DIFFERENCE BETWEEN THE EFFECT OF ENTERING NUMBERS AND FORMULAS

There are basically three methods of entering data into CF:

1. Entering a Number,
2. Itemization, and
3. Entering a Formula.

Entering a Number.

Using Itemization.

Entering a Formula.

• Do Not Use Formula for Remaining Months

If you enter a formula in CF, but you indicate that you do not want to use that formula for the remaining months, then the calculated number (as a result of the formula) only pertains to that particular month in the particular year where it is entered.

• Use Formula for Remaining Months

If you enter a formula in CF, and you indicate that you do want to use that formula for the remaining months, then the formula will "carry down" for each month through-out the following years until it is replaced by another formula. Since, you are usually preparing your CF model so as to make a projection over a number of years (and as it would be very cumbersome to enter each "number" over 60 months), using formulas will help you to make sure numbers which should apply for the entire 5-year plan are properly entered, without having to do so manually.

Incrementing by Zero:

• A very useful method of carrying down a number in the amount column is to use this formula in the month after the amount you wish to carry down appears and indicating an increment of zero. This is useful because not only does it save you the trouble of entering the same number repeatedly, but if after you have entered the formula, you then change an amount for a certain month, the following months will also reflect the change in amount.

• EXAMPLE:

• The business is going to be paying rent in the amount of $1,500. This amount will be the same every month, so we carry it down using the zero increment formula. However, after six months the rent is increased by 100. In the sixth month we change the amount to reflect the increased rent of $1,600; and upon entering this amount the subsequent months will now reflect the increased rent.

Multiplying by 100:

• Again, you can do a "no change" carry down of your amount by using 100 as your multiplier and the effect is the same as using the zero increment formula described above.

The Difference Between Projections and Forecasts.

In utilizing CF, you must consider the two fundamental alternatives available in the creation of your cash flow model.

• A FINANCIAL FORECAST is management's expectation of the future operation of the business based upon assumptions that are expected to occur.

• A FINANCIAL PROJECTION is management's expectation of the future operation of the business based upon "what if" situations. Therefore, in any projection at least one assumption is not necessarily expected to occur and, in fact, may be improbable.

In doing a budget that is in the nature of a forecast, the assumptions are "expected" to occur; on the other hand projecting growth is in the nature of a projection since the anticipated amount of growth is speculated and the anticipated amount of costs associated with the growth are projected upon the assumption of a particular cost or relationship with sales that may or may not be true. you do want to use that formula for the remaining months, then the formula will "carry down" for each month through-out the following years until it is replaced by another formula. Since, you are usually preparing your CF model so as to make a projection over a number of years (and as it would be very cumbersome to enter each "number" over 60 months), using formulas will help you to make sure numbers which should apply for the entire 5-year plan are properly entered, without having to do so manually.