Why stick to a static budget when you could proactively predict your financial future with rolling projections? Continuously updating financial projections allows businesses to reflect actual performance and adjust to changing conditions.
In this episode of The Agency Blueprint, I’m joined by Dan DeGolier to discuss valuable insights on financial forecasting, budgeting, and cash flow management for small and medium-sized businesses. Dan is the founder of Ascent CFO Solutions, has extensive experience as a CPA, and is now a fractional CFO. He is passionate about helping entrepreneurs understand their finances and cash flows so they can obtain the capital needed for growth.
Don’t miss this episode to learn the importance of focusing not just on profitability but also on the timing of cash inflows and outflows.
Key Questions:
- [01:03] What is the defining difference between a budget and a rolling forecast?
- [03:38] In what ways could frequent updates to your financial projections benefit your business’s decision-making process?
- [07:40] How can a business owner leverage rolling forecasts and projections to make more informed decisions during periods of rapid growth?
- [13:42] What are the common mistakes that CEOs and CFOs run into while they’re leveraging available financial information?
What You’ll Discover:
- [01:16] The difference between a budget and a rolling forecast and the importance of a rolling forecast for early-stage companies.
- [02:55] The connection between projections, cash flow, and the risk of running into financial issues even when a business is profitable.
- [03:50] How frequent updates to financial forecasts can help adjust for unexpected costs, like hiring, and avoid cash flow issues.
- [04:54] Key questions agency owners should ask when reviewing their financial forecast.
- [05:46] Why Excel is still a preferred tool for financial projections for smaller businesses.
- [07:54] The challenge of managing cash flow and profitability during rapid business growth periods, and how projections help make strategic decisions.
- [09:22] The importance of managing cash flow separate from profitability, and how rolling forecasts provide a clearer picture of both.
- [11:35] Cash basis vs. accrual accounting, and why accrual-based financial statements offer a more accurate view of a business’s financial performance.
- [13:54] The importance of having a backup plan to ensure financial stability during unexpected challenges.
- [17:14] The importance of financial management and forecasting as core foundational elements of business success.
Transcript
Agency Blueprint: Hey, agency owners. It’s time for a new episode of the Agency Blueprint, the number one podcast For agency owners looking to build systems to simplify and gain reliable profit growth, we’re also reducing stress and getting their personal life back. I’m your host, Robert Patton, international bestselling author, agency scale partner.
Agency Blueprint: And founder of Creative Agency Success. If you enjoy this episode, do me a favor and hit that subscribe button to make sure that you never miss an episode and help keep the show at the top of the chart so it can be found by more agency owners like you. And now for the show.
Agency Blueprint: Hey everyone. Today we are joined by Dan Dego. He is the founder of Ascent CFO solutions and is passionate about helping entrepreneurs understand their finances and cash flows so they can obtain the capital needed for growth. Dan has worked as a CPA. With a global accounting firm, full-time, CFO, with multiple private companies and is now a fractional CFO.
Agency Blueprint: His professional experience includes partnering with companies in many industries, including technology and SaaS manufacturing, e-commerce, professional services, financial services, and more. Welcome to the show, Dan.
Dan DeGolier: My pleasure, Robert. Thanks for having me on.
Agency Blueprint: So the topic in prep that Dan and I were discussing is projecting, and just Dan, for, for everyone listening, would you mind defining the difference between a budget and a rolling forecast for or projection.
Dan DeGolier: Absolutely, I’d be happy to. I guess the way that I look at it for, especially for a smaller, medium sized company, is that budgets tend to be static. They’re, um, they created once a year generally, unless there’s a particular event that has something to be rebudgeted as a, a company decides to rebudget, but generally.
Dan DeGolier: It’s kind of a stake in the, in the sand that says, okay, here is what we expect to do for a given, a given fiscal year. And I think they definitely have their place, but I think especially in an early stage company, a rolling forecast is also very important. It’s, and it’s different in that it, you continually update it to give you the, the most likely view of the world as you see it with new information each month.
Dan DeGolier: So as you closed out each month and you have actual revenue figures and actual cost figures that you can put into that model to help you understand maybe that you are a fixed. Expenses are a little bit higher, maybe you’d be able to delay. You’ve been able to delay some expenses, so they’re a little bit lower than you’ve forecasted for a period of time.
Dan DeGolier: Your revenue pipeline has, has maybe evolved since you built your budget so you can show those changes on a rolling basis. So the rolling nature of it isn’t, you’re updating it for actuals each month. Once you close the books and then you’re updating your, your revenue and your costs, predictions for future periods as you go along.
