This is the recital of all the previous sections into figures. These figures must be based on historical record and be substantiated by testing and analysis. The results must have reference to units of production or hours in the day that a service can be charged.
When the figures or projections are functions of production, and these are converted to sales must relate to logistics and common sense. There are set restraints on growth that are arithmetic, such as the ability to carry stock. Any growth will be limited by the size of a factory, the number of hours that the facility can be worked and the number of men that can and will work extra hours; growth also has an arithmetic relationship to working capital expressed as stock, debtors and work in progress.
Growth needs more cash not less. It is the blood in the veins of the entity and people have to make it work.
The spread sheet that details the flows of cash is the corner stone of all decisions.
Along with the order book, the cash flow – actual against budget is the daily prayer sheet of the C E O.
It is developed from the profit forecasts but it is not the profit and loss spread sheet.
The differences are in the timing of the expenditure. Expenses, such as insurance is a premium and payable once a year. Sales have a cash conversion time and slow payments by debtors can strangle growth and survival.
Excel spread sheets are a must, as they provide agreed percentages for each line item against the cash income line.
Fundamental to these is the bottom line – the “keep the doors open line”. This answers the question: How much cash do we need each month to keep the doors open, pay the staff, meet the rent, and pay the tax. The next fundamental is the amount of cash each unit contributes to overheads – the contribution margin.
The ‘cash balance sheet’ is a fundamental and is different in emphasis to the accounting Balance Sheet. The cash balance sheet has to be clear as to what is and can be turned into cash for day to day operations. Land, buildings, machinery, and ‘goodwill’ purchased or valued are of little use when the creditor cannot be paid.
The profit and loss is the history; it is the score sheet of the game; it is the basis for calculating the budget. The balance sheet must record all the assets and liabilities making sure that the liabilities are clear as to what long term and what has to be paid currently. Valuation processes are important as history may have no relationship to now and now may make the value worthless.
Budgets based on these historical accurate records are what is vital. Sales have a relationship to last year and if not has to be examined.
An Excel spread sheet can relate and ‘interconnect’ – essential costs to sales. If units are made from a raw material, the raw material – paper, steel, food costs – will have a fixed proportional value to the sale price. There will be industry bench marks for each line item that have to be assessed. Raw material will/should not exceed 25 percent, and labour should not exceed another 25% percent as overheads will soak up the balance, leaving the profit the poor loser. Raw material extraction has set cost benchmarks to guide the accounting and where hard rock or fuel expense gets above a certain level, it becomes un-profitable.