Finance Best Practices: Long-range Planning with Calenzie Consulting

Are you a business owner looking to maximize your financial performance and achieve your financial goals? Look no further than Calenzie Consulting, LLC. This accounting and finance consulting business specializes in providing top-notch consulting services to businesses and startups in need of expert advice. In this section of our blog we will be discussing finance best practices for long-range planning and how to ensure that you have enough detail without begin overwhelming. This will ensure that your organization's financial initiatives are set up for success and allow you to determine what levers you can pull to optimize your business' financial landscape.

Long-range Planning - Set up & Modeling

We've helped to enhance long-range planning and every single time, there are insights gained that would not have been made without the visibility provided by completing this exercise. We believe that some sort of long-range planning model is absolutely essential to elevate a business. This section will discuss the Finance Best Practices and framework to setting up a 5 year long-range planning model - the key is to keep it simple to understand but with enough detail to gain actionable insights with clear levers.

Each long-range model should include three financial statements (creating in order of operations), by month and summarized by year:

• Income Statement (also known as a Profit or Loss Statement aka "P&L")

• Balance Sheet

• Cash Flow Statement

1. To begin, start with the P&L. To accurately and effectively model the P&L, Calenzie suggests compiling supporting tabs:

   
   

   • Revenue

   • Cost of Sales

   • Operating Expenses

     
     

Each of these tabs will feed into the main "P&L" tab of your model.

For the Revenue tab, envision how you expect your Sales Pipeline to operate (i.e. will leads come in through marketing efforts, in-house sales staff, referrals, or combination of all). Get somewhat granular in the respect of how much you expect to spend on marketing per month, how many business development representatives (BDR) and/or sales executive (SE) you expect to hire, what the quota is per BDR/SE, and what the ultimate conversion rate is for inbound leads. The ending equation from these revenue generation inputs equates to a monthly expected incoming new Revenue booked. Make sure you include any lead or lag times between closing a deal/contract to fully realizing revenue. From here, also add in expected existing revenue, by month, to arrive at a monthly expected future top line Revenue.

For the Cost of Sales tab, the starting point will likely be the Revenue you modeled in the paragraph above (both existing and new). Really understanding your existing cost structure is the basis of this tab. From here, you can forecast or build in expected cost of sales improvements through efficiency or economies of scale. Begin by utilizing your existing cost ratios in the level of delineation you need, whether it is by product line, market, manufacturing plant, etc. you can accurately see the bigger picture and what areas of your business you need to optimize versus lean into. The ending monthly cost of sales dollars should flow into the main P&L tab.

For the Operating Expenses tab, Calenzie suggests breaking this down into 4 main buckets:

• Sales & Marketing (S&M) payroll,

• Research & Development (R&D) payroll,

• General SG&A payroll (G&A), and

• Other G&A (rent, travel, etc.).

R&D typically includes an organization's Tech department. General SG&A payroll typically includes executive functions (CEO, CFO, etc.) as well as line items for HR, Finance, Accounting, and any other non-sales, non-marketing, and non-tech departments. The key to calculating your operating expense payroll is to include average monthly payroll (fully burdened for benefits, payroll taxes, 401k, bonuses) multiplied by the number of headcount you expect each month. Calenzie Consulting also suggests using percentages (as a % of Revenue or Gross Margin) for calculating Other G&A line items to keep things simple. This will also help you see how much you will be spending (as a % of your total Revenue or Contribution Margin) and dial back any future expenses as needed in this modeling exercise.

After you've compiled all of the supporting tabs, ensure that the monthly sums flow into the main P&L tab. You can now determine and have the visibility of what your business expects to show as Net Income and/or EBITDA for 5 years out, by month. For presentation purposes, it helps to summarize each calendar or fiscal year to the left so that you can easily see the annual totals and also include historicals by month and by year. Including year over year % changes is also a good thing to show - as it will help you determine how close or far you are from what you wanted your business to show in the future.

2. The next tab you will want to create is the Balance Sheet tab. This tab will show you monthly ending cash balance, as well as include any capital expenses, forecasts for Accounts Receivable, Accounts Payable, Other Current Assets/Liabilities, Long-term Assets/Liabilities, as well as any debt or equity financing.

Similar to the set up of the P&L tab, you will want to include monthly columns. Ensuring that your balance sheet balances (Assets = Liabilities + Equity) is a must. Calenzie Consulting recommends adding in a check figure here for each month to ensure that your balance sheet does balance - as nothing will be more of a turn-off when your balance sheet does not balance. You'll likely be able to forecast your Balance Sheet within one tab (again keep it simple). For balances like AR, AP, Accrued Liabilities, Inventory, etc. use ratios like DSO, DIO, DPO starting with your ratios as they stand today - this will help illustrate the cash conversion cycle of your business and what may need to improve.

3. Cash Flow Statement

   
   

The Cash Flow Statement is one that builds off of both the P&L and Balance Sheet tabs. Begin with the ending Net Income or EBITDA from the P&L tab and add in reconciling items calculated from the Balance Sheet tab (month over month changes). Make sure to include any future incoming cash expected from fundraising and/or debt financing. The ending monthly calculation of the cash flow statement will show you your ending cash balance - congratulations, you now have visibility into how much cash your business can expect to have.

Conclusion

Now that you have your long-range planning model fundamentally built out, you can now go back and really analyze the levers of your business. For example, if you are expecting a cash crunch down the future based on the model, you can play around with various levers to see what you can do now (i.e. decrease DSO, increase DPO, maximum profitability, reduce expenses, etc.). Conversely, you can fiddle with your Revenue tab and see what may happen to your top line if you hire more sales reps at any given point. It will take time to put in any changes into your business so understanding they key components now is essential for not only your business surviving, but thriving! Calenzie Consulting also recommends that you make a copy of this model and then update each month as actuals come in, to see how you are tracking to your forecast. Lastly, update this model annually at the minimum to account for any discrepancies or changes in the business.

Home

What sets Calenzie Consulting, LLC apart from the competition is their real-world operational experience and track record of delivering tangible results. With a focus on providing insight into financial performance, accounting infrastructure optimization, providing recommendations on best practices for month-end close and controls, and helping clients reach their financial goals, Calenzie Consulting, LLC is committed to providing tailored solutions and expert guidance to help businesses succeed.

If you're looking to take your business to the next level financially, consider partnering with Calenzie Consulting, LLC. Their team of experts is ready to help you navigate the complexities of accounting and finance, optimize your financial performance, and set you on the path to success. Trust Calenzie Consulting, LLC to be your partner in financial growth and success.