Dan DeGolier: So
Agency Blueprint: for the distinction, just for clarity’s sake, for listeners, at least as far as I’m understanding them as well, is that budgets, presumably, you know, the way that we ink things on January 1st, if you’re a calendar year business, that things don’t go exactly as you planned on that day, right. For the entirety of the year.
Agency Blueprint: And so it’s exactly. Consistent number that you’re able to actually understand whether it’s higher revenue, higher costs, so that you have an understanding of what you can, how exactly you’re performing throughout the year. Right?
Dan DeGolier: And understanding it all comes back to cash flow at the end of the day, because you want those different factors as far as what your actual performance was.
Dan DeGolier: Historically is gonna influence what your future cash flows look like. And I think that’s the reason that a rolling forecast is, is really critical so that you have that visibility. You understand if you’re gonna have to, if you have to raise capital or debt sooner rather than when you had previously predicted.
Dan DeGolier: It’s very important to know that sooner rather than later.
Agency Blueprint: I think first, I mean something that I’ve said several times and ultimately abundantly true, especially for smaller organizations, is that you can both be profitable and also in a tight cash flow scenario. And ultimately businesses do fail based on cash flow more often than 100% profit.
Agency Blueprint: So it’s a vital thing to make sure that you’re understanding, but from a projection perspective, do you foresee and actually utilize these types of projections or these types of rolling models as a mechanism to understand where we are headed in the future rather than just where we have been?
Dan DeGolier: 100%. I think that’s the primary goal of having a rolling forecast is so you can, you can understand your, your next six or 12 months or, and even beyond, based upon all of the, the factors that you’re seeing that we’re, we live in a dynamic world and things change every month.
Dan DeGolier: Even every day
Agency Blueprint: or
Dan DeGolier: hour sometimes. Yeah, exactly. And, and some, and some companies will forecast more frequently than as soon as you understand that a, a key hire you wanna bring on is gonna be. More expensive than you expected. You wanna be able to update that because that’s gonna affect your cash on an ongoing basis.
Dan DeGolier: If you see that maybe you’re delaying higher or something like that, or are going to be reducing some discretionary spend in marketing or whatever it might be, then you, you’re able to, to make those adjustments to that forecast on a, on an ad hoc as needed basis.
Agency Blueprint: So that, that brings up two kind of questions for me.
Agency Blueprint: The first being, so let’s say that I’ve got, I’m an agency owner and I’m sitting here looking at a forecast that has been prepared by my financial support contract, CFO, fractional, CFO, or what have you. And what kind of questions am I gonna be asking of the document while I’m looking at it and reviewing it?
Dan DeGolier: Yeah. Well, I think the first thing is comparing your budget to actual and understanding what your differences were and being very clear about that. And then I think the next thing’s gonna be, how does this, how does this affect our cash flows for the next 12 months? Understanding your collections are slower than you had had forecasted, or if expenses are higher than you expected, you wanna be able to understand those different components.
Dan DeGolier: Well, how is it affecting my cash? What is it? What is, what does this mean to the cash flow of the business for the next period of time?
Agency Blueprint: The other question that I had was, I mean, I’m a heavy Excel user. Me having been in finance most of my life as well, and I find interestingly that softwares don’t tend to work quite as well for these types of things as an Excel document does.
Agency Blueprint: Because of the mechanism by which it’s actually projecting out revenue into the future and expenses into the future. It’s utilizing. It there, it’s just not as accurate, I find, and I’m curious on your take of that. Well,
Dan DeGolier: I think Excel still has its place, especially for earlier stage companies. I think we’re gonna see an evolution as, as AI starts to hit the, the, its, its usage starts to hit the mainstream.
Dan DeGolier: And there are some tools, I’ve looked at a couple demos, some come. These are doing some things that are interesting where they’re trying to automate, uh, things around forecasting. Right now, I think it’s still a little bit early and I know enterprises are using some different tools that, uh, where Excel simply doesn’t work If you’re a large scale enterprise for now, Excel and Google Sheets, as long as there’s clear controls around who’s allowed to, to edit and what tabs are allowed to be edited.
Dan DeGolier: We’ve all seen situations. We have somebody jumping into a thing and they’re hard coding something that’s supposed to be a formula. And the CFO or the person who kind of owns that model doesn’t realize that somebody has hard coded something. So you get pro protections around that, whether it’s Excel or Google Sheets as far as locking certain cells and mm-hmm.
