Planning To Succeed - The Definitive Eguide For Building Company Financial Forecasts Mark Ostryn DRAFT 180708

This is a very early
e draf
aft and
c
commen nts are trruly welccome att
markostryyn@know wledge22020.com m.
I hope thhat it’s of
o some value
v to
you – Mark
M Osstryn Julyy 2008
Kn
nowledge
20
020 pty ltd
FOREC
CASTIN
NG, FINANCCING & FASST
TRACK
KING YOUR
Y BUSIN
NESS GROWWTH
TTHE DEEFINITTIVE E‐‐GUIDE FOR

R BUILD
DING
CO OMPAANY FIN NANCIAL FOORECAASTS‐ MARK
M
OSSTRYNN
June 1,
FORECASTING, FINANCING & FAST TRACKING YOUR BUSINESS GROWTH
2008
TABLE OF CONTENTS
1 INTRODUCTION ......................................................................................................................................... 5
2 STRATEGIC VISION ..................................................................................................................................... 7

2.1 WHY FORECAST ................................................................................................................................................8
2.2 PROFILE OF SUCCESS...........................................................................................................................................9
2.3 MAKING FORECASTING EFFECTIVE .......................................................................................................................11
2.4 UNDERSTANDING CUSTOMERS ..................................................................................................................12
2.4.1 MARKET SEGMENTATION ......................................................................................................................13
2.5 REALISTIC ASSUMPTIONS ...........................................................................................................................14
2.6 GETTING STARTED WITH YOUR FORECAST ..............................................................................................................15
3. REVENUES ................................................................................................................................................19
3.1 PRODUCT SALES ..............................................................................................................................................20
3.2 PRICING ........................................................................................................................................................22
3.3 GEOGRAPHICAL EXPANSION ...........................................................................................................................25
3.4 NEW PRODUCT REVENUES .............................................................................................................................26
3.5 BUSINESS SEGMENTS .......................................................................................................................................27
3.6 ALLIANCES, PARTNERSHIPS, LICENSING AND DISTRIBUTION AGREEMENTS ..............................................27
3.6.1 Licensing ................................................................................................................................................28
3.6.2 STRATEGIC ALLIANCES ...........................................................................................................................30
3.6.3 DISTRIBUTION CHANNELS ......................................................................................................................30
3.7 FRANCHISING .............................................................................................................................................31
3.7.1 Being a Franchisor .................................................................................................................................31
3.7.2 Being a Franchisee .................................................................................................................................33
3.8 PROJECT MANAGEMENT ............................................................................................................................33
3.9 CONSULTANCY ...........................................................................................................................................34
3.10 OTHER INCOME ..............................................................................................................................................34
3.10.1 Grants & financial Assistance ...........................................................................................................34
3.10.2 Intellectual Property Income ............................................................................................................35
4. COSTS .......................................................................................................................................................37
4.1 COST OF SALE .................................................................................................................................................38

4.1.1 Refunds, Warranties and Guarantees ....................................................................................................38
4.1.2 Loyalty & Awards Programmes .............................................................................................................39
4.2 OPERATING EXPENSES / OVERHEADS ................................................................................................................40
4.2.1 Marketing ..............................................................................................................................................41
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© 2008. Knowledge 2020 Pty Ltd. Please do not reproduce without prior permission, which will usually be
granted. Contact Mark Ostryn 02 8005 1240 http://www.knowledge2020.com The above text contains
generic financial information that does not constitute financial advice
June 1,
2008
4.2.2 Information Technology .........................................................................................................................46

4.2.3 Employee / Personnel Costs ...................................................................................................................49
4.2.4 Administrative Costs ..............................................................................................................................53
4.2.5 Legal Costs .............................................................................................................................................54
4.2.6 TAXes .....................................................................................................................................................55
5. BALANCE SHEET, WORKING CAPITAL & CAPITAL EXPENDITURE .................................................................59
5.1 BUSINESS CHALLENGES – MANAGING YOUR CASH FLOW .......................................................................................60

5.1.1 Managing Working Capital ........................................................................................................................61
5.2 BUSINESS GROWTH – INVESTING IN THE FUTURE .......................................................................................66
5.2.1 Manufacturing challenges ....................................................................................................................67
5.2.2 Research & DeveloPment challenges ....................................................................................................68
5.3 LIMITS TO GROWTH – CAN YOU GROW TOO QUICKLY? .............................................................................69
5.4 DEPRECIATION & AMORTISATION .......................................................................................................................69
5.4.1 INTANGIBLE ASSETS & AMORTISATION ................................................................................................70
6 FINANCING ..............................................................................................................................................71
6.1 DEBT ...........................................................................................................................................................72

6.2 EQUITY .......................................................................................................................................................73
6.2.1 RETAINED PROFITS.................................................................................................................................74
6.2.2 Share capital issued ...............................................................................................................................74
6.2.3 Dividends declared & paid .....................................................................................................................75
6.2.4 Reserves .................................................................................................................................................75
7 REPORTING & ANALYSIS .................................................................................................................................76
7.1 CASH FLOW & CASH MANAGEMENT FORECASTING ..............................................................................................76
7.1.1 CASH FLOW AND INVESTORS .................................................................................................................79
7.2 RATIO ANALYSIS ...........................................................................................................................................80
7.3 VARIANCE ...................................................................................................................................................81
7.4 SCENARIO ANALYSIS .........................................................................................................................................82
7.5 FINANCIAL RISK MANAGEMENT .................................................................................................................... 84
8. ACQUIRING OR SELLING – VALUATION & OTHER CHALLENGES ..................................................................87
8.1 INCREASING YOUR BUSINESS VALUATION .................................................................................................89

8.2 MERGERS & ACQUISITIONS ...............................................................................................................................89
8.2.1 Vertical Integration ................................................................................................................................91
8.3 DUE DILIGENCE ...........................................................................................................................................92
8.4 EXITING YOUR BUSINESS ............................................................................................................................93
9 REVIEWING YOUR FORECAST ....................................................................................................................94
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1 INTRODUCTION
Entrepreneurship has its glamour. However behind the world of

intense negotiations, last minute deals and garage visionaries made
good lie the less glamorous concepts that you must get right – cash
flow, working capital, pricing strategy etc.
This eBook 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 eBook 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 issues 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
what of the future? 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?
• Can we afford to fund our growth? Will our need for ever increasing amount of
working capital sink our company?
• 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?
• Our acquisition plans? Will the anticipated future profit streams and the savings from
synergies justify the cost of acquisition?
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The forecasting process is often one of iteration, where you can try out different ‘what if’ levels
of investment in your budget model and see the different outcomes. If you increase the sales
budget, how many additional sales people will you need to generate that level of extra sales?
Developing your forecast on a spreadsheet or specialist 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 ice cream sales?
There are a couple more points, I’ll make 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 software packages and spreadsheets commercially
available. They vary in quality, robustness, price and applicability to your demands of your
particular industry. I have not specifically mentioned any in this booklet, but would be
delighted to understand more about your company 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 remains a PDF soft copy only at present, meaning I
can update it whenever I get the urge to. Hence your insight would be most welcome.
Happy reading and most important of all, good luck with your business!
Mark Ostryn
markostryn@knowledge2020.com
July 2008
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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 eBook 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 guessing that they may 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.
Crudely, you can liken any business to a poker machine that swallows up money put into it, and
hopefully spits out more. However that chance is based on the operators skill rather than the
luck of the pull.
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.
For the long term, 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 a series of stakeholders in the company that also need to be satisfied
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While maany of these

e stakeholders may not have
h a directt bearing on
n the perform
mance
measurements generated by thee company, their
t indirecct impact maay be substantial e.g.
• Requirem ment for enviironmental measures,

m su
ustainabilityy etc.
• Requirem ment to look at the comm munity impact of decisio ons to locatee in a particu
ular
city, provide employm ment to reidents of that city
• Requirem ment to look at “financial dispersmen nts” made by the compaany which may m
not be “financial ratioonal” to sharreholders, but which maay show the company ass a
good corp porate citizeen e.g. charitty donationss etc.
2.1 W
WHY FOREC
CAST
As foreca
asts are inva
ariable inaccu
urate or eveen wrong, is there any neeed to foreca
ast?
You mustt have a set of financial projections,, a numericaal statement of what you u want your
companyy to achieve.. Additionally, lenders needn to see a strong likelihood of repayment; an ngel
investorss and venturre capitalistss will calculatte what theyy think is thee value of yo
our companyy.
These figgures will be used by thee investor to calculate th

he potential future valuee of your
companyy based on a valuation teechnique such as multip ples of earnin
ngs or profitts. If they aree
convinceed that your framework has been scrrupulously prepared
p using best avaiilable
information, they will have moree confidencee to invest in n your company.
8|Page
© 2008 8. Knowledge 202 20 Pty Ltd. Please do
d not reproduce without prior permission, which will usually be
granted. Contact Mark Ostryn
O 02 8005 12
240 http://www.kknowledge2020.co om The above textt contains
genericc financial informaation that does no
ot constitute financcial advice
June 1,
2008
The process of generating these figures also adds reality to your expansion plans. For example,
if you want to open up offices or factories in China you will have to research and allocate the
costs for doing so. Having performed that financial anlysis, you will be in a better position to
assess alternatives such as building a distribution channel 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 $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.
In short, while no investor is expecting you to get your future projections "correct", the
discipline required in doing the projections in the first place alerts you to potential
opportunities or threats that you may not have otherwise considered.
2.2 PROFILE OF SUCCESS
The financial data that you forecast will tend to quantify some of the characteristics that
underly a successful company. 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 remain high,
and there’s less need to discount price.
• Entrepreneurs with a great track record.
• 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 serviceestablshes itself as
“needed” by its target market. Early 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 and sustainable margins. This can be through ownership of IP or
proprietary know‐how or through the organisation always remaining innovative and on
the cutting edge of technology
• Proven market need for the product.
• A sustainable competitive advantage with high barriers to entry for potential
competitors.
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• Possibility forr strategic allliances to leeverage the strengths

s off other comp
panies
A great framework fo or assessing where yourr company iss in relation to

t its compeetitive
environm ment is Porteers Five Forcces Model. Developed
D b Michael Porter, the model
by m describ
bes
five forcees that deterrmine the coompetitive inntensity and
d therefore the
t attractiveness of a
market. These force es are continnually changging and such
h continual changes
c also
o require thaat
you reasssess your maarketplace.
To illustrate this, imaagine the competitive fo

orces of a breead produceer:
• Their bargain
ning power with
w their customers – th he supermarrkets and catering firms.
• The impact of health trennds on the tyypes of breaad they produced.
• The changingg cost of raw
w materials suuch as grain and transpo ortation charges.
• Bread substittutes. What else can peo ople eat for lunch apart from sandwwiches?
• The impact of local bakerries and locaal franchises on total dem
mand.
This and other factorrs can be maapped to thee following diagram:

d
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An intereersting exerccise, prior to t number for your own company forecast

o crunching the f is to
o
apply youur industry to
t the Five Forces frameework.
2.3 M
MAKING FO RECASTING
G EFFECTIV
VE
Followingg in from thiis, ask yourself the follow

