Start-Up Financial Forecasting

Introduction

Start-up and early stage businesses underperform or fail largely because they run out of money (cash and credit).  In some instances entrepreneurs start businesses that will never generate the profit margins needed to pay for committed fixed assets and recurring operating expenses; and sometimes they run out of money after starting-up because they do not completely explore the possible financial consequences of what appear to be very sound operating decisions.

For example, starting a new retail store and spending most available funds (cash and credit) on fixtures and space improvements can place a great strain on remaining funds to pay employees, suppliers, rent, etc; and to weather the period it takes to build a profitable clientele.  Likewise, growing too quickly relative to a start-up’s available funding - evidenced by too high an investment in accounts receivable and inventory - can cause the same financial strain.

In any case, it is tragic to see promising businesses die, causing family wealth to be decimated, because of financial issues and obstacles that could have been identified and possibly overcome before operating plans were executed.

Financial Forecasting

Businesses are dynamic financial systems.  Changes in financial viability arise because a set of actions (operating initiatives) create effects (balance sheets and cash flow) that, in turn, cause other effects.  A primary task of sound financial management is forecasting the possible financial effects of business initiatives before the initiatives are undertaken and, based on forecasted outcomes, rebalancing choices to best protect the sustainability of the business. 

Forecasted income statements, balance sheets and cash flow statements are the financial dashboards that can assist entrepreneurs in exploring the financial effects (the “what-ifs”) of business initiatives.  Financial managers need to have a feel for the financial effects of business decisions - how decisions are monetized into the dashboards, and insight into the impacts on the dashboards after the decisions are implemented. 

The goal is to identify the unintended financial consequences of planned business initiatives; and to develop action plans, in advance, to mitigate their negative effects.

Forecast Software

If you do not already have a method to produce forecasts for your start-up or early stage business, please consider Corpfin.Net’s  web-based, easy-to-use business financial planning software.  The software helps create five-year financial forecasts, and 12 monthly forecasts for each of the five forecast years. 

Our start-up forecast model is used by businesses that have no operating history.  Our early stage model is used by businesses that have very limited (i.e., less than 12 months) historical financial information. 

Because start-up and early stage businesses have little or no historical financial history, we use SIC code financial data to help create the first draft of a forecast.  The models create a first draft forecast using a few user sales assumptions and the financial metrics for businesses in the primary industry in which the start-up or early stage business expects to compete.  The user can modify that draft’s assumptions to customize the forecast to suit her unique business circumstances. 

The major benefits of using the SIC code data are first, it provides guidance with respect to the profitability and asset investments by mature businesses in the industry of interest; and second, it is a very quick and easy way to get the financial planning process started. 

Our five-year forecasts are documented with eleven reports which include:

• An S I C extract showing the financial data on which the first draft forecast is based.

• A narrative report that is organized in a manner to help present the key elements and results of the forecast to a third party.

• Multiple versions of forecast financial statements (income statements, balance sheets and cash flow statements) and forecast assumptions reports.

• Comprehensive financial metric reports.

Our single-year model is nested within the five-year forecast models and enables the user to create single year forecasts (i.e., split a single year's forecast into twelve (12) individual monthly forecasts) for any year's forecast.  Reports generated by this model are similar to those documenting the five-year forecast.

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The cost of one month’s use of our software is $35, a minor amount when you consider the potential benefits of identifying unintended financial consequences before a business initiative is implemented.  Please see www.corpfin.net for additional details.   

Analysis of Carl Icahn’s Bid to Acquire The Clorox Company

On July 16, 2011 the Wall Street Journal published an article concerning Carl Icahn’s bid to acquire the outstanding common shares of The Clorox Company (CLX) for $76.50 per share.  With approximately 140 million shares outstanding (including Mr. Icahn’s current holdings), the bid values the equity of company at $10.710 billion.

I did a forecast of CLX’s future operations, assuming a 3.0% growth in revenues for fiscal years 2011 through 2014; and operating margins of 19.0% in 2011 and 19.8% for fiscal years 2012 through 2014.  

