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Section 7 | Lesson 40 - Forecasting, Budgeting, Fiscal Year

Notes

How do companies make budges How do they forcast

How do companies make budgets

Forecasting is always based on a percentage of sales.

  • forecast what your sales are going to be
  • everything else is just a percent of revenue

when companies forecast

  • Public companies forecast quarterly
  • Startups forecast monthly

    • survival is the goal
    • most startups collapse

Fiscal years

  • companies note when a season ends
  • companies also regard their years as "ending" on a different months
  • some companies end on black friday

    • this is when they make their most money
  • japanese companies end in march

Ethics

  • be conservative and honest with forecasts
  • some companies try to take from a different quarter to make up shortfalls
  • jailtime

    • it's easy to make clerical mistakes
    • overlook unethical co workers

time to turn asses into cash

Cash Conversion Period Ratio

  • when do we get PAID baby?
  • COGS: Cost of Goods Sold

    • how much it costs for goods for the day
example
  • $5000 of inventory
  • COGS is $50
  • we have 100 days worth of goods

if we put $1 into inventory it won't be converted into cash for another 50 days

Inventory to sale conversion period

  • measures on a yearlly bases how long it takes to turn inventory to cash over a year
  • you can also do this by season, just replace 365 days with 90 days

    \[ \text{ISCP} = \frac{\text{average inventories}}{\text{COGS} \times 365} \]

time to turn credit (not assets) into cash

  • when selling product on credit, how long does it take to turn it into cash

\[ \text{Sales to Cash Conversion Period} = \frac{\text{Average Receivables}}{\text{Sales}} \div 365 \]

time to pay your bills as late as possible

  • Purchase to Payment Conversion Period
  • pay your bills as late as you can

\[ \text{Purchase to Payment Conversion Period} = \frac{\text{average payables} + \text{average accrued liabilities}}{\text{COGS} \times 365} \]