wing:
• Do you know how markeetplace trend

D ds will affectt your compaany over thee next 12 to 18
m
months?
• H
Have you estaablished youur company’’s goals and priorities for the next financial yearr, and
beyond to the e next threee to five yearrs?
• H
Have you set financial tarrgets for thee next financcial year?
• D you have a method fo
Do or measuringg your comp pany’s perforrmance against your goaals,
priorities and
d financial targets?
• D
Does your maanagement teamt know your
y company’s goals an nd financial targets for the
t
next financiall year, and what
w they neeed to do to achieve theem?
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"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 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.
2.4 UNDERSTANDING CUSTOMERS
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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 purchases and they 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 Complany 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?
2.4.1 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 efffective, as it will cost you more to service them than the
revenues you can expect from them.
Take the potential markets for a product such as a device to test water quality. 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) initally, before
attempting to grab the woder market.
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2.5 REALISTIC ASSUMPTIONS
Ensure that all assumptions are documented out with the forecast. 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
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And a whole host of other factors.
Thus key determinants may be based on actual results from you or from companies of a similar
size in a similar industry.
2.6 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(R) 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!
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. 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 PERIOD
When you’ve decided how many months or years out yourwish to forecast, consider then, an
ideal number of columns that are useful for your business and are not time consuming or
unecessary for you to fill in. A 60 column spreadsheet (monthly forecast for five years) is
uncessaryily large , unwieldy to view on your screen and the monthly figures will likely become
meaningless as your move toward the distant future.
COMPANY STRCUTURE
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How will you sub‐divide your forecast as to make it meaningful without overburdening yourself
with data? Assume you have 10 product groupos with a total of 700 SKU’s and sales offices in
10 territories in Australia and another 20 worldwide. Will you try and incoroprate all of this
data on a single spreadsheet? Will you ccreate sepatate spreadsheets and feed in the macro
data into a master spreadsheet? How will you make allowance for future products or
territories?
DEALING WITH COMPLEXITY.
To produce 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 abnd 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 deprecaition and amortisation estimates to tanglibe and intangible assets.
HISTORICAL DATA
You’ll need to have an up to date set of financial statements with sufficicently 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
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Will you want to integrate a feed of the ACTUALfinancial performance into your forecasting
spreadsheet / software? This would:
• Save manually rekeying to input your actual financials.

• Provide comparisions between your actual financials and what you had previously
forecast.
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 differnet sections with summary sheets that bring together
the various components.
• Ensure that you can support a simple sensitivy analysis, looking at the effects of a
change in one variable on the financials.
• Show clearly which cells are iinput 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:
But feeding in to that toital 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:
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3. REVENUES
The first, key financial statement is the Income Statement, sometimes 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.
This statemnent 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 haeomoraging
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.
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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.
Our approach to forecasting product and service revenues is:
TOTAL MARKET PRICE PER NUMBER

CUSTOMER SHARE UNIT OF UNITS
BASE •% of total TOTAL
• Number of
potential
customer
base being
• X • = REVENUE
customers for served by all IN
your product available
competing FORECAST
•X products
including
PERIOD
yours
•X
Key factors affecting the sales forecast include:
• Previous year’s sales – is there a trend?

• Sales trends in the overall market
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• New promotions, sales initiatives or other marketing drives

• New product launches
• 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 sepatrate 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.
Next, 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
• Licencing revenues
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
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tiume in the future. They would also be a great propsect for future compoany 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 value of each sale.
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. Depoending 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 sustasinable product differentiation)
inorder to obtain economic profit. The introduction of 3,4, and now 5 bladed shavers have
allowed producers such as Gilette to charge enormous price premiums oin 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 your pricing policy may change over
time:
PRICING DESCRIPTION ADVANTAGES DISADVANTAGES

APPROACH
Cost Plus Standard margin Easy to calculate and Doesn’t take market
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above cost administer conditions into account.

Pricew 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 compertitive 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 retailiation, 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 custoemrs. unprepred 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
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%
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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 ridiculous 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
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!
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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.
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 rigourusly assess their cost benefit. This is particualrly 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, doesa my international expansion add value to the company or simply just grow my
top line revenue figures?
When cdonsidering expansion the forecast needs to evaluate the prioritisation of countrys (size
and accessibility) and an entry plan for each including company expansion, acquisition or
partering 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 envrionment
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• Respect for intellectual property and legal infrastrcuture

• 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, partivcularly if they have a
privalegaed market position, brand recgnition and access to resources, transportation or
distribution system.
In short tnere are four major ways that you can sell products in overseas markets
• Branch office – Gives control of the business, but establishing the infrastrcutreu may be
expensive
• Distributor / Local Agent – Low risk and low investment, but distributor may not give
your products much attnetion, while taking a proportion of your margin.
• Joint Venture – Partner has already established infrastrcutre and risks / costs are share,
however you must be preprare dto give up some control of the operation
• Online – May be cost effective, but its hard to get noticed.
3.4 NEW PRODUCT REVENUES
Forecasitng the revenue potential of new products is more problemmatic 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?
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• Are there obsolescence costs that will created for the customers 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 ber 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?
3.5 BUSINESS SEGMENTS
Your forecast should break down product and service revenue figures into appropriate business
and geographical segments:
Geographical Segment‐ This will be segmented by geographical territory, either within a

country (Northern Division, Southern Division) or internally (Americas, Europe)
Business Segments ‐ Distinguishable component of an enterprise providing a product or service

that faces different risks from other businesses within the enterprise.
3.6 ALLIANCES, PARTNERSHIPS, LICENSING AND DISTRIBUTION AGREEMENTS
There are a wide range of allainces that can be formed using your unique know how, location,
technology, intellectual property. These allainces can help you increase your revenues and
proftabilty without the risk that “going direct” would assume. Broadly speaking such allainces
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and partnerships incude: 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
entryand help you reach customers more efficiently.
Thre MindMap diagram below looks through the process timeframe for considering a
partnership / allaince, through the evaluation of benefits, negotiation process and exit
provisions. The process starts at 1 and runs clockwise to 9.
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.
3.6.1 LICENSING
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Licensing is the capacity to exploit another parties IP, perocess or 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 orservices.
This revenue stream may potentially be lower risk as many of the costs of market entry may be
removed. In addition, the licencee 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 upfront payments, running
royalties or a combination of both.
Can negotiate multiple non‐ exclusive licenses, 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 licencee sub‐license?
Finally, there’s an often quoted 25%rule of thumb for licensing revenue. It’s 25% to licensor,
75% to licensee of an expected profit margin. Probably best used as a starting point for
negotiations!
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3.6.2 STRATEGIC ALLIANCES
The world doesn’t come looking for a better mousetrap, and the economy is a machine that
involves companies acting together as well as competiting. It’s very difficult to build a wholly
self sufficient company, so it makes sense to assemble a group of companies together that form
a sustainable force.
Alliance opportuniies enable:
• INNOVATION: Generate new product ideas and acelerate commcialisation

• EXTENSION: enable your company to enter new channels and reach new custom
segments
• GEOGRAPHIC EXPANSION: Enable your company to entedr new markets or improve
existing international or interstate operations using the alliance partners local assets
• PERFORMANCE IMPROVEMENT: Enable improvements in efficiency and lower
operating costs and capital requirments through outsourcing.
3.6.3 DISTRIBUTION CHANNELS
It’s easy to see why a food manufacturer would use wholesalers or supermnarkets to sell their
products, but a component of your forecast is to evaluate whether your financial interests are
best served by using a channel strategy. If you wre comparing product revenues and costs by
using direct sales versus via indirect, here are some of the key considerations:
• LOWER COST: Using resellers can save on the costs of a direct salesforce while
extending the range of customers you are effectively speaking to. Simuilar you may
savbe on warehouse management, inventory management and logistics by taking up
space in a distributors facilties rather than building your own.
• INTEGRATION WITH OTHER PRODUCTS: Your products may require intengration or
bundling with other products in order to provide a complete solution to a custoemrs
requirements. In this instance you may require specialist resellers with integration skills
to sell complementary technology and effectively support and advise customers.
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• CUSTOMER REACH: As your business grows you may require resellers to reacha diverse
range of customers. If your product addresses many market segments and requires
geographical coverage then customer convenience in accessing a reseller becomes a
key criteria
If you are considering usinf non‐direct sales, remember to evaluate a range of options, that
ultimately will depend on your own industry structure:
Master distributors
Local distributors
Value added resellers
eSelling via the web (auction sites, catalogues etc)
Integrators
3.7 FRANCHISING
With brand name backing and reliable systems in place, it’s no surprise that franchising is one
of the fastest growing forms of business strcutre in Australia. In indsutries from fast food to
accountancy advice, franchising removes much of the need for promotiuonal expenditure to
brand build and gives clients the reassurance that they can trust the products and services of
the franchisee.
Franchising works best for businesses that have a good past sales and profit history, can be
easily replicated in new territories, are easy and inexpensive to operate and have good brand
name recognition.
3.7.1 BEING A FRANCHISOR
The "franchisor" authorizes the proven methods and trademarks of their business to the
"franchisee" for a fee and a usually a percentage of gross monthly sales. In return for this,
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support systems, advertising, training and other benefits will be made available to the
franchisee.
The key financial benfits of franchising your operation are:
• Once you have a methodology and a strcutre in place,,its easier to open “cookie cutter”
type operations through franchisees than doing it yourself.
• Costas are substantially lower as the franchisees upfront fees will defray much of the
risk.
• The franchisee may have much greater exerpoeice dealing with their local market.
• Greaer motivation on the franchisees behalf to make it successful than ifd you were to
do it through your own employees.
The key downsides of franchising your operations are:
• There may be some loss of control, as it may be more difficult to manage and get things
done through an individual franchisee than through a staff member.
• Getting the price right. Price it too highrelative to the franchisees income streams and
it’s a permanent demotivator to the franchisee. Price it too low, and you’ve left value
on the table.
• Potential for conflicts: An incompetent franchisee can damage the customers goodwill
for the brand by providing inferior goods and services
The key issues and controls you need to put into place are:
Length of agreement – could be from five (sufficnet time to realise returns from the initial
outlay and the lean start up period) to twenty years.
What would trigger an early termination of a contract?
What is the extent of a territory?
Exclusive or non exclusive?
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3.7.2 BEING A FRANCHISEE
The key financial benfits of purchasing a franchise are:
• You have likely to have a recognised brand and an exclusive territory such that you can
go to market and earn postitive cash flows comparatively quickly.
The key downsides of being a franchisee are:
• An incompetent franchisor can destroy their franchisees by not promoting the brand
adequately or being too aggressive for profits.
3.8 PROJECT MANAGEMENT
Much of the emphasis of this book so far is on the production and sale of tangible goods and
services. If your company’s busiuness is based on the successful completion of specific projects
includinga whole series of differtent financial and forecasting considerations come into play.
Your scucess id managed a set of resources – people and expertise, materials, money in order
to achieve the objectives of a project. The goal is profit, the classic constraints are time, quality
and budget.
Your initial analysis determines the price you will charge for the project based on an estimate of
the costs involved. From a financial viewpoint the key risk is that the project timescales or costs
overrun, and this can be partially mitigated by:
• Thorough pre‐planning and consideration of each variable.