Given that forecast and other assumptions (see link below), I calculated a financial buyer’s estimated pretax rate-of-return resulting from buying CLX in a hypothetical asset purchase in which the CLX shareholders receive pretax proceeds of $76.50 per share.  My buyout analysis indicates that pretax return to be approximately 15%.   The return would be lower if the buyer were required to issue warrants to subordinated debt providers. 

If the financial buyer’s pretax rate-of-return objective were 25%, the estimated purchase price of the shares would be approximately $67.00.  Click here to access the reports related to this buyout analysis at Google Docs. The “Overview” narrative report describes the valuation method and results.

[Note:  If you sign in to Google Docs using your Google account information, Google Docs allows you to view, print and download the buyout analysis reports]

Buyout Analysis of American Eagle Outfitters (AEO)

On 3/11/11 Bloomberg published an article commenting on the possible attractiveness of American Eagle Outfitters, Inc. (AEO) to private equity investors.

I did a quick LBO analysis of American Eagle assuming 3% annual sales growth; gross margin and operating earnings percents in line with history; and an EBITDA exit multiple of 10.0 four years after the purchase.

Assuming a private equity investor required a pretax rate of return of 25% and made an equity investment equal to 20% of the total purchase price, I forecast the net pretax proceeds to AEO shareholders in this scenario to be approximately $3.7 billion, or about 18% above the company’s current market cap of $3.13 billion as reported by Google Finance on 03/11/11.

Click here to access PDFs of the various buyout analysis reports at Google Docs.

[Note:  If you sign in to Google Docs using your Google account information, Google Docs allows you to view, print and download the buyout analysis reports]

Private Equity Model and Valuation Basics

Background

Private equity placements are minority (less than majority) investments in the ownership of private businesses that need capital for a variety of reasons, including: to expand operations; to restructure their balance sheets; to enter new markets; or finance major business acquisitions.

Generally, businesses that seek private equity funding generate revenue and operating profits, but are not able to produce sufficient cash flows to support new initiatives, or to borrow needed funds from senior lenders.

Private equity investments can be in the form of ownership units (common stock, preferred stock, partnership units or LLC units, depending on the legal structure of a business); or in subordinated debt with warrants, also referred to as mezzanine capital, which are loans which require periodic interest payments and allow holders to buy business ownership units in the future for a de minimis price per unit. 

Issuing new ownership interests in a business is usually very costly to existing owners in terms of the ownership give up, the likely loss of management’s prerogatives to run the business as they wish, and the potential for additional ownership dilution if the business plan, on which the new equity investment is based, is not accomplished. 

On the positive side, additional equity capital allows a business to pursue opportunities it could not otherwise undertake.  The important issue for existing owners is to weigh all of the costs and risks associated with the issuance of new equity against the potential increase in their personal wealth resulting from accomplishing the business plan that requires the new equity capital.   

Private Equity Valuation

Key metrics in a private equity analysis are the estimated "pre-money" and "post-money" values of a business, and the ownership splits immediately after the equity financing. 

The estimated pre-money value is the value of a business (that is, its enterprise value less its liabilities) before the new equity funding is added to a company’s balance sheet. 

The estimated post-money value of a business is equal to the sum of the pre-money value, plus the amount of new equity investment, minus issuance expenses. 

Subordinated debt with warrants is a hybrid security.  The principal amount of the subordinated debt is not added to the post-money value of a company because subordinated debt is a debt obligation.  It adds identical and offsetting amounts of assets and liabilities to a company’s balance sheet and therefore provides no net change in the value of a company.  While the value of warrants "attached" to subordinated debt are expected to be valuable to subordinated debt investors, their value to a business at the post-money valuation date is immaterial.

Estimated pre-money and post-money values are unique amounts that are derived from the interaction of a large number financial forecast assumptions and investment inputs.  Accordingly, changes to assumptions or inputs will result in changes to both values. 

Building a Private Equity Model

The amount of equity and /or subordinated debt sought in a private equity placement is usually an amount that bridges the gap between a conservative estimate of the amount senior lenders will lend a company and the total funding a company needs to achieve its long-term financial plan.   

