(excerpted with permission from “A Quick Start Guide to Financial Forecasting” (c) 2017 Philip Campbell)

(Editor’s note: Philip is a long-time SurvivalWare user and advocate of financial forecasting and cash flow awareness. I asked Philip if he could tell us why he thinks financial forecasting is so important to do, and he graciously agreed to give us his two cents).

I’ve found that starting something new is easier when you have a good view of the benefits that you’ll enjoy from making the effort to get started. Getting a clear picture in your mind of the benefits you will enjoy from creating a reliable financial forecast is helpful in motivating you during the hard work phase of forecasting. In addition, knowing the benefits you will enjoy also helps you answer questions like:

• Can forecasting help me increase profits and cash flow quickly?
• Can forecasting help give me the courage and confidence to make better business decisions?
• How will I benefit from making forecasting a part of how I manage my company every month?
• What kinds of business questions will a forecast help me answer?
• What role does forecasting play in my plans to take my company to the next level?

Here are some of the more powerful benefits of a reliable financial forecast that I have personally experienced and seen other entrepreneurs experience:

1. Create the view through the financial windshield of your business.
2. Develop a deeper understanding of your business model.
3. Strengthen your leadership muscles.
4. Help you stop doing things that lose money.
5. Prevent poor financial decisions.
6. Turn financial statements into a decision-making tool.
7. Anticipate the financial implications of growing your business.
8. Tap into the power of a strategically focused CFO.
9. Transform your accounting function into a strategic asset.
10. Promote a deeper understanding of your financial statements.
11. Reduce the risk of error in your financial statements.
12. Reveal answers to your month-to-month business and financial
    questions.
13. Create a tsunami warning system for your business.

These topics are explored in chapter 2 of his book. You can also get more detail from Philip’s blog.

Philip Campbell is an experienced financial consultant and author of the book A Quick Start Guide to Financial Forecasting: Discover the Secret to Driving Growth, Profitability, and Cash Flow and the book Never Run Out of Cash: The 10 Cash Flow Rules You Can’t Afford to Ignore. He is also the author of a number of online courses including Understanding Your Cash Flow – In Less Than 10 Minutes. His books, articles, blog and online courses provide an easy-to-understand, step-by-step guide for entrepreneurs and business owners who want to create financial health, wealth, and freedom in business.

Philip’s 35 year career includes the acquisition or sale of 35 companies (and counting) and an IPO on the New York Stock Exchange.

First an acknowledgement that it has been five years since the last blog post. SurvivalWare 2021 has now been released, and the blog is back on front burner. Visit our Knowledge Base for User Documentation and articles about financial forecasting.

What is Forecast Logging

Forecast logging is the process of saving financial forecasts throughout the year in a form that they can be analyzed later on. You want to make sure you save the “as of” date of the forecast, and a healthy set of metrics and time periods. If you are using separate files or worksheets to save the forecasts, it is important to adopt a naming convention that let’s you know what it what.

Why log your financial forecasts?

The one thing you can be sure of is that your forecast will be wrong. It is a matter of “by how much.” Why set yourself up for ridicule by saving old forecasts and comparing them to what actually happens?

Three reasons come to mind:

1. Digging in to why a specific forecast was off sometimes reveals flaws in your model or assumptions. You can make your forecasts better by detecting and correcting errors over time.
2. Viewing the “end of year” forecast as each month goes by can give you a good indication of changing company expectations, and may explain decisions made.
3. Seeing which variables are more “forecastable” than others helps you figure out how much to rely on the forecasts.

How to log Financial Forecasts

Excel

In Excel, it means you save each month’s forecast in a separate file or worksheet. If you are using an Excel forecasting model, just save the file using the same base name, and a month / year indicator added to it. Or you can add a worksheet for each saved forecast, as in the example below.

When it comes time to anaylze prior forecasts, you’ll need to copy and paste the column with the forecast target (e.g. Year Total for 2021) from each of the saved spreadsheets. This allows you to see the forecasts for the same time period side by side so you can see how they change over time.