• A clear understadning and alignment with the customers requirements.
• Taking account of all potential risks and having a strategy in place to address them.
• Having flexibility in the contract to be able to pass on unforseen challenges to the
customer.
• Effective people, process and budgetary management throughout the project phases,
including sub‐contractors.
To ensure that the project remains on cost and ontime, consider the following:
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• Ewha tis the critical path and what are the interrelationsips and interactions and
interdependencies between the resources?
• What key events, milestones, progress evaluations and critical activities been identified?
• Has time been allocated for quality, customer and stakeholder involvement?
• How has time contingency been incorporated into the plan?
• How thoroughly have target or actual project costs been clearly identified and
documented?
• Does the project cost estimation involve cost related risks and how are these managed?
• Is the project budget consistent with the project requirements, assumptions, risks and
contingencies? How are the project costs managed to ensure that the project is
completed within budget?
• Is there a satisfactory process for accounting of project purchasing and other
expenditure? Has this purchasing process been documented?
• Can you identify the root causes for budget variances, both favourable and
unfavourable? Is this revciewed?
• How has cost contingency been incorporated into the plan?
3.9 CONSULTANCY
There’s a lot of cynicism about Consultants, but good ones, well briefed can do much to help
companies evaluate their market opportunities, strategies and tactics.
3.10 OTHER INCOME
There are a wide rang eof other items that can fall into the “Other Income” category of your
Pfoit and loss. These can range from Grants from governments of private bodies, donations or
even the proceeds of your intellectual property. Some examples follow, but you’ll haVE your
own
3.10.1 GRANTS & FINANCIAL ASSISTANCE
Financial asssitance programmes at a federal (AusIndustry), state and export body (Austrade)
level can assist with grants and loans and tax offsets.
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Examples include:
• AusIndustry’s COMET support program gives financial support to innovative early stage
companies, their R&D Tax Concession prgorammes allows tax concession of up to 125%
of expedniture incurred on R&D and they offers specific industry support in areas such
as Tourism, Automoativer, Biofuels, Climiate change and green based initiatives.
• EFIC (Export Finance & Insurance Corporation) is Australia’s export cr3edit agency offers
export guarantees and direct loans.
• State governments offer a variety of programmes for SME’s. In NSW, for example, the
Deaprtment of State & Regional Development (DSRD) provides assistance with
commercialising R&D, regional relocation incentives, export incentives and payroll tax
rebates.
• Austrade, Australia’s export authority provides an Export Market Development Grant
(EMDG), as a rebate on the proprtion of total expenses incurred on eligible export
promotion activities.
3.10.2 INTELLECTUAL PROPERTY INCOME
Obtaining a royalty stream from yourIntellectual Property can, once the IP has been developed,
protected and marketed, be one of the significant income streams as it goes straight to the
bottom line. (IBM for example have over $1 billion dollars of income annually accruing from
their past IP).
Here’s a MindMap checklist of the considerations when embarking on a ruote to market that
involves the devlopment and licencing of IP.
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4. COSTS
This section looks at each of the key costs payable by your company, both vairaible (expenses
that change in proportion to the activity of a business) and fixed (those which don’t chang ein
proprtion to the business).
This simple diagram illustrates the two types of cost:
TOTAL COSTS
$
Costs
Variable Costs
Fixed Costs
Units Produced
Greater margins and profit are achieved by greater revenues and less costs and the business
challenge pre‐empted by your company forecast is to regularly eliminate unecessarty costs and
reallocate resources to activitries that will generate the greatest returns.
• Forecasting to reduce costs need to take the following into account:

• Likely cost savings given risks of executin and variability of outcomes
• Vosts and investments required to achieve savings e.g. sverence fees, new strcurtures
and technologies
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• Impact on revenue and earnings

• Timing required to implement initiatve and realize benefits
• Execution risks.
4.1 COST OF SALE
Cost of sale refers to the direct costs attributed to the production of goods sold by your
company, including the material costs and labour costs incurred when producing the goods.
A simple way of calculating this is:
INVENTORY AT BEGINNING OF PERIOD + TOTAL AMOUNT OF PURCHASES MADE DURING THE

PERIOD – INVENTORY AT END OF PERIOD = COST OF INVENTORY SOLD BY COMPANY IN PERIOD.
In a retailing or wholesaling company a large proportion of your cost of sale will be finished
goods inventory. A full discussion on reducing the risks from an extended working capital cycle
may be found in the section on xxx.
You may be reviewing your sourcing strategy as there may be substantial cost savings from
sourcing from outside Australia, particularly in the Asia Pacific region. However, these reduced
costs must be weighed up against
• the costs and risks of a buildup in inventory from having to purchase more,
• the costs involved in having a lengthier supply chain with much of your stock “on the
water”
• advanced contractual commitments to produce more in remote manufacturing plants.
Thus you have to weigh up reduced costs with the potential of carrying greater inventory and
less flexibility.
Also, a lower cost of sale will also result from making adjustments to the costs involved in
serving a customer. This could result from automated order taking processes to reducing
delivery costs to automated purchasing set up based on minimum reorder quantities being
reached by the customer.
4.1.1 REFUNDS, WARRANTIES AND GUARANTEES
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Having your company back the products that you sell with a money back guarantee or a
warranty on product failure, are almost essential components of establishing a credible brand.
Even if you don’t offer one, the legal system would probably step in to ensure that justifiably
dissatisfied custoemrs could enjoy a cooling off period, or that you were guilty under the Trade
Practices Act of “misleading and deceptive conduct”.
From a forecasting perspective, you need to consider the following:
• The potnetial for faulty (or even nonfaulty) product to be returned as new. What is your
policy for this? If you deal through channels, do they get a replacement product or
money back guarantee? Wil lyou refund customers money even if the product is perfect
and the csutomer simply decides that they don’t want it?
• The potnetial for product faults within warranty period. How much warranty will you
provide? What is your process for fixing faulty product – service agents, back to
manufacturer? What commercial arrangements will be in place for this?
• The potnetial for product faults outside warranty period. Is it worth fixing the product?
If so, by whom? What strategies do you hav ein place for replacing or upgrading the
custoemrs product?
4.1.2 LOYALTY & AWARDS PROGRAMMES
They are both cost to the business, and a future revenue driver. An airline will give away free
flights and upgrades to frequent fliers, but the act of accumulating points in the first place may
have generated some brand loyalty – if only to get the free flights!
The challenges are
• Giving away something in return for engendering loyalty for the product, rather than
merely getting something for nothing.
• Making sure that the giveaway is actually redeemable. Qantas, like most airlines, face
constant criticism for the non availability of free flights.
• Accounting for the cost of freebies that have not yet been redeemed.
The latter is a forecasting issue, as there are liabilities created on the balance sheet. You need
to give consideration to:
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• The probability that they will be redeemed at all. Some customers may simply not both
with the free gift or service.
• The cost of them being redeemed. Returning to the airline example, the marginal cost
of giving away a seat on a plane that wasn’t full anyway is lower than the cost of turning
away a paying passenger because their seat had already been taken by a free flight
redeemer.
• Expiry dates on redemption. This will lower the liability, but could also engender ill will
wqhen customers lose out when they simply don’t take up an offer prior to expiry.
4.2 OPERATING EXPENSES / OVERHEADS
Overheads refer to the ongoing expenses involved in running a company. These refer to all of
the necessary costs in running a company – rent, telecommunications, accounting fees that do
not directly generate revenue.
A component of your forecasting process should involve consideration of what percentage of

revenues should be spent on overhead. More importantly,
• How do they compare with other organisations in your market space?

• How can you reduce this percentage over time, and therefore increase your profits,
without affecting the efficiency of your company?
In the long term, you may need to review your entire operating processes, ensuring that they
can evolve to be the best in the industry and that they can see the company through both
booms and busts in the economic cycle. Key issues include:
• Where can work can conducted most cost effectively? Are there parts of your operation
that can be relocated to other (non CBD) offices, interstate or overseas?
• Can you shift work to a supplier based their capabilities? Do they have a superior cost
structure compared to yours?
• Can you outsource or use shared services? In recent years, internal telemarketing
teams have been outsourced to call centres, while IT departments have been replaced
by specialist IT service companies monitoring your network performance with back up
facilities and timed response rates.
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• Can you transform your entire way of doing business? How can you optimise your
workforce, processes and technology to provide the most productive and efficient
environment for your company?
The following sections look at all of the different components of your overheads.
4.2.1 MARKETING
Budgets need to be developed in order to ensure that your products and services are exposed
to your target audience. The methods of marketing used and the marketing spend / total
revenue ratio will vary across firms and industries and across the life cycle of a particular
product. First of all, seek out and use available data (online industry reports) to gauge an idea
of a realistic cost of creating a brand, and creating an awareness and desire for them to
purchase your goods.
Managers frequently underestimate the costs of marketing, and in order to cut through the
advertising clutter in order to obtain consumer awareness, these costs have to be maintained
over an extended period of time.
Within the marketing budget, has your company taken the following into account?
Advertising Placements Fees, Concept Development, Channel or Industry Specific
Bundling Cost of bundled product, Promotion, Packaging, Fulfillment, Support
Channel Distributor & Reseller expenses including ‐ catalogues, co‐operative

marketing, product management services, PR Programmes,
publications, reseller presentations, technical training, trade show
appearances, vendor nights, website listings
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Collaterals Logo, Domain Registration, Brochures, Case Studies, CD's, Demo

Disks, folders, electronic presentation, Not For Resale Software,
Merchandise (caps, mugs etc), Packaging
Direct Marketing Direct Mail, Direct Fax, Infomercials, Telemarketing

Electronic Marketing Website development & maintenance, Web ad development, CD
ROM distribution, Search Engine costs.
General Administration Training, Equipment Rental, Hardware, Meals & Entertainment,