We suggest forecasting, by month, the first two years subsequent to the planned private equity placement to determine if the amount of equity capital sought is sufficient to withstand expected monthly variations in net sales and cash flow; and to satisfy intra-year compliance with debt covenants.  Funding and compliance that may appear satisfactory on an annual basis may not be so during yearly interim periods.

Key assumptions and investment inputs used to create a private equity analyses include:

• The sales, profit, asset and liability assumptions contained in a business’ five year forecast.  Because additional equity capital usually supports higher growth rates than can be accomplished without that funding, it is possible that the original five-year forecast (without the new equity capital infusion) should be adjusted to reflect increased business opportunities.  

• The amounts, investment types and pretax annual rates of return (RORs) required by new investors on their equity and subordinated debt investments.

• The EBITDA multiple used at the end of the forecast period to estimate the gross value of a business at that point in time.  That gross value, minus the liabilities of a company retained / paid off by the investors at the end of the investors’ ownership period, is a proxy for the pretax value of all investors’ future interests.  That residual value is the amount that is divided among the original and new equity investors in accordance with their respective percentage ownership interests.

New investors annual pretax rate of return target on common and preferred stock investments is effected by a number of factors, including: the level of competition among investors for private equity investments; the perceived risk associated with an investee’s industry and the likelihood of achieving the forecast results; the rate of return target for the investor’s private equity fund; and possible dilution in ownership percent due to possible follow-on financing rounds. 

Generally, the higher the pretax rate of return required by new investors, the lower the pre-money valuation of a company and the lower the percent of ownership retained by the original equity investors. 

Providers of subordinated debt typically want to earn a total rate of return on their investment in the 20% range, with that return coming from the combination of quarterly interest payments and a share of the sales proceeds when a business is sold.  As such, the higher the coupon rate on subordinated debt, the smaller the share of the sales proceeds paid to subordinated debt holders when the business is sold. 

                 

The EBITDA multiple used to value a business at the end of the five year forecast period is a key private equity valuation assumption.  Like investors’ annual pretax rate of return targets, EBITDA multiples vary over time due to changes is various economic, credit and competitive conditions affecting the market for business investments and acquisitions. 

Private equity models built with spreadsheets integrate some fairly complicated math and accounting routines.  Those who wish to build their own models may find it helpful to review How to Fix Circular Formulas in Excel (http://www.ehow.com/how_4842732_fix-circular-formulas-excel.html).

Corpfin.Net Private Equity Model

If your objective is to generate private equity analyses and valuations, rather than spend your time creating and debugging your own spreadsheet model, our private equity model may be a good fit for you. 

To create a private equity placement analysis with our software a user must first create a five year financial forecast using our forecast model for either an established, start-up or early stage business. 

Our private equity placement model is one of three robust applications nested within our five year financial forecast models.  This design feature means that once you have completed a five year forecast, you are just a few moments and assumptions away from creating a private equity analysis which is supported by eight comprehensive reports.  In addition, our model makes it easy to create and save multiple valuation scenarios, with different operating forecasts, investment return and capital structure assumptions.

  

We approach a private equity placement as if, theoretically, the original investors in a business and the new private equity investors form a new company on the private placement date.  The original investors contribute their business (on a pretax basis), which is valued at its enterprise value less its liabilities.  The private placement investors contribute cash.  From the private placement date through four years of joint ownership, both sets of investors earn the same pretax rate of return on their equity investments.   

From a timing standpoint, our private equity model assumes that a private equity placement investor intends to invest in the business at the beginning of year two (2) of the five year forecast; to maintain his ownership interest for the ensuing four (4) years; and to sell his ownership interest, along with the original owners, when the business is sold at the end of the fourth year.  Again, a key attribute of our model is that both the original and new investors earn the same rate of return on their equity investments from the private placement investment date through the sale of the business at the end of the fourth year of ownership.

