Friday, December 9, 2011

Projected Cash Flow Analysis

To continue in the theme for this week, "planning next year's production and sales", I did some more work on my list of shows and application deadlines. My goal was to determine whether it was likely that I could actually pay all of the fees to get into these shows. The answer is "maybe".

Before I show you what I did, I want to familiarize you with a thing called "The Fermi Method of Estimation". In a Fermi problem, you use whatever information you have and make educated guesses about the rest. For each value in the equation, it helps if you use a margin of error. In my case, I like to create an upper and lower bound on the probable values. Since this problem involves simple addition and subtraction, I can be extremely confident in the result. You read more about this method of estimation at Wikipedia

So, what I did was to sort my whole list of shows and deadlines by date. Then, I estimated what the fees would be for each show. (I don't want to take the time to look up the actual show fees for each show if I'm going to have to drop some to stay solvent.) Then, I estimated the income from each show after travel costs. Again, I created a lower and upper boundary on these values. Next, I calculated three columns from these values: the running lowest balance which assumes that the shows were expensive and didn't make much money, the highest running balance which assumes that the shows were cheap and made a lot, and the average of the two, which is likely to be pretty darned close to what will really happen this year.

The worst case is pretty grim. I would be thousands of dollars under water by May 15th unless I dropped more than half of my shows. The best case is great! I never have any financial difficulty at all. And, the average case is just right. I need to come up with some extra income or drop a couple of the more expensive shows to keep my available cash from going negative. It looks like I'll be trying to find another way to promote my Etsy store to come up with that thousand dollars.

Here's a closeup of the trouble period, from now until May 15th. In this view you can see how it is that I correlated these values to time. I created a column in the spreadsheet that counts the number of days from today and then used a scatter graph with that value for the X and the cash balance value for the Y. This lets me see if there are multiple show fees due on the same day, for instance.

See the yellow marks? This is likely to be the real situation - a couple of show fees that would drop me below zero without another income boost before then.

One last thing to notice is how the values diverge dramatically over time. Obviously, if you compound unknown on top of unknown, this is going to happen. I'll be updating this document after each expense and income and watching the resulting values converge. By July or August, I should have a pretty clear idea of exactly how the year will end up. And, then, each year that I do this the unknowns will be fewer and fewer until I can predict pretty darned well what that year will hold. In theory, at least.

The step of the planning that I need to do today is one that I've never done before, estimating my production requirements to meet the average-to-best-case sales estimates. The end result should be a production schedule that tells me when I need to order material and the deadlines by which that material needs to be turned into finished merchandise.

It's funny how far removed these mental exercises are from the joy and fulfillment of creating beautiful cloth and sending it out into the world with people who love it. While I'm doing all of this business planning stuff, I just have to remind myself why it is that I do this...