Research, Consulting, couriers, Resource Materials, Software, Travel,
Web Hosting
Public Relations Editorial Guides, launch events, Press Kits, PR Agency, Press Mailings
Sales Promotions Bundling Costs, Design Development, Price Promotions, Seminars &
Other Events
Sponsorship Physical facilities, Causes, Events, Celebrities
Trade Shows & Events Stand costs, Personnel costs, transport & accommodation, advertising
Ultimately, your company will need to have a realistic proportion of forecast revenue set aside
for promotional expenditure. This can be in the range of 15‐30% of total revenue and will
depend on criteria like the number of new product releases, how competitive the market is etc.
A good guide is to look at the financial statements of publicly listed companies to review the
relationship between their marketing expenditure and revenue / profit. However, do not
assume an instant correlation between promotional spend and revenue. It takes a lot of
exposure and brand building before the effect on sales can be truly felt.
In addition to the marketing spend involved in promoting current and forrthcoming products,
you will also need to allocate expenditure on the following:
4.2.1.1 MARKET RESEARCH
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Market Research: This is essential. Understanding the consumers mind, their need for your
services and their perceptions of your products can greatly assist in the new product
development, launch and sales cycle for your products. Some key questions need to be
addressed within your Market Research brief:
• What is the potential size of the market and the estimated level of sales?
• Is this market growing or declining? What factors will affect this market?
• Have you clearly defined the market sector for your product or service?
• Have you researched your market territories been researched thoroughly? What local
differences, customers, languarge and regulation are likely to affect your final product?
• What is the consequence of making product changes for these different geographical
territories?
• If you are exporting, how competitive will your products remain if exchange rates
change?
• What are the appropraite channels to market? Direct selling, online, agents,
distributors, retailers? What is the possibility of channel conflict if more than one route
is utilised?
• What branding and other promotional effort is required?
• What is the shape of the competitive market place like now and what is it likely to look
like in the future? What competitors and competing products have been identified?
What future developments are there likely to be in these products and how will your
competitor respond to your product launch?
4.2.1.2 MARKETING EFFECTIVENESS
You should set some budget aside for measuring the effectiveness of alternative forms of
promotion, and use the knowledge derived to plan alternate marketing strategies. With online
marketing and Web analytics, it has become a whole lot easier in recent years to quantify key
interrelationships between customer exposure – customer interest – leads and customer sales.
4.2.1.3 COMPETITIVE INTELLIGENCE
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Competitive Intelligence: Invest in the capability to collect and analyse what is going on in your
market. You can get swamped by all of accessible online information (websites, newsletters,
search bots, share trading sites etc) about your competitors, future competitors, suppliers,
customer trends etc. The challenge is not in finding it, it’s having the headspace to filter,
analyse it and think about the repercussions of it for your own growth. To really understand
what is going you will require a time and a financial commitment:
• Purchasing filtered specialised news services that deliver relevant, industry specific
news to your desktop.
• Joining trade associations, networking forums and industry groups that allow you to
network to find out what is going on.
• Undertaking international reconnaissance. While you may not be a global firm at
present, overseas trends may well impact your own market as well as alter the
landscape and potential for export. Jump on a plane and talk to people at
international trade shows, exhibitions, industry forums etc.
• Consider outsourcing information filtering to Information specialists well versus in
reading, condensing market data and producing it for you in the form of updates,
newsletters, alerts.
• Developing an in‐house “Knowledge Base” and train your staff to input
observations, rumours
4.2.1.4 CUSTOMER RETENTION
To grow your market, you naturally have to find new customers and much of the here is
dedicasted to the goal. However it is an often stated, yet important trusism that it costs
significant less to have an existing customer purchase from you that it is to source a new one.
The growth in technology has made suppliers lazy in this goal and the use of impersonal
technologies such as e‐mail newsletters and other one way electroniuc messaging can make us
lose contact with the customer, their requirements, and whether indeed they are shopping
elsewhere. Repeat purchases, upgrades, subscription renewals etc are then at stake.
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There are a wide number of Customer Rentention strategies, but they can be summarised in
the following ways:
Customer retnetion and the capacity to provide them with new and additional services, renew
their subscriptions, charge them retainer fees etc, provides some interesting financial modelling
challenges.
Here’s a sample Excel(R) based model for a company that sells hardware, software and services
to both new and existing customers:
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The model has been set up so only the yellow cells need to have an input.
There is a known population of pieces of Hardware out in the market at the beginning of a
period, plus a forecasted assumption that around 65% of that existing population will purchase
a “renewal”. This 65% renewal rate on existing customers plus the new customers acquired in
that period then become the new Hardware population at the beginning of the following
period, and the calculation is made again at that point.
4.2.2 INFORMATION TECHNOLOGY
The use of technology within your company can loosely fall under two categories – as an
invesmtnet in driving revenue, profitability and growth, or as a cost of doing business.
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4.2.2.1 AS A REVENUE & PROFIT DRIVER
Excellence in information technology can drive real improvements to your company’s bottom
line. IT must deliver value to your company, rather than simply be a cost that should be
contained.
The rapid adoption rate in E‐ Commerce, Enterprise Resource Planning (ERP) systems, Customer
Relations Management (CRM), Knowledge Management, Business Intelligence & Analytics and
many web based technologies elevate IT considerations from being merely a cost to being a
driver of profitability and growth.
Effective use of technology creates competitive advantage. IT expenditure tied to your

company's business strategy will have the most clear‐cut business value, in terms of return on
investment. Moreover, when IT solutions and business strategy are woven together, companies
are finding that business benefits are often broader and deeper than expected.
Investments in the following technologies can all have long term highly positive payback in
terms of customer relationships and business efficiency:
• E‐Commerce: including a web store, inventory management process, order fulfillment

process and accounting system.
• Customer Relationship Management (CRM): Systems for tracking customer data and
customer interactions, as well as internal project tracking.
• Enterprise Resource Planning (ERP): An integration suite of most of the internal
processes within an organisation including manufacturing (scheduling, materials,
workflow and quality), supply chain management (inventory, suppliers, scheduling),
financials and project management.
• Management Accounting Software. While common low cost generic software such as
MYOB and Quicken may service your organisation for a while, at what point do you
require the greater functionaluity of mid‐range accounting packages.
As you grow, you will also need to cost in other applicatins such as [purchasing management
software, business process automation, document automation, asset management and other
applications specific to your production, R&D and warehousing operations.
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Consider with each the following costs: the “per seat” licence, the implementation costs, the
renewal costs, the additional customisation costs through their life, and the costs involved in
migrating the data to larger systems should your growth take hold.
4.2.2.2 AS A COST OF BUSINESS
Outside of staffing costs, Information Technology costs can be one of the most significant
operating costs of your company. As you grow your company, consider the future costs of
some of the following necessities:
• Hardware, software and networking products for your team

• Connectivity solutions with customers, suppliers, distributors etc.
• Disaster recovery and contingency planning requirements.
• Network and data security.
Even without the business benefits, there are commercial costs for not investing in
technology. Consider the costs of the following lost hours due to printer problems, network
problems, loss of unsaved work & failure to back‐up documents, equipment purchase delays,
inadequate computer training, inefficient processing power, computer downtime
(crashes/system failure) associated with inexpensive or inferior equipment,inefficient systems
and double entry, poor document management and access, complicated systems or retrieval of
data
Also consider the lost revenue because your phone lines are engaged or your equipment is
inefficient, because sales data is not immediately accessible to your sales team and because
your sales team does not have a contact management system to remind them to call back
potential clients.
Key areas for considering appropriate levels of IT expense include:
Personal Computers Considerations:

Required power of a new computer
Ability to upgrade PC’s versus purchasing new ones
Rent v Lease v Buy equation
Software Considerations:
Are software upgrades always necessary?
Are service / support agreements with software vendors being fully utilised?
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What about SaaS? (software as a service)

Is there an appropriate level of documentation being purchased with the
software, particularly as most vendors no longer package documentation?
Servers There is likely to continue to be a rapid increase in the number of servers
that your company operates as it continues to grow.
There are also technologies (e.g. virtualisation software) that can reduce the
number of servers, as well as the use of distributed applications.
Broadband Rapid increases in broadband take up in recent years. However the market
will continue to become more competitive and technologies will ensure that
“Moore’s Law” continues.
Outsourcing The extent to which high fixed costs e.g. IT professionals be outsourced.
Wide range of personnel and procedures outsourced to specialised
companies providing full system monitoring, application development etc.
4.2.3 EMPLOYEE / PERSONNEL COSTS
Staff costs can account for a large proportion of total business costs for your enterprise.
In addition to salaries, bonuses and commissions you will need to factor in the following other
employee entitlements.
• Superannuation
• Annual Leave
• Long Service Leave
• Cumulative sick leave
• Post employment benefits
• Termination benefits
Depending on how your organisation remunerates its employees there may also be share based
benefits ‐ such as shares owned, options etc.
According to a recent study (AMI‐ Partner Inc 2002) less than 50% of total human resources
spending are on direct staff salaries and wages:
• Staffing Services 49%
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• Legal, HR Services 16%

• Recruiting/ Benefits/ Administration / Miscellaneous 16%
• Payroll Services 8%
The key issues for consideration are:
• Labour force required to service the level of sales and support activity within the
company.
• Use of commissioned staff
• Use of overtime
• Use of contractors rather than full time employees
• Use of outsourcing.
• Possibilities of promotions or other changes in role necessitating change in salary rate.
Like IT costs, training costs can be seen as either a cost of an investment in the skill set of your
company’s employees. Consider when forecasting, ways to best allocate spending to improve
effectiveness of your company’s learning and development processes. The training areas to be
considered include: leadership; management development; professional skills; technology
skills; and new product skills.
One key forecasting question, givewn that staff costs are often the m,ost significant single cost
in a company, is – how many staff do you need? The answer can be clearer cut in some job
functions than in others. For production, it may be whatever keeps the assembly line in
operation if you decide to produce inhouse rather than outsource. In customer service
however, you may passively say whatever it takes to answer every inbound customer call, but
this passive approach needs to be considered in the light of having an active policy to perhaps:
Discourage low value calls by improving the quality of web based documentation and FAQ’s.
Or
Encourage high value customers by having an outbound call centre that checks up on their
levels of satisfaction.
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Another example where you need to evaluate your peronnel resource is in the availability of
sales people or pre‐sales engineers to close business. Particularly, what are the costs of getting
a new customer or getting an existing customer to buy more?
When looking at obtaining a new customer, you need to consider a Sales Funnel for your own
company. How many initial contacts do you need to obtain one sale? What is the cost of
servicing those initial contacts (salesforce, presentations, proposals etc) in order to make that
sale?
250 Cold Calls
100 Initial Discussions
50 Presentations
25 Evaluations
15
Negotiations
10 Sales
In this example, 250 initial prospects, pipelines through to only 10 sales, but you must cost in
the resource of making contact with all of those initial 250.
4.2.3.1 INCENTIVES (COMMISSIONS, BONUSES)
Depending on the nature of your industry a considerable componet of your employee costs will
be variable and relate to performance based incentives –
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These incentives will relate to the achievement of a predefined target.
For sales staff and managers this achievement could include any of the following, and more:
Calculated as a total company, as a team or as an individual:
• Total sales
• Total sales growth
• Total growth in gross margin
Calculated as a total company
• Profitability
• Growth in profitability
• Growth in business value (e.g. share price of a listed company)
Performance based incentives may also apply to project staff for ontime delivery of projects,
production & warehouse staff for efficient scheduling and working capital management, and for
a whole host of other individuals and teams in your company.
You’ll need to design incentive schemes as part of the forecasting process. However, ensure
that you take the following ointo considertation:
Is the behaviour that you are trying to incentivise creating the most desirable outcome for the
company in general? Will, for example, individuals:
• Achieve targets that may be detrimental to the performace of the company e.g. a
salesman targeted on revenue, may not care about the profitability of his / her
customer transactions.
• Defend the performance of their own silos instead of helping to shape action across the
whole organisation
• Tend to be ego driven and seek to enrich themselves at the expense of the organisation.
Ultimately, incentives and performance goals should be related to achieve best results. They
will need to be constantly re‐evaluate as there may be circumstances where they can
demotivate if the individual is not achieving goals or if the maximum earn outs has already been
achieved and the individual is squirreling away some achievement for the next period!
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4.2.3.1 DIRECTORS / ADVISORS PAYMENTS
While evaluating personnel costs you may need to consider an allocation for non executive
directors, and external advisers.
4.2.4 ADMINISTRATIVE COSTS
4.2.4.1 BUILDING LEASE
The size and functionalitiy of premises for office space, manufacturing facilities and warehouses
need to be constantly considered, and a forecast that assumes rapid growth must also take into
account, the extent to which current premises may be stretched or dysfunctional in the event
of that growth.
Leases are a commitment on space and while premises may be subleased in the event they are
inadequate, conside rthe following costs:
• Built in CPI (Consumer Price Index) increases