With respect to project documentation, reports generated by our model cover not only the details of the estimated private equity transaction, but also the detailed financial performance of the business before and after the financing.  This feature makes our private equity model useful to both original and new equity investors because it acts as a proof of the estimated transaction pricing; and it provides the means to examine the effectiveness of the equity infusion in serving the financial interests of the original equity investors.  Reports in both HTML and PDF formats are as follows:

• A multi-page narrative report that organizes and provides an interpretation of the private equity analysis.  The report is organized in a manner to help the user logically present and describe the key elements and results of the analysis to a third party. 

• A comprehensive statistical report that depicts the financial outcomes achieved by original and new equity investors. 

• The primary financial statements - annual income statements, balance sheets and cash flow statements - showing the financial performance of the business prior to and after the private equity placement.  We forecast information at approximately the same level of account detail as an accountant’s standard year-end report. 

• A financial assumptions report.  Our private equity model contains 162 assumptions in total (that’s 31 income statement and balance sheet assumptions for each of the five forecast years, plus 7 assumptions relating to the valuation and the rate of return objectives of the new investors). 

• Two financial metric and performance reports.  The first report is organized into six management sections (working capital; assets; liabilities; profitability; debt; and bank borrowings).  It contains forty-three different metrics for each historical and forecast year.  The second report is a subsection of the first report, and focuses on debt service metrics that are particularly important to lenders. 

For additional details concerning the operation of our private equity model, please see our tutorial at http://www.corpfin.net/newsite/models/tutorial4.shtml

If you have any questions about our private equity or other corporate finance applications, please feel free to contact me at tgf@corpfin.net. 

If you are a friend of a person who is thinking about raising private equity capital, or investing in a private equity opportunity, please send her/him the link to this post.

Buyout Analysis of Caterpillar’s Agreement to Acquire Bucyrus International

On November 15, 2010 Caterpillar Inc. (CAT) announced its agreement to acquire Bucyrus International, Inc. (BUCY) for $92 per share.  The transaction is expected to close in mid-2011.

I did a forecast of BUCY’s future operations assuming a 26.4% growth in revenues in 2010 and 8.0% per year for the years 2011 through 2014; and operating margins of 14.8% in 2010 and 17% for years 2011 through 2014.

Given that forecast and other assumptions (see link below), I calculated a financial buyer’s estimated pretax rate-of-return (PROR) resulting from buying BUCY in a hypothetical asset purchase in which the sellers receive net proceeds equal to $92 per share.  The purchase price is based on BUCY’s 82.253 million fully diluted shares outstanding for the quarter ended September 30, 2010. 

The results of the buyout analysis show an estimated PROR of approximately 11.0% on the financial buyer’s equity investment.  The return would be lower if the buyer were required to grant warrants to subordinated debt providers.

The return for CAT would likely be higher due to operational synergies not available to a financial buyer.  That said, if a financial buyer were able to reduce forecasted operating expenses by 10% per year during its four year ownership period, the estimated PROR on its equity investment would increase from approximately 11.0% to 16.5% - still a low expected return for private equity investments.   

Click here to access PDFs of the various buyout analysis reports at Google Docs. The “Overview” narrative report describes the valuation method and results.

[Note:  If you sign in to Google Docs using your Google account information, Google Docs allows you to view, print and download the buyout analysis reports]

LBO Model and Valuation Basics

Background
A leveraged buyout (LBO) is a type of business acquisition in which a buyer (typically a private equity partnership) acquires a company and uses debt to finance a significant percentage of the purchase price. 

The proportions of debt and equity capital used to finance LBO transactions depend on a number of factors, including:

• Credit market and general economic conditions.

• The historical and forecasted operating performance and management expertise of the company to be acquired.

• The ability of the acquired company to meet forecasted interest and principal repayment requirements.

• The market value of the tangible assets to be acquired.

• The buyer’s appetite for financial risk.

In an LBO transaction, the assets of the acquired company are pledged as collateral for debt, and the acquired company (or a newly formed company containing the assets of the acquired company) is the borrower.  The debt is usually in the form of secured bank loans and, if the acquisition is of sufficient size, subordinated debt provided by investment partnerships.

