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Deciding on Realistic Assumptions for Projections/Targets

Before we attempt to calculate goals and targets for next year we need to get clear and realistic about our assumptions for the business. Since we just spent time analyzing our most recent performance, we should be able to capture some specific assumptions upon which we will build our projections. Here are some assumptions I made for this sample business:

• Sales will continue to fall

• Margins will continue to shrink

• All the “obvious/low hanging” expense cuts have been made already

• We will not be able to borrow money due to our lack of profitability

• Vendors will not likely offer more friendly terms

• WE ARE COMMITTED TO TURN THIS BUSINESS AROUND!

Strategies to Survive:

• Reduce the Debt-to-Worth Ratio

• Increase inventory turnover to improve cash flow

• Continue to reduce expenses

FOCUS ON WHAT YOU CAN CONTROL!

STEP G

Start with the ratios – fill in reasonable targets that you determine will make the most positive impact on your business; in this case the business has decided to reduce the debt-to-worth ratio; and increase inventory turnover

We want to set target ratios that we believe are attainable.

STEP H

Calculate COGS and Inventory based on the target ratios

STEP I

Select sales levels based on assumption of falling sales and reducing margins – these allow the other components to be calculated to complete your targets.

We plan to cut expenses 10 percent = so we can calculate the P&L based on that.

Once you’ve started to examine your business you will quickly learn much of what you assumed is not supported by the numbers.

If you want help taking the next step in applying these methods to your business just contact me for a confidential appointment to discuss your situation. Our advisory services are provided at no cost to you thanks, in part, to a cooperative agreement between the U.S .Small Business Administration and Washington State University.

This article was compiled using multiple sources, including those from the Retail Owners Institute (retailowner.com) by Jerry Petrick, MBA, and certified business adviser with the Washington State University Small Business Development Center (SBDC) in Kelso. Jerry provides no-cost, confidential business advisory services by appointment. He can be reached via email jerry.petrick@wsbdc.org

Josh Carter President