A forecast is easier to examine when the reader can follow its support. BDC’s guidance on sale materials includes historical financial information and forecasts backed by information explaining the projections. The format varies by transaction. The owner’s preparation task is to make the connection visible, rather than present a larger future number and leave the explanation for later.
The worked example below follows one forecast from its starting records through costs, cash receipts, two sensitivities and a later revision. It is a preparation exercise for an adviser discussion, not a valuation or a prescribed buyer template.
What’s In this Issue?
Reconcile the actual starting period
Give each operating assumption a basis
Calculate performance and cash separately
Change an input without hiding the consequences
Replace elapsed forecasts with actuals and explain the revision
1. Fix the starting period before extending it
BDC’s financial-statements guide distinguishes annual and interim reporting periods and notes that interim statements may contain fewer components. Identify the exact period and documents you are using. A label such as “latest results” leaves too much unclear. Record the end date, report version and the figures carried into the forecast; keep unexplained differences open instead of inserting a balancing amount.
Everything about our example company, Cedar Service Co., is invented, including its records, assumptions and results. All amounts are Canadian dollars, shown as C$. January is its fictional completed starting month; February and March form a two-month teaching window. No particular calendar year or recommended forecast horizon is implied.
Cedar’s fictional January sales record, JAN-SALES-01, contains 100 completed and billed jobs at C$1,000 each: C$100,000 revenue. JAN-COST-01 records C$400 per job, or C$40,000 variable cost, plus C$40,000 fixed cost. Subtraction gives a C$20,000 illustrative operating result: C$100,000 − C$40,000 − C$40,000.
JAN-CASH-01 starts with C$30,000 cash. Add C$90,000 received from customers and subtract C$80,000 of payments: closing cash is C$40,000. JAN-AR-01 starts with C$90,000 owed by customers; adding C$100,000 sales and subtracting C$90,000 receipts leaves C$100,000 receivables. These are invented teaching records, not documents obtained from a business.
The distinction matters because an income statement describes performance while a cash-flow statement describes cash movements. Our schedules separate those questions but are not complete financial statements. Checking that the starting figures agree is also different from establishing that future assumptions are reasonable. Both tasks remain visible.
2. Give the assumptions a basis and an owner
BDC’s sales-process guidance identifies sales-cycle length, closing rate and average sales price as measures to examine. For a volume assumption, ask what your own records show about opportunities and their progress. For price, identify the evidence behind the amount used. A pipeline estimate and a confirmed sale are different kinds of support; neither a source’s sample conversion rate nor a desired growth target establishes your future sales.
BDO Canada says projected growth and earnings should fit the business narrative and include associated costs and capital expenditure. If the story requires additional people or equipment, the forecast discussion should expose those dependencies. Leaving them outside the explanation makes it harder to understand what the proposed growth assumes. That does not mean every cash outlay is an operating expense.
BDC’s modelling guidance recommends connecting projection data and recording assumptions separately. Our adaptation is a short record for each important input: value, period, supporting document, responsible person and unresolved question. The record helps someone challenge the input without losing track of which forecast it supports.
For Cedar, sales lead Leah proposes 120 February jobs and 140 March jobs. She labels the figures planning assumptions, with customer support still to be checked. Operations lead Omar must explain how the work could be delivered at the stipulated C$400 variable cost per job and C$40,000 fixed monthly cost. Reporting lead Nina keeps their comments with version V1. These names and responsibilities are illustrative, not required job titles.
3. Calculate the base before changing it
V1 holds the price at C$1,000 per job. Jobs are completed and billed in their stated month. Every invoice is collected in the following month, and operating costs are paid as incurred. The example excludes inventory, tax, interest, depreciation, capital spending, financing, distributions, bad debt and other movements. Its illustrative operating result is not EBITDA, net profit, valuation or cash available for distribution.
February performance: 120 × C$1,000 = C$120,000 sales. Variable cost is 120 × C$400 = C$48,000. Subtract that and C$40,000 fixed cost to get C$32,000 illustrative operating result.
February cash: start with January’s C$40,000 closing cash, collect January’s C$100,000 receivables and pay February’s C$88,000 costs. C$40,000 + C$100,000 − C$88,000 = C$52,000 closing cash. February’s C$120,000 sales remain receivables at month-end.
March performance: 140 × C$1,000 = C$140,000 sales. Variable cost is C$56,000; fixed cost remains C$40,000. The illustrative operating result is C$44,000. March cash is C$52,000 + C$120,000 collected from February sales − C$96,000 payments = C$76,000. March ends with C$140,000 receivables.