LBO debt is almost always non-recourse to the business buyer, meaning the buyer is not liable if the debt is not repaid by the borrower.  If the borrower defaults on the debt, the lender(s) may seize the pledged collateral, and debt recovery is limited to the amount realized from the disposal of the collateral.

The LBO form of business acquisition is attractive to business buyers because they need to fund only a fraction of the acquisition purchase price.  This funding strategy reduces the buyer’s at-risk equity investment, and enhances his return on investment, if the acquired company performs as expected. 

If the acquired company does not perform as expected, the debt service requirements of a leveraged capital structure can range from very challenging, to a situation in which the buyer’s equity investment is worthless.

LBO Valuation

LBO valuations use the financial structure and analyses techniques employed by LBO buyers to estimate the value a business.  The valuation presumes the business buyer is a “financial buyer” (for example, a private equity partnership) that owns no other company in the acquired company’s industry and, therefore, expects all of its investment return to result solely from the forecasted performance of the acquired company.   

An LBO valuation is typically built on a five year financial forecast of the acquired company’s operations.  The valuation analysis forecasts the operations of acquired company during the forecast period, the debt and other liabilities repaid during the ownership period, and contains an assumption about the multiple of earnings a business will be sold for at the end of the ownership period.  By targeting pre-tax annual rates of returns on equity and subordinated debt investments consistent with those sought by private investment funds, an LBO valuation estimates  the purchase price a financial buyer should be willing to pay for a business to achieve those returns. 

In general, an LBO valuation estimates the minimum current value of a business since buyers who already own similar businesses, and would benefit from operational synergies with the acquired company, will usually pay more for a given business than will a financial buyer.  These synergistic buyers are also known as "industry buyers". 

An LBO valuation model can emulate industrial buyer pricing by adjusting the financial forecast of the acquired company to fit its revised ownership - generally by increasing forecasted sales and/or reducing costs and expenses of the acquired company due to its ownership by a complementary enterprise. 

Building an LBO Model

For those interested in creating their own LBO model, eHow.com provides a helpful narrative titled “How to Build an LBO Model” (http://www.ehow.com/how_5106647_build-lbo-model.html).  eHow.com is an online community (80 million visitors per month) dedicated to providing practical solutions to completing a huge variety of task.

The eHow instructions indicate “the key elements of an LBO model are the three major financial statements (income statement, cash flow statement and balance sheet) as well as assumptions regarding debt levels, repayment periods and interest rates.”

The narrative suggests the following steps to create an LBO model, using Excel as the software platform:

• Enter an outline of the company’s capital structure.

• Build the company’s income statement to the EBITDA level, entering at least three years of historical data for the income statement and then use this data to create five years of projected income statements.

• Enter three years of historical balance sheet data.

• Calculate historical balance sheet ratios, and use these ratios to calculate five years of projected balance sheet information.

• Build the cash flow statement.

• Create a debt pay-down schedule to determine interest expense.  Link the interest expense figure back to the cash flow statement.

• Calculate the exit value for the business based on a multiple of year five EBITDA.

• Use the XIRR formula in Excel to calculate the annual return on investment.  Compare the return on investment to the desired rate of return based on the riskiness of the investment.

• Make sure that the circular references setting in Excel is enabled. Linking the interest expense back to the cash flow statement will create a circular reference, which Excel will not be able to execute unless it is set to manual calculation.

The instructions indicate that a “basic knowledge of finance and accounting will be very helpful in building an LBO model”... and that the difficulty encountered will be “moderately challenging.”

Corpfin.Net LBO Model

If your objective is to generate LBO valuations, rather than spend your time creating and debugging your own Excel model, our LBO model may be a good fit for you. 

How does our LBO model differ from the (bare-bones) Excel model described above?

• Our LBO model is one of three applications nested within our five-year financial forecast models.  This “nested” design feature means that once you have completed a five year forecast, you are just a few moments and assumptions away from creating an LBO valuation, supported by 8 comprehensive reports.