• Option to extend lease at a pre‐agreed pricing formula.
• Whether the lease includes services such as cleaning, security etc.
Important to cost in proper control of your bookkeeping – importance of decent accounts

package – what to look out for in accounts package – costs of not having decent package etc.
4.2.4.2 INSURANCE
There are a wide range of different types of insurance required for your company. The purpose
of most of this insurance is to transfer some of the risk within your operations onto an insurer
in return for a premium. Some such as Workers Compensation are compulsory, others such as
Professional Indemnity high recoomended, and others such as Key person life insurance
optional.
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They can be grouped into sections as follows:
• Professional Indemnity –important if you are involved with providing special services
or advice where the consequences of following your advice could lead to
detrimental outcomes.
• Public Liability – Either for the public to protect your company when customers
could suffer personal injury or property damage, or for employees to insure for
negligence against injuries resulting in the place of business or while travelling.
• Workers compensation ‐ This insurance is usually required by the state in which the
company operates. It provides valuable protection to workers and their employers in
the event of a workplace‐related injury or disease.
• Property Insurance ‐ This type of coverage will insure inventories, facilities,
furnishings, and equipment from fire, theft, etc.
• Key person life ‐ This type of coverage insures for business interruptions and/or
financial loss due to the death of a key officer or owner.
4.2.4.3 TELECOMMUNICATIONS
4.2.5 LEGAL COSTS
Legal costs are often underestimated by high growth organisations, particularly where they are
seeking to enter new markets, protect intellectual property, and form contractual relationships
with suppliers and customers or change shareholder agreements. Consider and cost in some of
the following:
• Changes in ownership & structure of your company. Legal negotiation and agreement
may be required where the classes of shares and their rights change over time or where
commitments are honoured to provide shares, options or profit share.
• Trading Agreements: An expanding company will be subjected to the necessity to
create a wide range of trading agreements including franchisee / franchisor, exclusivity
on particular geographical territories or market sectors, royalties on revenues received,
licensing of product etc.
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• Intellectual Property: The cost of researching, registering, protecting , enforcing and

ligitating major IP forms IP such as patents, trade marks, copyright and designs can be
very large for a company on the cutting edge of research , design and prototype
manufacture.
• Environmental Regulation: Environmental considerations are important to proposed
developments in Australia and the continued operation of a project or venture.
Legislative controls cover a wide range of relevant areas including: land use and
development, environmental impact assessments, building and pollution, waste and
contamination.
4.2.6 TAXES
4.2.6.1 GST (GENERAL SALES TAX)
GST is a broad‐based tax calculated at the rate of 10% on the value of the supply of a broad
range of goods and services. It is paid at each step of the supply chain and the liability to pay is
on the supplier of the GST items. Assuming your company is registered for GST (your projected
annual turnover is > $50,000) you will claim an input tax credit which offsets the GST ncluded in
the price of GST items.
Your forecasting process needs to take account of
• The GST component of each transaction.

• The due date (monthly, quarterly etc) when GST payables and receivables due are
netted out.
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4.2.6.2 INCOME TAX
The plethora of assumptions in the forecast need to be continually updated with real figures if
the cash flow needs of the company are to be adequately understood.
The tax situation will vary whether your company is classed as a sole trader, partnership,
company or trust.
Company Income is taxed at the company tax rate of 30% and distributed to shareholders via
dividends will be subject to top up tax at personal tax rates. However companies can retain
after tax profits indefinitely. Tax rules are different for other forms of company structure such
as a Partnership or Trust.
Your forecasting will need to account of issues such as tax refunds due from previous trading
activity, losses carried forward, tax concessions and timings of tax payments.
4.2.6.3 OTHER TAXES
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You will also need to take the following additional taxes into account when forecasting:
• Fringe Benefits Tax (FBT) ‐ Levied in respect of the total value of taxable benefits
(technology, cars, discounted looans, family schooling) prvided to your employees as
part of their package.
• Customs Duty ‐ imposed on various goods imported into Australia at rates prescribed in
the customs legislation.
• Payroll Tax ‐ imposed by the various States and Territories on wages paid or payable by
an employer to an employee.
• Stamp Duty ‐ levied by each of the States on documents and transactions such as
transfers of property (including businesses and other business assets), sales of
marketable securities which are not quoted on ASX (including shares and units in unit
trusts), leasing and hiring arrangements and most secured lending transactions and
some unsecured lending transactions.
• Land Tax – imposed by each of the States on the ownership of land within the State or
Territory.
• Municipal Rates ‐ a common levy imposed on the value of land serviced by local or
municipal governments.
When operating internationally, your company will also need to factor in the various national
and local taxes and other charge applicable within that jurisdiction.
4.2.6.4 TAX PLANNING
Income Tax deductions can be claimed for a wide variety of expenses. Typically, any expense is
tax deductable if it is incurred in order to run the company. These could typically include
borrowing expenses, bad debts written off, and an increase in inventory value across the
financial year, insurance, tax advice and recruitment costs.
In addition, take advantage of any tax breaks and schemes. For example,
You can claim an Entrepreneurs Tax Offset if your turnover this year is likely to be less than
$75,000.
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You can claim capital works deductions for property improvements. This applies to extensions,
alterations and improvements to buildings and structural improvements. To qualify for the
deduction, the building must be used for the production of assessable income.
Naturally a range of opportunities to take advantage of tax breaks. Specialist advice is most
appropriate here.
One final message. Before entering overseas markets it is important to get professional tax
advice as to your obligations and how to structure overseas transactions.
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5. BALANCE SHEET, WORKING CAPITAL & CAPITAL EXPENDITURE
One of the key financial statements required to be produced by any private registered or
publicly listed company is a Balance Sheet. The Balance Sheet shows the assets, liabilities and
equity in your company as a snapshot at a particular point in time.
The Balance Sheet is a snapshot of what you own and owe and
Simply speaking – assets are what the company owns and liabilities are what it owes. The
balance sheet equation can be expressed simply as
ASSETS = LIABILITIES + EQUITY
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It also shows the liquidity of your company, which is the ease in which assets can be converted
into cash in order of liquidity.
It does not show the value of the firm, quality of management, and economic and market
conditions in which your company operates.
5.1 BUSINESS CHALLENGES – MANAGING YOUR CASH FLOW
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Estimating and monitoring the future value of assets, liabilities and equity is a very important
component of the forecasting process. You must consider the company’s capacity to fund the
ownership or access to assets which help to create value for the company by generating profits
and growth.
Conversely it is possible to go broke while making a profit. How? Simply through shortages in
working capital where continual growth consumes cash. Debts generated by increasing sales
cannot be collected quickly enough to pay off the increasing bills from suppliers whose
products you are selling more products from. You require more inventories to service the
growing number of customers who will eventually purchase your goods, given a time lag. If you
don't have enough cash fluidity in the working capital cycle, you capacity to fund expansion is
severely limited.
5.1.1 MANAGING WORKING CAPITAL
Working capital measures the funds that are readily available to operate a company. Working
capital comprises the total net current assets of a company, which are its stocks, debtors, and
cash—minus its creditors.
The working capital cycle describes capital (usually cash) as it moves through a company: it first
flows from a company to pay for supplies, materials, finished goods inventory, and wages to
workers who produce goods and services. It then flows into a company as goods and services
are sold, and as new investment equity and loans are received. Each stage of this cycle
consumes time. The more time the stages consume, the greater the demands on working
capital.
Early warning signs of insufficient working capital include:
• pressure on existing cash;

• exceptional cash‐ generating activities such as offering high discounts for early payment;
• increasing lines of credit;
• partial payments to suppliers and creditors;
• a preoccupation with surviving rather than managing;
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FOREC
CASTING, FIN
KING YOUR BUSINESS
B GR
ROWTH
2008
• Frequent sho
ort‐ term emergency req
quests to thee bank, for exxample, to help
h pay wagges,
pending receipt of a cheq
que.
We should now look in detail at the different componen

nts of workin
ng capital an
nd review ho
ow
they can be improved:
5.1.1.1 RECEIVABLE
R ES
Your und
derstanding the
t ability of a customer to pay, pro opensity to pay
p on time and how you
can speed up the collections pro
ocess is an esssential partt of the cash flow and prrofitability
process.
onsider the time

Firstly, co t lags thaat occur between when the customer originallyy orders a
product oro service an
nd when revvenue is colleected from that
t customeer
• ORDER: When
W the saales order is recorded
ORDER
• VALUE: When
W the salles order is fulfilled
f
VALUE
• INVOICE: When the invoice is issued

INVOICE
• RECOGNITTION: When
n revenue is recognised in the
RECOGNITION accounts
• COLLECTION: When rrevenue is reeceived from

m the
COLLECTION customerr.
Review the processees that you plan

p for your company, and
a build into your foreccast how thee
transition
n between them can be speeded up
p. Here are some
s ideas, which may be applicablle to
you depeending on yo
our own com mpany:
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• Introduce retainer payments – a guaranteed fixed sum payment, usually monthly

that enables the customer to call on you for regular work.
• Try to have the customer make as much payment upfront e.g. ask for 1/3rd when the
job commences, 1/3rd while in progress and the remaining third on completion.
• Send the invoice as quickly as possible.
• Offer discounts for early payments – say within seven days.
• Ensure that your credit reference checking is stringent prior to offering credit terms.
• Ensure that your customers know the payment terms and other credit policies.
Make them highly visible in the invoice.
• Incentivise the customer to make payments using the method least costly to you –
direct debit to your bank account avoids the fees payable to the providers of credit
cards.
• Use collections as a way to motivate your sales force. Delegate to them the
responsibility for timely receipt as a condition of bonuses.
• Ensure that regular statements are sent to customers to act as a reminder.
• Be prepared to follow up late payments with phone calls or emails.
• Charge interest or service charges on overdue balances.
• Aim for partial payment where you know that the customer may be experiencing
financial pain.
• Keep records including client’s reasons for slow payment. It will make it easier for
you to validate the reasons the client gives the next time they pay late.
• Don’t hesitate for too long in using debt collection services.
Note that as you grow you may lack the capacity or inclination to manage accounts receivable
processes internally. There are many professional services you can utilise by outsourcing the
debt to a reputable collector.
5.1.1.2 PAYABLES
Accounts payable is the process of paying your suppliers, and like accounts receivable there are
plenty of opportunities to improve your cash flow and profitability here.
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• Before looking at some simple ways to improve your cash flow, review first whether it is
necessary to buy the goods and services that you are purchasing in the first place.
Above all are your variable costs increasing faster than your revenue? Are you
predicting those sales accurately? Can you purchase second hand rather than new? In
the current economic downturn, the auction sites are spilling over with great bargains in
nearly new office furniture.
• Don't be too hasty when paying suppliers. Dun &Bradstreet estimate that the average
largish company is taking more than 50 days to pay suppliers – and that those are
increasing as we head towards a downturn.
• Are you asking your supplier for discounts? Negotiate with each of them as you may be
surprised at what they can offer you, particularly if you are likely to purchase in
quantity, be a regular customer over time or when your supplier is operating in a
competitive market.
• Try to get credit rather than cash terms with suppliers, but ensure that your own
systems can cope with that.
• Make sure that you are being accurately billed. Suppliers do make mistakes. Their
invoice personnel may not know about the discount you were offered by the
salesperson.
• Have a good payments tracking system so that it make sit easier to go back to them for
better trading terms and bulk discounts.
• However, don't damage your credit rating or string out supplier payments too long. It
may not help in your future dealing with the supplier. If there was a shortage of product
that you normally rely on from that supplier, would you expect to receive your fair
allocation?
5.1.1.3 INVENTORY
The ultimate key to success here is to ensure that you have sufficient stock in your warehouse
or retail premises to meet your customer’s needs, that you are not holding onto unsold stock
for long and that you can order and receive stock from supplier at just the right time to achieve
this. Remember that your value of stock you carry can be magnified by slow moving items,
which in turn tie up your cash in an unproductive way.
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Effective inventory management is imperative in ensuring proper cash flow management and
profitability. You need to know how quickly items are selling, as well as what products are
obsolete, what are trends, seasons and fashions depending on your products, what it costs you
to store inventory and what your margins are on finished products.
Consider your inventory in three categories
• Raw Materials – Components or materials required to produced finished goods – the