Across the two forecast months, sales total C$260,000 and the illustrative operating result totals C$76,000. March closing cash happens to be C$76,000 too. That numerical match is a feature of these invented inputs; the measures are different. Do not add February and March closing cash together: each is a balance at its own month-end.
BDC’s cash-flow explanation makes the underlying distinction explicit: a sale need not bring an immediate receipt, and a purchase need not involve immediate payment. A forecast needs the timing as well as the amount. Treat the operating calculation and the cash schedule as connected questions, not interchangeable answers.
4. Change one input, then test collection timing
BDC describes sensitivity analysis as changing inputs to examine possible outcomes. State what changes and what stays fixed. The answer is conditional on those assumptions; it is not a probability estimate or a prediction. Saving the comparison separately also prevents a test from quietly becoming the new base.
Volume-only test: reduce February jobs from 120 to 100. Keep March at 140, with price, unit cost, fixed cost and collection timing unchanged. February sales become C$100,000 and variable cost C$40,000. After C$40,000 fixed cost, the illustrative operating result is C$20,000.
February receipts still come from January: C$100,000. Closing cash therefore becomes C$40,000 + C$100,000 − C$80,000 = C$60,000. March receives only C$100,000 from February, so its closing cash is C$60,000 + C$100,000 − C$96,000 = C$64,000. Two-month sales are C$240,000 and the operating result totals C$64,000.
Lower current costs briefly make the volume test’s February cash look better, while the reduced sales reach the cash schedule later. Its March cash finishes C$12,000 below V1. Showing only the favourable first month would hide the consequence of the collection lag. That is why the comparison needs both periods.
BDC’s projection guidance advises considering credit policy and when customers pay. A written payment term is something to investigate, not proof that cash will arrive on that date. Keep a timing test separate from a change in sales.
Receipt-delay test: return to V1’s job volumes and costs. Now stipulate that C$20,000 of January receivables arrives in March instead of February. February collects C$80,000, so cash ends at C$40,000 + C$80,000 − C$88,000 = C$32,000. March collects C$140,000, including the delayed amount, and ends at C$32,000 + C$140,000 − C$96,000 = C$76,000.
Sales and operating results do not change in that test; eventual full collection is stipulated. February has less cash headroom, but the example does not establish a funding shortfall. No minimum cash requirement or timing of payments within the month has been supplied. Month-end balances alone cannot settle those questions.
5. Replace elapsed forecasts and explain the revision
BDC recommends comparing actual results with projections and adjusting plans as conditions change. Preserve the old version so the explanation can distinguish what happened from what you now expect. An updated total without that separation makes it difficult to see whether a change came from elapsed results, remaining assumptions or both.
Cedar now reaches February-end in our fictional timeline. Nina records 110 actual February jobs, replacing the 120 forecast in V1. Leah separately revises March’s forecast from 140 to 120. Call this V2. It does not incorporate the volume-only or receipt-delay tests; collection timing and the other base assumptions remain unchanged.
February actual sales are C$110,000, variable cost C$44,000 and fixed cost C$40,000: C$26,000 illustrative operating result. Receipts are C$100,000, leaving C$56,000 cash after C$84,000 payments. March reforecast sales are C$120,000, with C$48,000 variable cost and C$40,000 fixed cost: C$32,000 operating result. Cash ends at C$56,000 + C$110,000 − C$88,000 = C$78,000.
V2 combines C$230,000 sales and C$58,000 illustrative operating result. Against V1, those fall C$30,000 and C$18,000 respectively. Yet March closing cash rises C$2,000. Closing receivables fall from C$140,000 to C$120,000. Under our exact assumptions, the cash difference is −C$18,000 − (−C$20,000) = +C$2,000. Less remains tied up in receivables; this does not turn weaker operating performance into an improvement.
6. Hand over an explanation, not just a total
BDC describes advisers challenging optimistic or unsupported forecasts and reviewing interim statements. Bring the starting-period reconciliation, assumptions record, scenario comparisons and version explanation to that discussion. Identify who must resolve each remaining question. These preparation records are our practical adaptation, not a buyer-mandated checklist, assurance report or guarantee of acceptance.
For Cedar, Nina’s final note identifies February as actual and March as forecast, preserves V1 and points Leah and Omar back to their unresolved volume and delivery assumptions. The arithmetic has explained the change. It has not supplied the missing customer evidence or operating support.
For general information and education, not legal, tax, investment or valuation advice. The fictional example is illustrative and does not predict your business’s value, financing terms or sale outcome. Consult qualified advisers about your situation.
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