• Our software creates an LBO valuation from the perspective of both a buyer and a seller.  We call these perspectives Cases.  Case 1, the most usual analysis, views the business acquisition from the point of view of the business buyer and solves for the purchase price of the business acquisition, given the buyer’s required pre-tax return on its equity investment.  Case 2 views the business acquisition from the point of view of the seller and computes buyer’s return on its equity investment, given the seller’s target selling price of the business.  In instances where parties disagree about valuation, we find that looking at a transaction from both points of view leads to constructive discussions and negotiations. 

• Our LBO model makes it easy to create and save multiple valuation scenarios, with different operating forecasts, investment returns and capital structure assumptions, for a same purchase and sale transaction.

• Our LBO model reports cover not only the business valuation and the details of the estimated purchase and sale transaction, but also the financial performance of the business before and after the sale.  Reports, in both HTML and PDF formats, are as follows:  

•  A multi-page narrative report that organizes and provides an interpretation of the valuation results.  The report is organized in a manner to help the user logically present and describe the key elements and results of the valuation to a third party. 

• A comprehensive statistical report that depicts the valuation result and the outcomes achieved by the seller and buyer of the business.

• The primary financial statements - annual income statements, balance sheets and cash flow statements showing the financial performance of the business prior to and after the purchase by the financial buyer.  We forecast information at approximately the same level of account detail as an accountant’s standard year-end report.

• A financial assumptions report.  Our LBO valuation model contains 183 assumptions in total (that’s 35 income statement and balance sheet assumptions for each of the five forecast years, plus 8 assumptions relating to the valuation and rate of return objectives of the buyer).

• Two financial metric and performance reports.  The first report is organized into six management sections (working capital; assets; liabilities; profitability; debt; and bank borrowings).  It contains 43 different metrics for each of historical and forecast years.  The second report is a subsection of the first report, and focuses on debt service metrics that are particularly important to lenders.

If you are looking for an easy-to-use, sophisticated, presentation-oriented LBO model, please consider using ours.  You will save a lot of time vs. creating your own model - you will probably complete your first draft of a valuation, with all of our automatically generated reports, in about the time it takes to format the spreadsheet for a bare-bones Excel model. 

Please see our LBO model tutorial at http://www.corpfin.net/newsite/models/tutorial3.shtml for additional information. 

If you have any questions about our LBO or other corporate finance applications, please feel free to contact me at tgf@corpfin.net. 

If you have a friend who is thinking about buying or selling a business, please send her/him the link to this post.

Commercial Banker Software

Summary

There are many professional development courses aimed at helping commercial bankers enhance their credit analysis and corporate finance skills. 

Unfortunately, the course sponsors do not appear to provide the comprehensive take-away software tools needed to implement the techniques taught in the classes.  If you are looking for such tools, please consider trying ours (see Final Thoughts below).    

Continuing Professional Education (CPE) Courses

Commercial bankers interested sharpening their credit analysis and corporate finance skills have a variety of CPE vendors and course options available to them.

For example, both the Risk Management Association (RMA) and the American Management Association (AMA) offer courses covering commercial banking and corporate finance subjects.  RMA is a professional association focused primarily on education and research for the banking industry. AMA is a world leader in professional skill development for individuals, organizations and government agencies.

   

A sample of RMA courses dealing with credit and corporate finance matters includes the following:

• Financial Statement Analysis (2 days, Member price $760).
• Corporate Finance & Business Valuation (2 days, Member price $775).
• Credit Risk Analysis for Commercial Bankers (3 days, Member price $1,065). 

AMA courses dealing with the same subject matter include:

• Financial Statement Workshop Seminar (2 days, Member price $1,895).
• Financial Analysis Seminar (2 days, Member price $1,995).
• Applying the Tools of Corporate Finance Seminar (2 days, Member price $1,995). 
• Valuation of Companies: The Practical Aspects Seminar (3 days, Member price $3,595). 

These and other related RMA and AMA courses appear to be rich in practical content; as a group, they provide a foundation in financial statement analysis, cash flow analysis, cash flow drivers, debt capacity and forecasting.  However, after reviewing the course outlines it appears that none of the courses provide students with comprehensive take-away software tools to implement the analyses that are taught. 

