1. Economic assumptions. Any cash flow forecast must be based on the preparer's estimate of such macroeconomic factors as inflation rates and interest rates. Projected market conditions are also extremely important. The introduction of new competitive products, demographic changes, projected government actions affecting site location, market growth, impact on the continued growth or survival of the company must be clearly stated as part of the forecast. Assumptions about sources of supply, projected results of labor contract negotiations, and changes in government regulations (such as tightened EPA restrictions) should also be reflected.
2. Sales forecast. A sales forecast should recognize both volume and price changes from historical levels. It should also incorporate probable variations in product mix, market trends, new product introductions, and potential competitor actions. Companies that manufacture products to customer order should forecast from the order book, order backlog, and production cycle rather than from historical shipments. However, historical receivables turnover ratios can be used to project cash receipts.
3. Purchase forecast. The purchase forecast should reflect the same variations in product mix as the sales forecast. It should also reflect inflationary changes in the pricing of at least major items and preferably all purchases. Companies that stock invetory for resale should base purchasing time lags on historical inventory turnover. Those that buy materials to customer order should incorpate the lag/lead time required by the production cycle.
4. Payroll forecast. Supervisory and direct labor payroll forecasts must include anticipated wage rate and salary increases. The projected number of employees should be used as the basis, rather
than a straight extrapolation of historical payrolls. All fringe benefits should be included, taking into account expected increases in federal and state tax rates, worker compensation rates, group health insurance rates, and potential new pension plans. All salaries to the owner/manager should be excluded.
5. Nonpayroll operating expenses forecast. The forecasted expenses for utiltiies, lease payments, telephone, operating supplies, insurance, maintenance, professional fees, and so on should be based on historical averages. Such averages can then be factored up for expected inflation rates. Obviously, if facilities are added or deleted, historical data must be adjusted accordingly.