what it looks like on the Balance Sheet:

 

Other Current Assets

Other Current Assets

And here is the (Incr)/Decr calculated in the “Other Cash Flow” tab.

(Incr)/Decr Other Current Assets

(Incr)/Decr Other Current Assets

It seems reasonable to forecast no change in the account going forward unless you have some specific knowledge of some activity that will affect this account in the future.

 

There are times when accounts play a more prominent role in your total Cash Flow Projection.

 

If you are a software vendor who sells annual support contracts, or a publisher who sells prepaid subscriptions, you might find a lot of activity in the Deferred Revenue Liability account.  If you sell a $12,000 support contract that covers a 12 month period, you would set up a liability (deferred revenue) of $12,000 – and reduce that amount by $1,000 per month as you perform the service.  The corresponding cash flow item – “Incr/(Decr) Deferred Revenue” would show a positive change of $11,000 the first month (the $12,000 sales less the $1,000 recognized as revenue the first month), and then minus $1,000 per month for the following 11 months.

 

For the sample data we’ve been using in this projection, here are the items we forecast in the “Other Cash Flow” tab:

Other Cash Flow tab

Other Cash Flow tab

We’re planning a “Distribution to Owner” of $10,000 in August 2008.  This is a payment not considered to be Salary, but is more like a dividend.  Depending on your ownership structure and how you capitalized the business, you might have an “Owners Draw/Distribution” account in the equity section on the balance sheet.  You can put money in or draw it out without tax consequences.

 

Separately, there is an asset account called “Loans to Shareholders.”  By prior agreement, we’re lending an additional $2,000 each month to a key shareholder.  This is a negative cash flow and is entered as -$2,000 in the line “(Incr)/Decr Loans to Shareholders” in each month.

Summary of Cash Flow

 

This is the combination of all the assumptions made in the other sections.  Changes you make are instantly reflected here.  The summary starts with the beginning cash balance, and adds each of the four major cash flows to get to the Ending Cash Balance. Note that Ending Cash is projected to be negative in July and August.  And of course,  Beginning Cash Balance is equal to the prior month’s Ending Cash Balance.

 

Note: EBITDA is Earnings before Interest, Taxes, Depreciation, and Amortization – and is basically the same as Operating Income.

Summary of Cash Flow

Summary of Cash Flow

This is how it looks graphically:

Projected Cash Balance

Projected Cash Balance

There is also a “Cash Flow Balance Check” section to make sure the model is in balance.

 

 

Balance Check

Balance Check

 

 

 

 

When you see “POM” in the variable names, it stands for “Peace of Mind” – the cash flow schedule that Philip Campbell talks about in his book, Never Run Out of Cash. The SurvivalWare model calculates two cash flow formats:

 

·        The “Peace of Mind” Schedule

·        A Traditional Cash Flow statement

 

The line item “Ending Cash Balance – POM” is the ending cash balance calculated when you add all the cash flows from the Peace of Mind schedule to the beginning cash balance.  This should equal the Ending Cash Balance that appears on the Balance Sheet, and if it does the “Cash Flow Check” line will have all zeroes.  If not, it probably means the balance sheet was out of balance in the last historical month.

 

At this point, you can go back to any prior tab, and make changes – then come back to this tab to see the impact on you cash balance.  You can also look at tabs that contain the projected “Income Statement” and “Balance Sheet” in the same format used for the historical statements.  Use the menu item “File / Save” to save these projections.  You can save them under a different file name if you want, and keep multiple scenarios.

 

Changing the planning horizon

 

The model allows for a total of 5 projected years beyond the current year.  Within that planning horizon, you have the option of breaking next year into months, or forecasting it in total.

 

To switch the view to years, click on the “Years” radio button in the upper right.

 

Months or years

Months or years

 

Projecting Years

Projecting Years

Then you can use the “File” menu item to switch back and forth between forecasting next year (2009 in this case) as Months or Years.

File menu

File menu

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5 Responses

  1. Great Article. Thanks for the info. Does anyone know where I can find a blank generic financial statement to fill out?

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