There are, of course, workshops and seminars in financial model building offered by various vendors (e.g., AMA’s Financial Modeling and Forecasting Workshop and K2 Enterprises’ Excel Budgeting and Forecasting Techniques), but the courses I reviewed appear to teach model building methodology (Excel) and do not supply attendees with completed models. 

CPE Experience

My personal experience is that CPE courses that provided or specify take-away tools (e.g., finance - HP 12C Financial Calculator; statistical methods - Minitab or SAS software; etc.) to tackle the subject matter of the courses are the ones whose concepts I retained and used.  Those that did not were soon forgotten.  

My general reaction to finance-related CPE courses that do not provide take-away tools is summarized in two rhetorical questions:

• If I am taking a course to increase my knowledge of a certain subject area, how am I supposed to know, after a one or two day course, all of the issues that need to be incorporated in a spreadsheet model? 

• What makes the course sponsor think that I have the time, or know or care enough about modeling, to develop my own analyses tools?

A Few Observations About Commercial Bankers and Lending                       

Unlike accountants, commercial bankers are usually not employed because of their spreadsheet development prowess.  Rather, commercial bankers’ success and personal advancement depend on their sales and customer service skills; a thorough grounding in credit analysis and corporate finance principles; and good judgment.  

           

While the analysis of borrowers’ historical financial statements is important in making credit decisions, commercial bankers know that commercial loans are serviced by future operations - which may be very different from past performance.  This is why some bankers create forecasts of their customers’ businesses. 

The forecasting process generates important benefits for both bankers and their customers, including:

• It complements the traditional credit analysis approach and leads to hands-on insights into expected future cash flow drivers and customer debt capacity.    

• It quantifies the potential risks and rewards of the customer relationship, and identifies the lender as a value added advisor who has more to offer than money and price.

• It leads to meaningful discussions with customers about future sales volume, operating margins, inventory requirements, capital expenditures, etc.

• It provides a very efficient “needs checklist” for marketing purposes, and demonstrates the bankers financial expertise and his interest in his customer’s success.

Mastery of financial forecasting and corporate finance analyses methods (as compared to general principles) is particularly important to those commercial bankers who aspire to become private equity or mezzanine fund principals.

Corpfin.Net Software

Corpfin.Net software is a very efficient web-native tool for use in the analysis of both historical and forecast financial statements, including generating the traditional ratios and other metrics favored by lenders.  Some specific uses of the software include:

• Generating five-year financial forecasts, and monthly forecasts within year.  The output of the forecast models (in both HTML and PDF formats) include:
• the primary financial statements - income statements, balance sheets and cash flow statements. 
• several pages of documentation detailing the key assumptions underlying the forecasts. 
• a narrative report that organizes and provides an interpretation of the forecast results. 
• actual and forecasted financial ratios and other important metrics.

•  Determining debt capacity and coverage.

• Credit facility structuring.

• Demonstrating to customers and prospects the role of debt and equity in capital structures.

• In depth modeling and analysis of proposed transactions such as business acquisitions; LBOs and MBOs; sales of businesses; and business recapitalizations. 

Unlike spreadsheets, the Corpfin.Net software is designed to be a fast, presentation-oriented planning, analysis, and valuation tool suitable for CEO/CFO-level collaboration. 

Final Thoughts

If you are intending to take a credit analysis or corporate finance CPE course that does not provide take-away tools, or if you are looking for corporate finance-oriented software to accomplish some of the tasks outlined above, please consider using Corpfin.Net. 

Our software is fast, easy to use, and fully integrated (our financial forecast models integrate seamlessly with our corporate finance analyses models).  Accentuating these positives is its Web-native design and sharing function, which give team members the ability to collaborate using a common platform.  

If you would like to tryout our software located at www.corpfin.net on a no-obligation basis, please send me a note at tgf@corpfin.net. 

If you are a client or friend of a banker, please send her/him the link to this post.