Dan DeGolier: Training users that inputs are only to be on one tab or a limited number of tabs. So there’s some things that can be done there, but yeah, it’s, we’ve definitely, uh, I think we’ve all seen Excel because of the. What makes it great also makes it problematic, right? Mm-hmm. The fact that it’s so flexible means that it can get messed up pretty easily.
Agency Blueprint: It’s funny that you mentioned that there was literally a conversation I had with a client yesterday about locked fields that I had created in Excel, and they asked to unlock the Excel and I raised a pretty big red flag of, okay, well this, but this. Has its risks by doing this. So yeah, 100% agree on that.
Agency Blueprint: When we’re talking about growing rather rapidly, right? We’re having a significant amount of revenue growth. We’ve closed a lot of business, and we’re in a place where expenses largely from a delivery perspective tend to grow in tandem. And there’s a lot of factors that are then playing into account at that point from both cashflow considerations, profitability considerations, making sure that we’re bringing people on at the right kind of timeline ahead of when we’re gonna need them so that we have the opportunity to train them and all of that.
Agency Blueprint: All of these factors need to be able to be decided at a pretty high level in the organization. And so my question lead up, I guess to the question is, is that how does a business owner, A CEO, or CFO truly leverage this in making decisions while they’re growing rapidly?
Dan DeGolier: I feel like I’m, I’m kind of repeating myself a little bit, but I, I think at the end of the day, it still comes back to cashflow.
Dan DeGolier: Understanding each, all of the components of your cashflow cycle, right? Your billing, your collections, your credit card expenditures, and your a, accounts payable, your payroll. The model allows you to have a, a. Picture a scoreboard, a some very clear visibility to, to all the financial aspects of your business and all of those historical, every, every single month you’re learning more information and you maybe you’re making changes to your business.
Dan DeGolier: You mentioned case of a high growth business. You’re probably hiring people, you’re bringing on new, you’re spending more money on sales and marketing and perhaps r and d or production. And then you’re also seeing that that revenue scale up at at a level that maybe is ahead of plan. Behind plan, whatever that looks like, all these factors enter into, into one place where then you can understand, well, how does that affect your cash?
Dan DeGolier: How is that gonna affect your cash in the next three months, six months, nine months, 12 months and beyond?
Agency Blueprint: In my mind, and happy to disagree on it, but the, in my mind, I actually see a projection from a financial perspective because I, I generally am looking at accruals of how did the business actually function in that given month?
Agency Blueprint: And so the rolling forecast or projection from me. Fiscal perspective, an income statement perspective, and then cash flows. I actually have them generally separate because I, I see them as very different things in my mind as how do, how are we managing cash versus how are we managing profitability? And do you have a difference of opinion there?
Agency Blueprint: And how do you actually see the distinction between both?
Dan DeGolier: Yeah. Uh, I mean, that’s an excellent point. The rolling forecast that we’ve been talking about is definitely a, a three statement, uh, model, right? So it’s it’s income statement, balance sheet and cash flows. So you’re probably doing your forecast and your budget based upon your, your profit and loss statement, and that’s perfectly appropriate.
Dan DeGolier: But as you build that out, as you build that budget, even, you also want that to be a cash flow. You wanna have a cash flow budget that shows, you know, you know what your, you know, have, you’ve been in operating for a while, you know what your collections are, you know how quickly you pay your vendors and your employees.
Dan DeGolier: So you should be able to model that out very clearly in accordance with, with the historical and, and planned timing on your cashflow statement. And then as you’re forecasting, as you’re updating it for actuals and, and updating your rolling forecast. You most definitely wanna, wanna continue to have your cash flow statement in place as well.
Dan DeGolier: So they are separate, but they are also related. Of course, your revenue is gonna affect your ultimate cash flow. It’s, it’s not gonna, it depends. You may have extended payment, maybe you’re giving somebody 90 day terms or maybe, maybe, yeah, maybe as a, let’s say a SaaS company who might be billing up front for a full, a full year and that’s gonna be, mm-hmm.
Dan DeGolier: You’re gonna be deferring revenue, but you’re gonna have the cash upfront and you have to make sure that you’re preserving that. So there’s a lot of factors gonna go into it, and every business is different. You, you brought
Agency Blueprint: up an interesting thing that I have a follow up question that I will lead into another piece of it.
