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1 Financial Forecasting Workshop NYU Stern School of Business November 4, 2009
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Financial Forecasting WorkshopNYU Stern School of BusinessNovember 4, 2009
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o AGENDA
o Goal of accurate projectionso Key Elements o Methodologyo Sales Forecasto Key Sales Questions o Staffing Forecast o Key Staffing Questionso Operating Expenseso Balance Sheet Forecast o Cash Flow Forecasto What the Oracle President says about projectionso About Beyond the Bottom Line
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o Predicts Cash Flowo Provides:
o A financial “Road-map” for the organizationo Confidence to donors, sponsors and other stakeholders
o Sets goals for:o Grant Proposals, Sponsors, Eventso Timing for staff hiring, capital investment, program expenses, and fixed expenses
o Determines the amount of grant dollars or debt required
Why Financial Projections are Important?
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o Assumptions that are realistic and achievableo Accrual vs. Cash Accounting
o Projected financial statements o Income Statemento Balance Sheeto Cash Flow
o Planning Period – 1 – 3 years (Year 1 by month; Years 2 -3 by Quarter)
o Accurate Supporting scheduleso Sales Pipelineo Staffing and Outside consultantso Operating expenses (fixed and variable)o Mini schedules for Balance Sheet (A/R, A/P, Fixed Assets, Deferred Revenue, Taxes)
o Dashboards to summarize the critical financial and operating information
Elements of a Successful Financial Model
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o Use the “Bottom Up” Approacho Show more calculation lines instead of imbedding long formulas into cells
o Line 1 Unit Rate Dollarso Line 2 Quantityo Line 3 Budget Dollars (Unit Rate $ times
Quantity)
o Facilitate scenario planning by altering one or all variableso Link Worksheets o Make sure that all of your worksheets are print ready
Methodology
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o Income Statement
o Revenue, by Source o Net Asset Releaseso Eventso Sponsorso Current Year Grantso Interest Income
o Less: Operating expenses (Personnel, Variable, and Fixed, etc.)
o Equals: Change in Net Assets (for non profits) or Net Income (for profits)
Income Statement Format
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o Well thought through assumptions for Who you are pitching and Why
o Understand donor and grant maker funding trends
o Review past events (attendance, sponsors, etc,), factor in current economic trends, and then develop your individual event forecast
o Understand what other revenue sources your should pursue and Why
o Gross Revenue = Use range of high and low average of Gross Revenue
o Net Revenue = Gross Revenue discounted by a probability factor
o Cash Flow Forecast Tip: o The most important first step is to create a list all of the probable and realistic funding
sources. The next step is to have a solid understanding of your expense structures and range of expense dollar levels so you know how much you need to fund at a minimum.
Sales Forecast
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o Selling Processo Understand the donor decision making process o What is the “Sales Cycle” (how long does it take from the start of the application
process to the receipt of the signed LOA)o What are the steps involved o Who needs to approve the grant on the donor end o How soon after the verbal approval will we get an Award letter o Make sure funding terms are explicit, either based upon date or a milestone
deliverable
o Sales Pipelineo By donor prospect
o Apply a probability of the likelihood that it will happeno Result = Expected Revenue. (that is the number that goes on your monthly
income statement forecast. (See example)o By Event
o Number of attendees and average ticket priceo By Sponsor
Key Questions for Sales Forecast
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Sales Pipeline Example
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o Determine the staff required byo Department or Programo And then by Title
o Determine the annual pay, and date of hire for each staff person. We need to track headcount separately and then calculate base pay from that
o Calculate and link in cost of living increases, bonuses, etc.
o Annual pay + Cost of Living + bonus = annual compensation
o Payroll taxes = annual compensation times 10 % (estimate)
o Other benefits = 5 - 8% of annual compensation
Staffing Forecast
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o Annual compensation + payroll taxes + benefits = total compensation costs
o Is any compensation to be deferred, or is any compensation contingent upon meeting milestones?
Cash Flow Forecast Tip: Base monthly compensation is usually paid twice per month. If you use an outside payroll service, your payroll taxes will be withheld by the provider when they process the payroll. Benefits could be paid the next month along with related workers compensation and other insurances
Staffing Forecast
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o Build vs. Buy (employees vs (1099) consultants)?
o What are the Skill Sets Required? What’s the Timing to acquire skills?
o How much will it cost? And how much can your business afford?
o Who is available in the marketplace or labor pool?
o Staffing Options:o FTE (Full Time Employees)o Permanent Part Timeo 1099 / outside consultants
Key Questions for Staffing & Consultants
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o Rent (use 200 SF/person) and benchmark rental space in your marketo Example: 10 people * 200 SF = 2,000 SF * $ 30/SF = $ 60,000 annual rent
o Budget Items based upon headcount (vary up/down based upon staffing levels)
o Office supplies
o Telephone
o Desks, chairs and phones
o Insurance
o Laptops & printers
o Cash Flow Forecast Tip: Rent is usually paid within the 1st 10 days of the month and all other costs can be paid usually within 30 days, or the next month after purchase.
Operating Expenses
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o Assetso Casho A/R (Accounts Receivable)o Prepaid Expenseso Fixed Assets
o Liabilitieso A/P (Accounts Payable)o Accrued expenseso Deferred Revenueo Debt or lines of credit
o Net Assetso Unrestricted o Temporarily Restrictedo Permanently Restricted
Balance Sheet Forecast
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o Option 1 - Traditional Cash Flow
o Beginning Cash
o Plus: CASH INFLOW (Collections and Other income)
o Less: CASH OUTFLOW (Expenses and Taxes)
o Plus or minus: FINANCING (Investment proceeds, bank debt proceeds, Capital expenses)
o Equals Ending Cash
Create Mini schedules for Balance Sheet for any item where activity in one month has an effect in a following month (A/R, A/P, Capital, Deferred revenue, Income Taxes, Sales Tax )
Cash Flow Forecast
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o Option 2 - Statement of Cash Flows
o Starts with Net Income
o Cash provided by Operations
o Cash Flows from investing activities
o Cash Flows from financing activities
Adds up to Net Increase (Decrease) in Cash and should agree with the ending cash balance
Cash Flow Forecast
“If it’s not in the numbers, I don’t care how strategic it is, it doesn’t play out.”
from Safra Catz, President of Oracle(Fortune magazine 9/28/09)
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What We Do
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John Gillespie, President
703.527.2825
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