The data are in and your 2024 plan is now likely wrong... here's why:

A ThREAD about why your forecasts may be wrong.

Margin Malaise.

What inflation and supply chains are doing to excel sheets everywhere.

As you might well imagine, I’m on many email lists for tidbits of news and information about businesses.

One such list is about small business valuation.

A recent article announced that inflation and supply chain issues were causing people to have to ‘renovate’ their excel models for business valuation.

What does that mean?

Well, normally, when we imagine a business’ future, we must make certain assumptions.

One common assumption is that the Cost of Goods Sold or COGS will remain constant as a percentage of sales.

This assumes that the business can maintain a constant gross margin.

The days of this assumption being reliable are ending.

I ran into this myself with a consulting client recently.

We were looking at a surgical services-related business that did about $2M in sales each year.

From 2021 to 2022 sales were flat.

BUT- COGS went up by $100K!!

How did that affect the business?

Well, most of the expenses stayed flat, so the cash flow of the business went down by $100K.

When asked why, the seller explained that all their materials and supplies went up in price but the contracts he has with hospitals have no ability to be adjusted until they renewed.

So, he has to eat this lower gross margin.

It reduced the value of his business substantially, of course.

So, what does this mean for inflation?

I think we’re stuck in a higher inflation world as these delayed adjustments come into effect across many players in many industries.

But how do you manage this as a business owner or prospective buyer?

It means you need more sophisticated models that will let you examine different scenarios, like the one described above.

That’s why, if you want to work on your forecasting kung fu, I’d recommend my cash flow forecasting program.

It teaches you how to make an accurate model from scratch to model any industry.

It follows several sample companies that all have different characteristics.

Some examples are business purchases, and some are startups.

If you need help learning cash flow forecasting within the framework of small business, either for a startup or an acquisition, just ask for help in the comments down below and I'll share a link to where you can find my 13-week program which has received lots of rave reviews from people all over the world. (Especially those who already hold an MBA.)

Cheers

David C Barnett

P.S. If you enjoyed this and would like more just like it everyday in your inbox, head to https://www.DavidCBarnettList.com and get on my daily email list. Expect more every day.