Monthly Budgeting & Forecasting Model

Summary

This video tutorial explains how to build a monthly budgeting and forecasting model, emphasizing its importance for internal corporate planning and performance evaluation. It details the components of the model, including drivers of revenue and expenses, and illustrates how to dynamically link financial statements. The process of rolling forward the model with actual results and extending forecasts is clearly outlined. Viewers will learn about the organizational structure of the model and the usefulness of charts for visualizing cash flow and performance metrics, making it a vital tool for strategic financial analysis.

Takeaways

• 📊 Monthly budgeting and forecasting models require distinct assumptions compared to annual models.
• 🔑 Key drivers such as revenue, expenses, and capital costs are essential for effective financial planning.
• 📈 The model allows for dynamic linking of the three financial statements: income statement, balance sheet, and cash flow statement.
• 🔄 The model can roll forward, updating forecasts with actual results as they come in.
• 📝 Internal corporate planning and decision-making are primary purposes of a budgeting model.
• 📅 The structure includes sections for assumptions, financial statements, supporting schedules, and visual output like charts.
• 🏪 Retail business assumptions, such as the number of stores, are critical drivers in the model.
• ⚖️ Debt covenants and leverage ratios are incorporated, adding value for financial planning and analysis (FP&A).
• 🔧 Updating the model involves inserting new columns for actual results and adjusting forecasts accordingly.
• 📉 The model provides a clean and simple structure for monthly forecasting in a retail context.

Q & A

What are the main components of a monthly budgeting model?

The main components include assumptions, drivers of operations, and dynamically linked financial statements.

How does a monthly model differ from an annual model?

A monthly model provides a more granular view of financial performance, allowing for detailed tracking of revenues and expenses on a month-by-month basis.

What are drivers of operations in financial planning?

Drivers of operations include factors that influence revenue and expenses, such as the number of stores in a retail business.

What are the three financial statements built in the model?

The three financial statements are the income statement, balance sheet, and cash flow statement.

What does it mean for a model to roll forward?

Rolling forward means updating the model by replacing forecasted data with actual results as they become available, while extending forecasts into future periods.

What is the purpose of a budgeting model?

It is used for internal corporate planning, budgeting, forecasting, measuring results, evaluating performance, and strategic planning.

What does the model include to assist with financial analysis?

The model includes supporting schedules, debt covenants, leverage ratios, and summary charts and graphs.

How do actual results integrate into the forecasting model?

As actual results are reported, they replace the corresponding forecasted results, and a new forecast column is added for the next month.

What assumptions are made for a retail business in the model?

Assumptions may include the number of stores, balance sheet variables, and financing details.

How frequently should the model be updated?

The model should be updated monthly to reflect actual results and extend the forecast.