Agency Blueprint: I suppose for a lot of smaller organizations, they’re predominantly looking at the date of invoice, and especially for those in this industry, very often you’ve got like a 50% bill at the beginning of a project and a 50% bill at the end of the project. So you see. This is one of the issues that I see, at least for agencies that are sub five 7 million in revenue.
Agency Blueprint: That doesn’t really make sense to get to the deferral oriented schedules, off book schedules that you’re deferring and recognizing revenue at different paces depending on how you’re billing. Do you agree, generally speaking, that you want to have it to be as accrual based and true accrual financials as best as you possibly can without creating for an operational problem and over investment in it?
Agency Blueprint: The thing that I see is. My issue, I suppose, is that you have these like huge spikes and valleys mm-hmm. In gross profitability and profitability, depending on when their invoicing cycles actually happen. And it bothers me when looking at a financial statement.
Dan DeGolier: Yeah. No, I, I get it. We think all businesses should be running on an accrual basis with very few exceptions.
Dan DeGolier: Again, the, the cash basis is still something that you want to be also forecasting, but when it comes to being able to analyze. The, uh, how the business is doing and be able to assess that accrual is, there’s a reason that it’s generally accepted accounting practices, and that is that you’ve, it, it represents when revenue was earned and when expenses were incurred, and it gives you a much more, I think, a much more accurate view of how your.
Dan DeGolier: Business it’s actually performing. Mm-hmm. As opposed to cashflow, which again, cashflow is, is very critical and you need to be paying attention to that as well. But if you’re getting, as you described in, in certain agency contracts where you have 50% up front, you haven’t earned that revenue yet, and you still have expenses you’re going to in incur in order to earn that and in order to, to earn that revenue, even though you may have had that.
Dan DeGolier: Put the money in the bank and then as you go, you’re gonna reverse that balance sheet entry, if you will, towards the second half of that as you start to occur. Mm-hmm. Those additional costs, and, and have them bill for the second half of the, of the project.
Agency Blueprint: Just for the sake of, of everyone listening, Dan and I are talking about accounting speak for a moment.
Agency Blueprint: So I’m just gonna go ahead and define for everyone the distinction between what accrual and cash means. A cash basis, financial statement is for when their invoices, the funds come in from your clients. Is when you ultimately recognize revenue and when the funds go out to vendors, employees, et cetera, is when you recognize the expense and versus accrual.
Agency Blueprint: True. Bonafide accrual is when we are actually performing the work. So let’s say that we have an invoice for a client, we’re still gonna recognize the revenue kind of in a work in progress and see the actual revenue on our income statement, even though we may not have been built for it yet, or we may not have received an invoice from the vendor yet, and we’re still accruing the expense that we were expecting on that given project.
Agency Blueprint: So that. The activity that happened in a given month is actually reflected on your financial statement. I
Dan DeGolier: hope we didn’t just lose our whole audience, Robert.
Agency Blueprint: Um, I think they’re quite used to, I mean, I’m a very, having, as I mentioned, having been in finance most of my life. The listeners, I think, are quite used to the financial speak that happens on this podcast. As far as you see it. What are the kind of common mistakes and pitfalls that CEOs, CFOs run into?
Agency Blueprint: While they’re scaling and also even leveraging the financial information that they have in front of them to leverage it to make decisions.
Dan DeGolier: I think having an inaccurate forecast, I’ll stay on the forecast theme, but having the forecasts that are not accurate and getting surprised and, and realizing that there was revenue, you, a cash receipt that you expected was gonna come in this month and all of a sudden you’re sweating a payroll, if that’s the worst feeling, I know for a lot of, for entrepreneurs is when you feel like I gotta pay my employees in in three days.
Dan DeGolier: I didn’t get the payment I expected to have. So having a contingency plan, I think the mistake is, is not, is having something inaccurate and not having a plan B, you know, having access to a, a line of credit if, if that’s what it is, or having personal savings in, in some cases, in, in a, in this smaller organization, having some way that you’re able to have a backstop and be able to sleep well at night.
Agency Blueprint: I generally will agree one of the. The things that I see happen very frequently when it comes to cashflow management and cashflow projections is that often people will plan for cash receipts to happen on the date that the invoice is due. And I’m sorry to break it to everyone, but that is very uncommon to actually get the payment on the day that it’s due.
Agency Blueprint: The, the way that I tend to look at it is I will look at what are the average days to pay by client, and then I’ll still add 15 days because I like to be very conservative. I’d rather see a conservative view and be planning on a conservative view. Than an optimistic view. And as entrepreneurs generally, we tend to be more optimistic and see opportunity things.