nuts and bolts
• Work in Progress – Work that has not been completed but has already incurred a capital
investment from the company. This could include partly finished products in an
assembly line, an unfinished house on a property development or even a consultant
time or knowledge in a service business.
• Finished Goods – Ready for sale to the customer.
Now what can go wrong?
• Inadequate tracking system or a mismatch between supply and demand that could
result in too much overall stock, too much old or obsolete stock. There needs to be
proper control over inventory ordered, with optimal ordering cycles, supplier flexibility,
regular stock takes and efficient warehouse system. The challenges can be multiplied by
a factor of thousands when you consider all of the individual unique SKU’s
• Theft, shrinkage and spoilage are all important aspects and you should budgets for
proper physical safeguards over inventories including locked storage areas for high
value items, limited access to secured areas and adequate security at warehouse
locations.
• Review your supply base, could you rationalise the number of suppliers and thus
negotiate better discounts, service, quality or delivery lead times
• Inevitably you will have slow moving items. You will need to make allowance where the
value of the inventory falls below its cost e.g. when you need to respond to a
competitors price discounting initiative, when newer versions of products outdate
current stock. The magnitude of this will depend on the industry you operate within.
Fashion items may rapidly decrease in value over time, as will the value of newly
released DVD's
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Ultimately, accept that you will never get things totally right. You’ll need a rule of thumb for a
proportion of total items that are going to be sold for less than cost. This also include fixing or
damaged inventory as well as staff discounts.
When producing a forecast, it is important to consider that some costs will be variable and
some fixed, and some costs will fluctuate more over time. Consider the longer term input costs
and maintain the flexibility to transfer components of cost from variable to fixed such as
building factories rather than outsourcing manufacturing.
5.1.1.4 FACTORING
This is typically arranged with a financial institution and involves them lending cash to you
based a proportion of the face value of invoices. The institution provides a flexible line of credit
and promptly pays up to 90% of your book debts in cash.The balance is paid to your company
when the debt has been collected from your customer. This process creates a flexible line of
credit, allowing you to fund your rising cost of working capital that will come from business
expansion.
Naturally this comes with costs attached and while it brings forward your cash receivables, it
does so at the expense of the loss of some of the gross margin you would obtain from the
customer.
5.2 BUSINESS GROWTH – INVESTING IN THE FUTURE
A key forecasting principle is that over the long term, the assets must generate profit. That rate
of profit generated must be higher than the rate of interest incurred on the interest bearing
liabilities. When you plan to purchase assets, review the long term value that will be derived
from them, whether those assets are tangible (plant & equipment), intangible (patents,
goodwill) or even entire companies in an acquisition.
• Sale & Leaseback: Opportunity to derive cash by selling property or large equipment
and leasing it back. You remain the tenants or continue to use the property and
equipment.
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• Appreciating Assets: Certain assets, particularly land and buildings may rapidly
appreciate in value over time. Other assets integral to the operation of the company
such plant & equipment and motor vehicles may depreciate.
• Intangibles: In certain industries, intangible may form a major part of your longer term
assets. These include patents and other intellectual property, brands and goodwill, and
can be the liveblood of your company, the source of many of the high value sales and an
important item in the valuation of the company.
• Investment in associates or other non related businesses: Investments are additional
assets not needed for the main part of the company. They are generally acquired using
surplus cash that the company is not using for working capital or CapEx.
• Acquisitions: Your company may perceive that it needs to make strategic investments in
related companies‐ suppliers, customers and associates. These may in the future lead
to strategic acquisitions. This is covered in Section 8.
• Investments in unrelated property, shares, trusts and interest bearing securities : These
have no relationship to the core business, but may be a simpler way of obtaining higher
returns (at least in the short ‐ medium term) that deploying those funds in company
related activities.
Throughout your forecasting period you may want to look at the structural nature of your
organisation and how well it handles a given set of inputs (cash, resources, labour etc) in order
to produce the most efficient set of outputs – finished products, profits and growth.
The following are a series of questions that need to be addressed and include in your growth
costings:
5.2.1 MANUFACTURING CHALLENGES
• Can you make any improvements in efficiency?

• How close are the manufacturing facilities to your distribution channels? Is
responsiveness affected? Could you reduce transportation charges? Is there
government or other incentives for you to relocate company facilities?
• How available are raw materials and what are the likely cost fluctuations?
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• What is the maintenance requirement of the manufacturing plant? Have they been
costed in, in downtime costs?
• What opportunities are there for vertical integrating your manufacturing? Can you
create efficiencies by manufacturing rather than sourcing components? If you supply
product to another manufacturer, can you enhance the value of their end product by
producing it yourself?
• How effective are your inventory control systems?
• How effective are your QA system?
• How old is your equipment? Can newer technologies create cost efficiencies?
• What is likely to be the turnover of key personnel? What value do these personnel
bring to your organisation and how dramatic is the learning curve for replacement
personnel?
5.2.2 RESEARCH & DEVELOPMENT CHALLENGES
One of the key challenges here is to ensure a pipeline of new product innovations that relace
and enhance the current product offering. Dedicated resource in terms of research, market
analysis, partner involvement and the devlreopment of buisness cases need to be costed and
included in the forecast.
For both new product development and general R&D consider the following:
• What is the research capability of your development team? Are there any skill sets that
you are lacking? How well equipped are your laboratories and development areas? Can
they be improved? What access can you have to superior, shared resources?
• What manufacturing support is there for R&D? Can tests and small production runs be
fed through to your plant?
• Do your research staff have a true vision of how the marketplace is evolving? Can their
managers inspire a vision and facilitate an innovative & creative environment? Do they
understand costs and benefits? Are they focused on market realities and optimise cost
with performance
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• How able is your company to recruit and retain specialists? Tech managers who
understand financials,
• How proprietary is their technical knowledge and are there risks of that changing?
• Can they both create and shape future developments as well as act in the defensive
through lowering offensive manufacturing costs, low cost product improvements and
supporting economies of scale requirements?
5.3 LIMITS TO GROWTH – CAN YOU GROW TOO QUICKLY?
Economic downturns can challenge the most successful rapidly growing companies, but much
of the problem could be that they grew too fast in the first place, by undertaking sub‐optimal
growth. Recently Starbucks in the USA announced the closure of 600 unprofitable locations,
opening during times of economic growth, but built in the first place without rigid demographic
analysis. It is possible to grow too fast when an investor’s demand for growth exceeds the
strategic business rationale for doing so and it turns into growth only for the sake of growing.
5.4 DEPRECIATION & AMORTISATION
Realistic methodologies need to be attached to the calculation of depreciation, where any

property, plant or equipment that "wears out" over time is revalued based on its current value.
The two key methods of depreciation are:
• Straight line ‐ where the same amount of depreciation is charged each year, and
• Reducing Balance, which gives a reducing charge over the life of the assets.
Reducing Balance is best used on assets that
• have a higher maintenance cost as the asset ages or

• are subject to early obsolescence because of technological advances
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5.4.1 INTANGIBLE ASSETS & AMORTISATION
These include trade names, licenses, patents and goodwill i.e. any non physical asset. It also
includes the value of a customer base, the value of competent and loyal employees.
Much of a company’s value lies in these important assets, yet often they are not accounted for
on the balance sheet. Tyhis is why there is often a large gap between the market capitalisation
of a listed company and its book value. It also explains why the market value of your company
will hopefully be significnatly greater than the value of its assets!
Goodwill, the difference between the purchase price and the fair value of the assets and
liabilities acquired, can only be reduced in value ‐ through impairment. This is through
amortisation, using the straight line method.
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6 FINANCING
The freeing up of excess working capital may be the cheapest form of financing. However,
there will be some occasions in your growth cycle where external finance is the most
appropriate way of achieving a large scale input of funds into your operations. You may be
expanding your product range, processes, research capabilities or your geographical reach, and
simply making internal adjustments will not give you the financial flexibility you need.
As well as having an operational strategy in place, a rapidly growing company also requires a
financial strategy, which is a set of policies that determines the sourcing and distribution of
funds.
Even smaller organisations must have a framework for assessing their financial strategy and
ensuring that it is aligned with the operations of the company. Why?
• To assist in making acquisitiosn that can help grow the company through diversification,
horizontal / vertical integration or simply scale by acquiring competitors.
• Ensure that there is sufficient access to finance that the company can draw on in periods
of underachievement.
• Ensure that free cash flows are either profitably reinvested into the organisation, or
distributed to shareholders if such reinvestments cannot obtain a market rate of return.
• Ensure that the cash reserve is deployed appropriately.
Key issues:
Most companies will be financed by a mixture of debt and equity. A healthy growing company
should have an “appropriate” balance of debt (borrowings) and equity (ownership). This
“appropriate” capital strcuture needs to give consideration to your company’s future revenues
and investment requirements.
Debt finance is less costly because debt holders expect a lower rate of return in exchange for
greater certainty of repayment and a preferential position in the event of bankruptcy. Debt is
also tax deductible, thus further reducing the cost of debt to the company.
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One of the purposes of forecasting is to ensure that you have sufficient debt capacity in place to
be able to cope with a range of different scenarios that could occur. One key issue is to watch
the interest charges incurred by borrowings. Profits can be reduced or even eliminated by
borrowings which in turn have to be funded by a reduction in owners’ equity. In the current
economic circumstances with rising interest rates this is all the more prevalent.
Equity includes
The original share capital rose for the company

Any additional capital raisings
Previous year’s profits not dispersed through dividends.
. Debt is …….
funding are the interest deductibility on the debt lowering the cost of capital relative to equity.
6.1 DEBT
Your company is more viable long term if the borrowings match the assets e.g. a company with
mainly long term assets requires mainly long term borrowings. You should not arrange short
term borrowings to acquire non current assets, as the short term cash inflows from revenues
generated by the non current asset will more than likely not match the outflows from payments
due on the asset.
You will need to consider appropriate levels of debt. Too much debt as a percentage of total
company value can mean:
• Interest payments will swell and put pressure on your company to be able to cover
interest and principal repayments.
• A lower credit rating for companies who are rated by credit agencies such as Moody’s
and Standard & Poors
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Loans have the potential to be substantially reduced if other cash flow components could be
managed
The timing of borrowing repayments is important as sufficient cash will be required, or new
borrowings arranged. You'll need to predict the likely cash situation at the time and the likely
need to arrange new funds.
You may also have given commitments to lenders, such as banks, that the company maintains
certain pre‐agreed ratios for liquidity (cash buffers) and other criteria. These are known as
covenants, and commit the compan y to agree limit other borrowing or to maintain a certain
level of gearing. Other common limits include levels of interest cover, working capital and cash
flow.
6.2 EQUITY
Along your growth path, you are going to be reviewing a range of issues pertaining to
ownership of your company. While you may have 100% yourself, have the ownership split
amongst a number of shareholders, or indeed have an external investor such as a business
angel or venture capitalist involved, your needs for funding and your need to keep your own
managers motivated and incentivised may result in a dilution of this ownership.
The issues that surround deal making with external investors and employee share and option
programmes go beyond the scope of this booklet, but from a financial forecast, you need to be
cognizant of the following:
Dividend payments to shareholders after reporting periods. Shareholders may want to see
some return on their shares even prior to a planned trade sale or ASX listing. The rational
approach to dividend payments is that if the company cannot reinvest the earnings at a higher
expected return that the shareholder would obtain through use of the money in an alternative
investment proposition, then the company should pay the Dividend.
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6.2.1 RETAINED PROFITS
Explain issues of declaring dividends, retained earnings etc.
You've got a positive NPAT (net profit after tax), so how is that money best deployed? Discuss
dividend payouts versus reinvestment vs idle cash
Several factors should be considered when thinking about investing retained profits. These
include
RETURNS ‐ The percentage you earn on an investment is key. Some products, like bonds, offer a
specific, guaranteed return. Some products offer a higher return, but it is not guaranteed.
SAFETY ‐ What’s the risk factor? Conservative investors might choose a bank savings account
because the return is safe. Aggressive investors might prefer to lean towards property or
shares, but their money is not insured, nor is the return guaranteed.
LIQUIDITY ‐ If and when you need your invested money, how quickly can you access it? Money
market accounts and savings accounts are considered liquid assets because they can be turned
into cash quickly. Products with staggered maturity dates give you access to cash at different
times.
DIVERSITY ‐ A smart way to reduce risk is by spreading your money among several types of
investment products. For example, you could bonds and shares.
6.2.2 SHARE CAPITAL ISSUED
Determinants ‐
Large issues have proportionately much lower costs of issuing than small ones
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6.2.3 DIVIDENDS DECLARED & PAID
Consider the necessity of declaring a dividend.
Determinants include:
• How much cash is available ‐ liquidity