You can insert a graph one at a time for the variables you are most interested in, such as Sales, Net Income, and Cash.

SurvivalWare

In SurvivalWare, you have two choices.

1. You can turn “automatic forecast logging” on, and it will save a snapshot of your forecast every time you save your SurvivalWare MTX file.
2. You can save a forecast with an automatically generated file name whenever you are done with the forecast for that month.

Automatic Forecast Logging

To turn on automatic forecast logging, select Settings / User Preferences from the main menu.

On the User Settings screen, specify a logging folder, and click the checkbox “Log Forecast with every save.” The logging folder is a separate folder to store all of the saved forecasts.

Saving a forecast manually

Select “Toolbox / Save Forecast” from the main menu.

You get a confirmation message box, showing the automatically generated file name. In this case the base names is DD-6. SurvivalWare adds a time / date stamp in the format “YYYY-MM-DD-hhmm”, and the extension, .CSV.

Analyzing Prior Forecasts

Once you have save a few forecasts, you can analyze them in two steps:

1. Select a target time period to compare forecasts for
2. Click on the “Prior Forecasts” button for the time period range.

Select Time Period

This can be a month, quarter, year to date value, or year. You might for example select your year end forecast for a key metric, and see how it changes month by month over the course of the year, and see how close each forecast came to the actual outcome.

You select a time period by clicking on a column name in the grid.

Prior Forecasts

To compare prior forecasts for the selected column, click “Prior Forecasts”

Here is a case where the outlook for sales increased and held steady most of the year, but then plummeted in the last two months. This begs the question, “what changed?” Was it a forecasting problem, a change in business conditions, or a fall-off in sales execution?

Looking at how your forecasts change over time helps you ask the right questions about your business.

Back of a cocktail napkin is a good place to start.  But then things can get complicated as you learn and pivot and spend and invest and pivot some more.  All of a sudden you have employees and leases and inventory and receivables.  A portfolio of credit cards becomes a major source of working capital.

So how much is this project XYZ going to cost?  Month by month?

What impact will it have on sales?  Margins?  Month by month?  Also: what are the ranges of possible values?  Best case?  Worst case?

Suppose I sell licenses only and not subscriptions?  How about the other way around?

What if customers take 45 days to pay?

How much money do I need?

Look before You Leap with Financial Modeling.

Financial modeling is a tool that allows you to look at different business models “on paper” first.    Unless you have unlimited funds, you need to plan each move carefully.  Over time things get more complex.  There are many moving parts.  You can’t keep track of everything in your head.

You start with the facts. This is where you are today.  Cash, Inventory, Debt, recent sales.  A few years of monthly financial statements if you’ve been around that long.

The financial model is a structure to accumulate this data and make sense of it.  It also allows you to peek into the future

This is what SurvivalWare is all about.   It is a tool to help you Look before You Leap.

The SurvivalWare Experience

You first look at historical performance to inform your decisions about what is possible going forward.

You look at trends graphically, efficiently, with push button ease.

The provided financial models show you everything you need to make assumptions about in order to do a complete financial projection (Income Statement, Balance Sheet, and Cash Flow).

You can base your assumption on history or on judgement.  Or “back of the napkin” sketches.  Days of market research.  Coin flip.  Whatever.

You look at what happens to the cash as the end result of everything else.

The secret about financial modeling is that the income statement and the balance sheet have to be in balance.  Once you’ve got estimates for everything else, your cash balance is the plug.  It is the end result of everything that goes on in the business.  The model calculates cash for future months based on your assumptions about sales, inventory, receivables, expenses, credit cards, etc. etc.

Look before You Leap – try it out for 30 days!

SurvivalWare Simple is a great way to start, and is yours free for 30 days.

