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Cash Flow Projections and the Monthly Review Process

Feb 22, 2017 | By Seth David | 2 Comments

Topics: Firm Operations

A number of years ago, I unwittingly stumbled onto something in my business that would go on to become something of a phenomenon. "Nerd's Cash Flow Projections."

My wife asked me about some of the clients who would come in my door with a severe mess on their hands. My initial answer was that they are not accountants. That they are really good at doing what they do, which is not accounting. So they can make money, but they don't necessarily account for it well. Furthermore, it usually doesn't become a concern until one of two things happens. Either they run out of money, and wonder where it all went, or they get the tax bill, and wonder where all the money went!

My wife asked me why they didn't do what she saw me do, when I started my consulting business. She saw me toil for hours in my spreadsheets making sure that I could bring in enough money on my own, to pay the bills. Again I explained that this is a certain skillset, that even a lot of accountants don't have.

Around the same time, I remember one of my clients paying their CPA for forecasted financial statements. The bill was a couple of thousand dollars, and the deliverable were three pieces of paper with a lot of qualifying language. When I asked about getting a copy of the financial model, I was told that due to FASB (Financial Accounting Standards Board) regulations, they could not provide this. In fact they had to make sure that none of the numbers could be changed. The qualifying language assured the reader of the projected statements, that none of this would necessarily amount to reality. It was based on "...management's best estimates of the expected performance of the company."

While I understood the limitations, and the reasons, I thought to myself, what a waste. For the same $2,000 I could deliver a document, in the form of a spreadsheet, that would allow a user to change assumptions, and test scenarios. MBA's charge $3,000 for this kind of work, so why not me? Aside from the fact that I don't have an MBA, that is. Then I realized I could do one better. I could model the whole thing after a client's chart of accounts, by starting with exported reports right from QuickBooks.

Next I held a webinar on my new system, and I was surprised at how many CPA's signed up. When I asked some of them, the assured me, that they knew the basics of Excel really well, but not like this.

In my previous post, you saw an example of how I use this kind of template to analyze scenarios around buying fixed assets, and planning that well. Now, I will show you a little more about how the template works. If you were paying attention, then you noticed that when I originally added the $50,000 fixed asset, the model assumed that cash was paid, and the cash balance reduced from $200,000 to $150,000. Then when I added $50,000 in a loan payable, the model re-calculated and cash was back up to $200,000 less the interest expense. In this video, I will walk through a bit about how that works, and as always, I invite you to ask questions.

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