• Debt covenants restricting the payout amounts to shareholders
• Stability of earnings.
Dividend policy revolves around public perception rather than rational company objectives‐ i.e.
that the firm should maintain or increase its dividend payout every year. However, the real
issue is whether the firm can gain a better return on those funds than the shareholder.
6.2.4 RESERVES
Types of Reserves
Shareholder Contributions This includes
a) options, where investors subscribe funds to acquire an option that
gives them the right to acquire funds at a later date.
b) Forfeited shares reserve, where investors failed to pay a call on
partly paid shares.
Realised Gains These include:
Gains made on disposal of capital types of profit
Retained earnings
General reserve
Capital profits reserve
Unrealised Gains These include:

Asset revaluation reserves
Foreign currency transaction reserves
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7 REPORTING & ANALYSIS
Behind the financial statements sit a whole series of analysis about whether your company is
heading in the right direction. This section is dedicated to:
a) Reviewing your cash flow forecast.

b) Reviewing your performance ratios.
c) Tracking your actual performance to your budget
d) Explaining the value of considering alternative scenarios for your company
7.1 CASH FLOW & CASH MANAGEMENT FORECASTING
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“You can lose money for a while, but you only run out of cash once”
The cash flow forecast is an absolutely essential part of your company. It will help you to see
how much cash is in the company at a future point in time determining your requirements for
external financing and your capability to expand. A properly formulated forecast will help you
understand whether you can afford the growing working capital requirements of an expanding
company, whether you can pay your debts and reward your shareholders and whether you
afford the capital expenditure required to future growth.
Cash flow is simply the movement of cash in and out of the company. Cash flow management
is essential as a discipline that keeps a company is kept in a healthy state. It reduces the risk of
insolvency and can reduce the cost of financing an entity. This is by reducing the amount of
capital employed.
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FOREC
CASTING, FIN
KING YOUR BUSINESS
B GR
ROWTH
2008
But this relies

r on con
ntinual reporrting and thee effective management
m t of information to fully
understaand the cash flow needs of the comp pany.
The cash flow statem

ment shows where
w the cash is comin
ng from and where it is used
u in the
running of
o the company. lt's in th
he form
• Cash
h flow from
m operating activities
+ • (reven
nues and costts, adjustmen
nts in inventory, interest, and
a tax)
• Cash
h flows (+//‐) from investing activitiess
+ • (investments and accquisition / prroceeds from
m sale of P,P & E)
• Cash
h flow (+/‐‐) from fin
nancing activities
a
+ • (share issues, borrowings & repaayments)
• Net cash
c movvements for
f the peeriod
=
• Cash
h at the beeginning of the peeriod
+
• Cash
h at the en
nd of the period
=
This stateement provides an earlyy warning of potential caash shortagees, identify whether
w
additionaal funds will be needed, identify pottential surplu
uses that can be investeed to generate
additionaal income annd assists in preparing reequests for financiers
f fo
or additional funding.
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O 02 8005 12
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In your forecasts , there will be cetain danger signals, where ther eis insufficient cash being
generated from operations:
• Net cash flows from operations are negative

• Receipts from customers are lower than payments to suppliers and employee.
• Cash flow from operating activities is lower than the after tax profit
Most likely, your forecasting software will generate for you a forecasted cash flow based non all
of the revenue and cost inputs that you have made into the software. The key consideration is
that you have sufficient cash in the bank / funds to cover any periods where your cash outflows
exceed your cash inflows. You also need to consider shortfalls and seasonal fluctuations. You
may have slow sales periods or periods in which customers are more likely to pay late.
With this forecast, you must also take into account, various risk factors. If you’ve got very little
set aside in your account, what percentage shortfall in revenues earned will make you unable
to meet your month end payments?
7.1.1 CASH FLOW AND INVESTORS
Finally viewing the cash flow statement from a potential investors standpoint, before investing
the investor needs to be convinved that cash will be created, that can be eventually taken out
of the business by the investor. The investor will seek a cash flow model incorporating the
following variables with built in scenarios that can be changed in a “What If…? Type format.
• The estimated costs of acquiring a customer

• pricing and gross margins,
• accounts receivables aging,
• realistic administrative costs,
• taxation
• depreciation.
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7.2 RATIO ANALYSIS
You need to include within your forecast, a series of ratios that review the forecasted
perfroamcne of your company across a range of criteria. These include:
Short Term Solvency / Can the company pay its due • Current Ratio = Current Assets / Current
Liquidity debts? Liabilities
• Quick Ratio = Quick Assets / Current Liabilities
Activity / Efficiency How well is working capital • Asset Turnover = Revenue / Total Assets
managed? How well do your • Receivables Turnover = Revenue / Receivables
company’s assets generate • Inventory Turnover = Cost of Goods Sold /
sales? Average Inventory
Financial Leverage How does your financial • Debt ratio = Total Debt / Total Assets
strcuture change over time? • Debt/Equity ratio = Total Debt / Total Equity
How much financial risk are • Debt / Capitalisation = Total Debt / (Total Debt
you exposed to? plus Equity
• Interest Cover = Earnings before interest and
taxes (EBIT) / Interest Expense
• Profitability – measure performance / profit
• Profit margin = Profit / Revenue
• Return on Assets (ROA or ROI) = Profit / Total
Assets
• Return on Equity (ROE) = Profit / Equity
Market Value Ratios If you are a listed company, • P/E ratio = market price per share / Earnings per
whaty is the market’s view of share (EPS)
your company? • Dividend Yield = Dividend per share / Market
price per share
• Market / Book = Market price per share / Book
Value
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7.3 VARIANCE
Simply forecasting your company’s finances is not sufficnet enough. You need to be continually
monitoring how your actual performance is comparing to your forecast.
Has your actual financial performance for the period lived up to the budgets and expectations
you set at the beginning of the period? The difference is simply the variance and is a key set of
statistics for presentation to the board, management and financiers.
If your company has not performed to expectation, how much of this can be attributed to:
• Unexpectedly high or low level of awareness or sales from promotional activity.

• Poor purchasing policies or efficiency
• Poor labour usage or efficiency
• Poor distribution policies
• Poor pricing strategy
• Changes in consumer behaviour or attitudes
• Unanticipated seasonal variations
• Reputation of the company changing.
And more important, what can be done to change this?
It is important to be able to track your actual overhead costs to that which you had budgeted
for. Costs have a way of spiraling out of control when there’s insufficient management scrutiny.
The greater the risks and volatility in your overall industry, the greater the time and emphasis
should be placed on tracking your performance to budget. The more unpredictable the future,
the more often you need to be reforecasting and producing rolling forecasts in order to align
your operating needs with the general competitive environment.
Increasingly, board reporting is simplified by a series of pre‐developed digital dashboards

illustrating the perforamnce of key variables. Here is one such excample:
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Finally, what kind of financial reviews take place, who undertakes and how frequently are they
undertaken. These reviews could include:
STRATEGIC: Is the company focused and focused in the right direction? Review by
performance to budget, sales to expense ratios etc.
PROFITABILITY: Where is the company making most of its profit? Review by product,
customer, territory or channel.
EFFICIENCY: How efficinet is expenditures in different areas relative to results. Review by

production, R&D, marketing, sales, accounts, customer service and pretty well every business
function that has costs associated with its upkeep.
7.4 SCENARIO ANALYSIS
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A complete financial forecast will have alternate results reflects alternate outcomes that could
happen to the company. For example, they may reflect realism, optimism and pessimism in the
financial plan
The impact on a cash flow of a pessimistic forecast must be taken into account. Can the
company withstand the shocks, in terms of its current liabilities (interest to be repaid, creditors
etc) and reserves of one or more worse than expected reporting periods.
With the results of a pessimistic cash flow forecast, consider your strategies for the following:
• Would you seek to maintain or downscale future capital expenditures for subsequent
periods?
• Do you have the flexibility to adjust the debt repayment schedules?
• What changes would you make to the operational side of the company in terms of
subsequent forecast periods of revenue and cost? In the end this would depend on the
reason for the performance shortfall relative to base case.
• Has the overall market for your products and services changed? (How did your
competitors perform?) Are there structural changes in the way that your customers
have their needs met (Airlines v Video & WebConferencing) or are there changes in the
overall economy (downturns in consumer spending)
You may want to develop a more sophisticated modeling environment for forecasting:
• What would be the profit impact of delaying a product launch?

