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Cash Flow Analysis and Forecasting: The Definitive Guide to Understanding and Using Published Cash Flow Data by Timothy Jury

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21

The Use of Assumptions in Spreadsheet Models

INTRODUCTION

In the previous chapter, I illustrated the four generic types of model:

  • Forecast models to monitor and control monthly cash flows.
  • Forecast models to decide whether to proceed with a capital project.
  • Forecast models for strategy and planning purposes.
  • Forecast models for cash flow valuation purposes.

I hope by now it is clear that a model is only as good as the assumptions used to drive it. If these have been carefully researched so that their likely range and behaviour in different economic conditions are well understood, and they have been coded into the model with appropriate logic that behaves as desired, the model should be a useful tool to show us what future cash flow performance may look like given variations in the assumptions.

What follows is a more detailed discussion of some of the remaining issues involved in introducing assumptions to cash flow spreadsheet models.

HOW ASSUMPTIONS ARE USED IN A SPREADSHEET

The assumptions are there to allow us to create forecast values for the income, costs, balance sheet and hence cash flow. For example, the cash flow from sales is typically derived by adding a second assumption (debtor days) describing the time it takes customers to pay for the sales.

So, we might drive the sales line by showing an increase in sales of 5% for the first forecast period. The logic being the spreadsheet would then take the historic value and increase it by 5% to represent sales in the first ...

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