Agency Blueprint: Exactly.
Dan DeGolier: Exactly. But we
Agency Blueprint: also, from a financial perspective, I wanna be conservative.
Dan DeGolier: You need to be pragmatic in that case. Right? Lets, let’s be realistic. Look at your actual history of when clients pay and the larger client is, who’s gonna have the larger receivable? Might be the slowest one to pay. You may wanna have, you know, buildin and some extra time in there for that, for that collection, so you’re not caught after guard.
Agency Blueprint: As a general kind of just rule of thumb, I would say a couple of things that I would. Want to, and obviously this is in an ideal world, I’d want each of you to have listening right now to have a reasonable amount of cash reserves available if you don’t have access to credit, credit lines, et cetera, as Dan was mentioning, to have a reasonable amount of reserves that allows for you to be able to manage these influxes of cash or delays in payments.
Agency Blueprint: But also one of the biggest things that I see, especially in smaller organizations, that is the biggest problem, is that they manage their financial perspectives based on their bank account balance. That I don’t actually see as a proper mechanism by which to see where you are. And there’s so many instances where I’ve heard stories where people are just looking at their bank account statement every single morning.
Agency Blueprint: Yeah. And ultimately, not a great way to manage your business.
Dan DeGolier: It’s a lagging indicator. Yeah, it’s not very proactive to be, to, to be using that. I mean, certainly knowing what cash you have in the bank is, is helpful, but, um, it’s not necessarily, it’s definitely not the right way to, to manage a business.
Agency Blueprint: I’m a bit of a nerd here, and I, I rather enjoy having a bit of a crystal ball, if you will, and the amount of excitement that I actually get when my, my projections are within like a 1% variance.
Agency Blueprint: Like, wow, I, I really got my finger on the crystal ball at this point. You know, Dan. I thoroughly enjoy having any conversation around financial conversations, and I, I just want to iterate to the listeners today that what we’re talking about right now is a core foundational element that if you wanna be.
Agency Blueprint: A business owner, you want to be a true bonafide, CEO, running a sustainable, growing, healthy business. As much as this is not the shiny lead generation, sales generation piece of your business, this is a core foundational component that if you wanna run a business, you need to be doing these things and you need to be looking at these numbers and it is vital for you to actually run it.
Agency Blueprint: You run your company,
Dan DeGolier: you know, I, I equate it to, um. You’re on the highway and you, you should, you should turn your headlights on. You know? I mean, I really, I look at forecast as being as, as being headlights as opposed to the night with no moon and, and you have your headlights off and your sunglasses on.
Dan DeGolier: So, I mean, it really creates, yeah, creates visibility to the future.
Agency Blueprint: Yeah, my, my analogy is always flying a plane blind. Like, you’re not gonna feel comfortable if you have a pilot in, in the seat of a plane and has a blindfold on. How comfortable are you gonna feel you’re gonna crash right into the side of a mountain and you don’t wanna do that.
Agency Blueprint: Doesn’t sound like fun, does it? No, no, that’s not what I’m planning for my weekend, at the very least. You know, Dan, if listeners are wanting to get in touch with you, how can they they find you
Dan DeGolier: the best? Uh, two ways. One is check out our website. It’s ascent cfo.com, that’s A-S-C-E-N-T cfo.com. And we’re really active on LinkedIn.
Dan DeGolier: LinkedIn tends to be the place where we put out our content and share things. So it’s just, we’re just a sent CFO, uh, people wanna Google that on or, uh, search that on on LinkedIn. You’ll find us very easily. And we do also have a newsletter you can sign up for on our website. If you, uh, just go to our website, there’s a, uh, page on there where you can easily, easily, uh, get our, we don’t spend, send out a lot of, a lot of, uh, newsletters or, or updates.
Dan DeGolier: I think we do like two a quarter. And that’s the reason because we want to, we want to be able to create something really interesting and not just, uh, not content for content. So not written by ai, at least not yet,
Agency Blueprint: um, until it’s able to do things in a. Accurate format. We’ll make sure to include the links in the show notes, everyone, so that you can go ahead and click on everything and get in touch with Dan.
Agency Blueprint: Thank you so much for joining me today. Dan DeGolier: Yeah, my pleasure. Robert, really great to get to know you.
Contact Us
Questions or business inquiries regarding our part-time CFO, finance and accounting services are welcome at: info@ascentcfo.com