• What would be the impact on profits of offering discounts to increase sales volume?
Consider applications that provide sophisticated and powerful modeling and "what if"
calculations.
The following layout compares the financial outcomes under a range of alternate sceanrios.
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7.5 FINANCIAL RISK MANAGEMENT
A majopr component of forecasting is the understanding of risks that could adversely affect the
cash flows of your company, as well as a strategy for mitigating them, even if, like most of these
risks they are outside of your control.
Increasingly uncertain times, greater competiveness and greater industry volatility calls for Risk
Management processes even in the smallest of organisations.
Components such as interest rate fluctuations (both in Australia and overseas), changes in
exchange rates and changes in the commodity prices, are all inevitable issues when doing
business. They create an unanticipated mismatch between prices, costs and debt and most
significantly affect trading margins and interest repayments.
You need to
a) considering where you are exposed to risk
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b) understand the size of that exposure

c) consider how this risk may be mitigated.
Risks may be classified as follows:
TYPE OF RISK EXPLANATION DETAIL MITIGATION

Liquidity Risk Insufficient funds Borrowed funds Maintain unused funding sources in view
to meet due not available at of factors such as future debt repayment,
liabilities. acceptable terms. capital expenditure, seasonal fluctuations,
Loss of credit line potential acquisitions and contingencies
from funder.
Interest Rate Risk Movements in Include sensitivity analysis in your
interest rates will forecasts.
affect financial Use of pre‐agreed fixed and locked in
performance by interest rates.
increasing interest Offsetting the increases in interest paid in
expenses one part of business with interest
received on another.
Use of swaps – exchanging a floating rate
obligation for a fixed obligation.
Foreign Exchange Risk that exchange Risk that these Forward planning including buying
Risk rate used to movements make forward currency
convert foreign your company’s Other hedging against currency moves
revenues and products or e.g. foreign currency bank accounts.
expenses and services
assets / liabilities uncompetitive
to Australian internationally.
dollars causes
shareholder
wealth to decline
Commodity Price Risk that a change Reducing reliance on specific
Risk in the price of a commodities
commodity that is Forward buying
a key input /
output of an
organisations
business will
adversely affect
financial
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performance
Credit Risk Risk that the other Could also be the Assess counterparty risks prior to
party in a consequence of involvement. Use of prompt payments.
transaction will international Avoid creating an undue dependency of a
not be able to government limited number of suppliers, distributors
meet its financial directives and or customers
obligations. policies or a
settlement
delivery risk that
destroys future
business dealings
Here’s where the key risk elements may be create:
• Who are your customers? How much of your total revenue is made up by the top five
spenders? Top ten? Top twenty?
• Where are your customers located?
• Where is your manufacturing done?
• How much are your interest expenses, are they fixed or floating and in what currency
denomination?
• What is the main currency denomination of your payables and receivables?
• What are the main currency denominations of your major competitors?
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8. ACQUIRING OR SELLING – VALUATION & OTHER CHALLENGES
You may need to value a company for a whole range of reasons. These can include anything
from a buy / sell proposition or an employee share option plan to a capital raising or a marital
dissolution.
Your prime business goal will probably be for you to maximise both the current value of that
company and its future potential value.
An updated cash flow forecast allows you to be able to use one of the more sophisticated
methods of valuing a company, Discounted Cash Flow (DCF) to calculate your company value.
This may also be appropriate when looking for additional shareholders or equity partners, or
buying out existing partners in the company.
A discounted cash flow simply values your company based on the expected future cash flow
streams generated, adjusted for the level of risk inherent in achieving those forecasts. Reams
have been written on this methodology, its applications and its limitations that would be out of
place in a document of this nature, but simply stated, models that incorporate a valuation,
require as inputs:
• Around five years of forecasted cash flows.

• A risk percentage rate required to discount these forecasts by – the higher the percentage
risk rate, the riskier the business proposition. (Stable cash flows in a stable industry with
high capital requirement and higher barriers to entry attract a lower discount rate than
more volatile organisations and industries.
• An overall per annum anticipated growth in cash flows of the company, relative to the
overall growth in the economy.)
An alternative method for valuing a business is applying a multiple to the normalised

earnings (EBIT, EBITDA , PBT etc)of your company to arrive at a nominal value. Normalised
earnings would exlude extraordinary or exceptional items, one off non recurring items and
discontinued divisions or product lines.
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The following chart illustrates the average value of a bui8sness in different indsutries in the
first quarter of 2008 as a multiple of their EBIT:
SOURCE: BizExchange Index ‐ March 2008 Quarter Results
________________________
Generating forward cash flow figures and discounting them at the cost of capital enables you to
calculate the present value of your company. Your software is a useful valuation tool, as the
software helps you look ahead at those future cash flows and allows you to see what steps
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need to be taken to increase the valuation. Valuation is particularly important where future
profit may be a long way out, or where your cash flows are irregular.
Valuation is a versatile tool appropriate for buying or selling a company or as an important

management focus and motivation tool. Agreeing and targeting a stream of anticipated future
cash flows, is a far better measure of business value that accounting statements!
8.1 INCREASING YOUR BUSINESS VALUATION
Your financial forecast should display numerical evidence that many of the following stragtegies
are being adopted as you grow your company:
• Implementing a marketing strategy based on differentiation, ost leadership or extreme

focus .
• Create entry barriers through economies of scale, product differentiation.
• Access to distribution channels.
• Design a strategy to maintain market share
• Reduce costs in line with industry demand reduction
• An effective relationship between total cumulative output and unit cost of your
production of products and/or services.
• Attempt to identify profitable niche
• The effectiove use of possible alliances/partnerships.
8.2 MERGERS & ACQUISITIONS
It is estimated that only 17% of acquisitions add shareholder value, while 53% actually lose
shareholder value and the remaining 30% produce no added value.
An acquisition may be part of your “roll up” strategy to consolidate the number of players in
your industry. The advantages of this may include:
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• Revenue enhancements from improved marketing, less competition, capacity to enter

new markets and greater muscle when seeking large corporate or government
customers through tendering opportunities.
• Cost reductions from economies of scale, economies of vertical integration, elimination
of inefficient management, purchase economies and the capacity to make better use of
existing resources.
• Risk diversification through having either a broader geographic operation, the capcity to
diversify into different customer segments
• Tax gains from transfer of operating losses, unused debt capacity and lower cost of
capital.
A longer term strategy may also be the incrwase overall valuation of the combined company
through obtaining the higher valuation multiples that corporates achieve relative to SME’s.
However undertaking an acquisition for this purpose alone is risky as economic boom / slump
cycles also play a significant role in the determination of multiples.
In addition, many of the more successful “roll up” acquisitions are under the guidance of a
Private Equity team. While Private Equityclearly has its role in strategic planning, driving
processes and financial strcutures etc, investors may well have different time horizons to
owners and may be motivated more by the financial engineering than the long tern business
opportunities.
With potential acquisitions, you should be able to see a financial opportunity through
underperforming assets or bad management. But they may be more than offset by the Control
Premium, the costs of acquisition, and post acquisition challenges such as potential
diseconomies of scale includng loss of key staff dissatisfied by the acquisition etc.
Acquisition is only one of many alternatives for growth. Other quasi‐ integration strategies
include technology licenses, strategic alliances, franchising, joint ventures or asset ownership.
The chart in Chapter Three review the partnering and alloajnce process and argues that you
could achieve smilar objectives at a lower risk by considering this route.
Acquositions may also involve a Management Buy Out (MBO) of your company, where your
incumbent management team raises capital to buy your company. Alongside your
management team, an investor or VC will take a stake in the company, and arrange debt
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funding for the management team The advantage of this is that the amangement team is now
focussed on the same goals as the shareholders.
8.2.1 VERTICAL INTEGRATION
Vertical Integration is a means of co‐ordinating the different stages of an industry supply chain.
Here your company may seek to owns its upstream suppliers and its downstream buyers. It’sd
however a risky strategy, complex, expensive and hard to reverse.
The main circumstances given when it can be good to integrate are:
• When the vertical supply chain “fails”, transactions between the players become too
risky and too costly, and there needs to be some “control” or market power in its place.
• When vyou can create an exploit market power, usually be creating barriers to entry for
other companies looking at competiing in this space.
• Where the industry life cycle is either too young – andf you have to forward integrate to
develop the market, or too old e.g. you have to fill gaps by others leaving market. (You
may need the reassurance of product supply from a company considering exiting the
industry).
There are also spurious reasons for integration e.g. reducing cyclicality and assuring market
access.
In the end Long‐term contracts, joint ventures, strategic alliances, technology licenses, asset
ownership, and franchising tend to involve lower capital costs and greater flexibility than
vertical integration.
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8.3 DUE DILIGENCE
Definition of due diligence….
If you are considering a takeover …
Large & complex subject in itslef, but this series of mindMaps will….
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8.4 EXITING YOUR BUSINESS
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9 REVIEWING YOUR FORECAST
How good a shape is your company in at the end of your forecast period? Have you costed in to
your forecast, expenses that ensure the following are covered:
• Your manufacturing plant remains effective, productive and not facing technical
obsolescence.
• The next generation of those products have been developed to replace and enhance
your current revenue streams
• There is the potential spare capacity in manufacturing, or the flexibility to outsource in
order to cater for an upsurge in demand.
• You have the right skill set in your development division to respond to or create new
developments in your chosen market.
• You have made the right investment in environmental safeguards both
o Positively ‐ "green" products that will appeal to a more concerned public
o Negatively ‐ limit the potential for litigation for environmental damage caused by
products, manufacturing plants etc or via public opinion ‐ packaging etc.
The final words go to Woody Allen:
“More than anytime in history, mankind faces a crossroads. One path

leads to despair and utter hopelessness, the other to total extinction.
Let us pray we have the wisdom to choose correctly”
94 | P a g e

Planning To Succeed - The Definitive Eguide For Building Company Financial Forecasts Mark Ostryn DRAFT 180708

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Planning To Succeed - The Definitive Eguide For Building Company Financial Forecasts Mark Ostryn DRAFT 180708

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This is a very early

TTHE DEEFINITTIVE E‐‐GUIDE FOR

2 STRATEGIC VISION ..................................................................................................................................... 7

4.1 COST OF SALE .................................................................................................................................................38

4.2.2 Information Technology .........................................................................................................................46

5.1 BUSINESS CHALLENGES – MANAGING YOUR CASH FLOW .......................................................................................60

6.1 DEBT ...........................................................................................................................................................72

8. ACQUIRING OR SELLING – VALUATION & OTHER CHALLENGES ..................................................................87

8.1 INCREASING YOUR BUSINESS VALUATION .................................................................................................89

9 REVIEWING YOUR FORECAST ....................................................................................................................94

Entrepreneurship has its glamour. However behind the world of

This eBook is all about financial forecasting. It addresses the truism

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

Those that make things happen.

While maany of these

• Requirem ment for enviironmental measures,

These figgures will be used by thee investor to calculate th

2.2 PROFILE OF SUCCESS

• Proprietary technology, owned by the company. This acts as a barrier to entry,

• Possibility forr strategic allliances to leeverage the strengths

A great framework fo or assessing where yourr company iss in relation to

To illustrate this, imaagine the competitive fo

This and other factorrs can be maapped to thee following diagram:

An intereersting exerccise, prior to t number for your own company forecast

Followingg in from thiis, ask yourself the follow

• Do you know how markeetplace trend

Effective forecasting requires good communications throughout your organisation. The

2.4 UNDERSTANDING CUSTOMERS

An important aspect of forecasting is in understanding the makeup of customers who purchase

2.4.1 MARKET SEGMENTATION

2.5 REALISTIC ASSUMPTIONS

• The growth of total population of Australia in the forecasting period.

And a whole host of other factors.

2.6 GETTING STARTED WITH YOUR FORECAST

CUSTOM SOFTWARE OR EXCEL SPREADSHEET?

TIME SPAN OF FORECAST

DEALING WITH COMPLEXITY.

INTEGRATION WITH YOUR ACCOUNTING SOFTWARE

• Save manually rekeying to input your actual financials.

DESIGN AND USABILITY

You may have a summary sheet of overall operating expenses:

Looking through each of the components of the Income Statement.

3.1 PRODUCT SALES

Our approach to forecasting product and service revenues is:

TOTAL MARKET PRICE PER NUMBER

Key factors affecting the sales forecast include:

• Previous year’s sales – is there a trend?

• New promotions, sales initiatives or other marketing drives

• One product may be complementary to another in which case there is a direct

• Existing products into new market

• Increasing the number of customers

PRICING DESCRIPTION ADVANTAGES DISADVANTAGES

above cost administer conditions into account.

Discount pricing impact overview

Conversely, if you adopt a premium pricing strategy

(3) Your sales could decline by the

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

3.3 GEOGRAPHICAL EXPANSION

• Determining the total customer base or market size

• Respect for intellectual property and legal infrastrcuture

3.4 NEW PRODUCT REVENUES

Some considerations include:

• Does the customer have to change behaviour?