Flawless Financials       
   the Financial Forecasting Online Newsletter 
   from Minotaur Financial
   and David Brode

   June, 2004

   Sent monthly to over 400 subscribers.
   Please pass on Flawless Financials to those in your network.
   To leave Flawless Financials, follow instructions at bottom.

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This month: Keeping Forecasts Up To Date

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Keeping your forecast current is like flossing.  You know you 
should do it, and believe that all those other companies are doing 
it, but there's always something more pressing to do.  You only 
really regret not flossing when the dentist finds a cavity; similarly, 
your stale forecast causes problems only when an investor notices 
the gap between reality and what was once a solid forecast.  

Recently I've been working with a client that needed to keep 
financial forecasts updated for monthly board meetings, financing 
requirements, and to test strategic shifts.  It is an intense exercise 
for my client to continuously check for message consistency versus 
prior versions.  In this newsletter I share what I've learned from 
this client and others: how to identify the types of reality/forecast 
gaps, and how to stay up-to-date.


The Three Gaps

Gap #1: The March of Time
I recently saw a plan with a detailed three-year forecast.  
Unfortunately, those years were 2002, 2003, and 2004, a period 
during which the company missed its targets BIG TIME.  
Typically this gap isn't so huge, but forecasts completed in 
December typically need to be updated by the following March.

Gap #2: Strategy Changes
Some early stage companies change strategies as often as they 
change underwear.  Your numbers should stay in sync with your 
talk.  

Gap #3: Detailed Learning
Every company makes rough assumptions at the beginning of the 
planning cycle, which get validated over time.  Often investors ask 
detailed questions about these assumptions.  Make sure these 
accord with your current knowledge of your business opportunity 
and market.

Staying Up To Date

I recommend a monthly review of financial forecasts.  If you try to 
do it once a quarter, the job looks too ominous, and like many of 
my clients, you'll be inclined to defer it in favor of, well, any other 
task.  So just as the accountants close the books monthly, so too 
should the forecast be scrubbed monthly.

Solution #1:  Tie to Actuals.
If you're doing a forecast, there's always the point where reality 
stops and fantasy (uh, projections) begin.  The bright part of that 
line is between the past and the future.  So for all historical 
periods, you should have actuals—even at a summary level—in the 
model.  So enter the relevant units (e.g., customers), tie out 
revenue and COS/COGS and gross margin.  Enter salaries and 
other operating expenses so that EBITDA ties.  Tie out net income, 
capital expenditures, and the rest of the balance sheet.  Finally, as a 
check, ensure that cash ties.  Label the column "Actual" and 
maybe change the text color to blue to show that it's different.

Solution #2: Change Time Periods.  
If it's taking a bit longer to get off the ground, you may just want 
to re-label the time periods in the model from calendar month 
names to "Month 1," "Month 2" and so on.  This is useful for true 
startups with very small current operations but plans to move 
quickly once funds are raised; clearly this approach is not suitable 
for companies where the current operating results are material.

Solution #3: Getting Granular.
We assume you had a model from last year with twelve months of 
detail followed by four quarters and then three years.  Over the last 
year you've diligently input the monthly actuals.  Well, now it's 
time to split those quarters into months and look at the upcoming 
period with more granularity.  Clearly this is a pile of work, but it's 
important work.  If it's right to do this for a new forecast, you have 
to bite the bullet and invest the time to show the proper level of 
detail.

Solution #4: Narrative Description.
Often it's easier to read linear text than it is to audit a whole 
model.  So if you write out the basic assumptions and methodology 
of the model as a narrative it takes just a few minutes to re-read 
that and think about what has changed in how you view the 
business.  I recommend splitting this into sections for revenue, 
COS/COGS, headcount, other operating expenses, capex, and 
other balance sheet.

Solution #5: Tie to New Budget.  
Companies typically do a detailed job of budgeting the next three 
to twelve months.  So, make sure that the assumptions with respect 
to units, price, revenue, headcount, salaries, capital expenditures, 
etc. are reflected in your long-term financial model.  

Finally, don't forget to update your PowerPoint presentation and 
Word documents (business plan, executive summary) to reflect the 
results of your new financial model!


Until next month, all the best,


David Brode -- Minotaur Financial
Removing Financial Issues as a Deal Roadblock


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NEWSLETTER ARCHIVE AVAILABLE

Make sure to visit the Minotaur Financial website for the 
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http://www.brode.net  mailto:David@Brode.net

1919 14th Street, Suite 510
Boulder, CO 80302
(303) 444-3300

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ABOUT DAVID BRODE

I’m a financial modeling specialist.  Over the last fifteen
years I’ve completed dozens of models and certainly thousands
of versions to support corporate development, M&A, strategic
planning, and debt and equity transactions.  These models 
have raised over $1B in debt and $100M in venture capital
and private equity.

Over time I’ve consistently revised software tools and 
work processes to get the job done quickly and well.  If you
have a financial forecasting issue, I’d love to help.

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(c) 2004 Minotaur Financial, All rights reserved.  You are 
free to use material from the Flawless Financials newsletter 
in whole or in part, as long as you include complete 
attribution, including a live web site link.  Please also 
notify me where the material will appear.  The attribution 
should read:

"By David Brode of Minotaur Financial.  More articles on 
financial forecasting can be found at http://www.brode.net "

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Are you struggling to convince others to do a deal which
you think is a no-brainer?  To discuss how you can
take numbers off the table as a deal roadblock, call (303) 
444-3300.  I'm very accessible and glad to help.

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