Should my forcast include a balance sheet?

May 2010

"My CEO wants me to present a budget and sales forecast to the board, with a 'simple' cash flow analysis. I think the forecast should also include a balance sheet, but he insists that will just confuse most of the board members. Who's right?"

Mike: It's very possible that some of your board members are clueless about balance sheets. But without a balance sheet, the board can't get an accurate picture of the financial position of the business. You'll just have to educate your board members--and perhaps your CEO--about what the numbers show.

In fact, I'd argue that the balance sheet is the single most important document in a standard financial presentation. (The others are the income statement, the cash flow statement, and an analysis of the equity accounts.) The balance sheet summarizes your current financial position, and it ties together those items not on the income statement that affect your near-term cash balances, such as your receivables, payables and current notes due. And it's the basis for cash forecasts and credit-based lending decisions, including bank debt

What issues should a forecasting model cover

November 2009

"I asked a management consultant to develop a forecasting model for our business, but what he gave us is little more than a toy. I know it's my fault for not giving him better instructions. What should I have told him in the original requirements spec?"

Mike: Well, there's no industry standard forecasting format. But I've seen literally hundreds of models and designed a few hundred myself, so I'd say the key elements include the following:

An opening page that clearly highlights operating results and cash balances, along with projections for revenues, collections, expenses, payments, and upcoming financing requirements. I find it's helpful to summarize all of these numbers with easy-to-understand graphs and charts.

Behind the scenes, the model must be fully integrated. On the balance sheet, cash and retained earnings must agree with the cash flow and income statements, and assets should equal liabilities plus equity.

There should be income statements for each business unit, with department-level summaries of major expense categories (such as compensation, travel, and facilities).

You should also have a page that includes a headcount summary (where you calculate salary expenses) and identifies assumptions about revenues, collections, equipment purchases, depreciation rates, accounts payable terms, deferred revenues, and debt and equity financing.

Be sure you try out the model on the people who will use it--your directors and top-level managers. If there's something they find confusing, fix it. Remember, your job is to organize the model so a sophisticated reader can grasp the essentials without a lot of hard work.

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ON THE WEB: One of the more complex financial models on my Web site is a forecasting tool that helps analyze the "sensitivity" of a dozen possible changes in a company's numbers. For instance, what happens if collections slip from 50 to 65 days? If we raise maintenance fees from 15% to 20%? If average travel costs for a sales rep rise from $30,000 to $40,000? You can enter your own data in the model to get real-world results, but I've supplied dummy numbers that let you see instantly which factors have the greatest impact. I promise you'll be surprised at what you see.
http://www.gonnerman.com/tools.htm

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