If you decide to take this step – do it right!  Call or email to arrange a free consultation.  Let us help you get your data loaded, and give you some pointers on how to peek into the future financially.

custsupport@survivalware.com

703-780-2044

A part of experience is how to deal with setbacks.  One of the best attributes Elway ever had was his perseverance.  People told him for 14 years he couldn’t win a Super Bowl, but his drive enabled him to win in years 15 and 16.  All he heard for 14 years was that he didn’t have the touch.  There were so many things people would say.  ‘You can’t win the big game.’  He never, never gave up and was always the leader of the team despite adversity.  With that drive and perseverance he was able to win back-to-back Super Bowls.  To me, what I admired the most was that he would never, ever give in.  He was just relentless.  Anytime you have that willpower, to never give up, that separates people.

Check out the full article.  Bravo Philip!

Of course, the answer is, “It Depends.”

Discounted Cash Flow (DCF) Analysis

DCF Analysis is a technique that allows you to compute the implied Annual Percentage Rate (APR) of taking the easy payment plan vs. up front lump sum.  With DCF Analysis, you apply a discount factor to future cash flows to bring them back to the present so that you can compare them to an amount of money today.   Take a simple example of a credit card with an monthly interest rate of 1.5%.  If you owe $1,000 today, you can pay it off for $1,000.  Or let it ride, and pay $1,015 in a month.  DCF analysis is a way of saying that the $1,000 today is the same as $1,015 one month from now – assuming a monthly discount (interest) rate of 1.5%.  

The formula for discounting a future payment back to the present is simple:

Present Value = Future Payment * 1 / (1 + i) ^N  where “i” is the interest rate per period, “^” means “raised to the power of”, and “N” is the number of time periods in the future that the Future Payment occurs.

Internal Rate of Return (IRR)

Then Internal Rate of Return is that discount rate that which causes the future “easy payments” to be equivalent to the lump sum payment today.  When you model the payment alternatives as a stream of cash flows, the IRR is that rate at which the Discounted Cash Flow is zero.

Practical Example of DCF/IRR Analysis

I recently joined an entrepereneur peer group and will use their membership fee structure to illustrate.  You can either pay $895 up front for annual membership, or $95 per month for 12 months – at the beginning of each month.

Here are the two alternatives:

Pay $895 today

Pay $95 today, and then $95 at one month intervals for the next 11 months

So think of the second alternative as the equivalent of borrowing $800 (the reduction in what you have to pay today: $895 less $95), and paying it back over 11 months.  You can state that as a stream of cash flows in Excel:

You get $800 today (cash inflow),  resulting in negative $95 per month (cash outflow) for the next 11 months.  You can use the IRR function built into Excel to determine the monthly discount rate that would cause the discounted cash flow stream to equal zero, and then multiply by 12 to get an annual rate.

C4=IRR(C2:N2)

C5=C4*12

So in this case, making the 12 easy payments is the equivalent of borrowing at an annual percentage rate of 56.88%.

Why would you ever do such a thing?  There are at least two or three reasons:

1. There may be some uncertainty about using the service for a full year, so you want to contain your risk by committing to just a month at a time.

2. You could be close to tapping out your credit cards and / or lines of credit, and you don’t want to use up any spare credit capacity.

3. Your cost of capital is above 56.88%, and this is a cheaper form of borrowing.

In my recent post, Your CFO to the rescue: Solving the mystery of cash flow – Part 9, I talked about the importance of avoiding the accounts payable trap.

In this post, I’ll show you an example that helps highlight how that trap can snare you if you are not careful.

In my book Never Run Out of Cash, I devoted chapter 8 to a real life example I experienced in a company I had come in to help.

The president of the company had some concerns about cash flow.

He thought the process for collecting receivables from his customers was not functioning as well as it could. Money was tight and he believed the primary reason was a slow-down in collecting receivables from his customers.

One of the first things I did was spend some time in the accounting department, which, as the keepers of the accounting records, is where one should be able to find the answers to the questions.

And find the answers I did!

Cash is a “Little Tight”

The first thing I found was that cash wasn’t just “a little tight right now.”

The dollar amount of vendor invoices in the system to be paid (accounts payable) was three times more than the cash available to pay the invoices.

More than half of the invoices were already past due.

The next issue was that not all the invoices had been entered in the accounting system.

There were fairly recent invoices that were sitting in a stack to be entered later. The accounting department personnel were in no rush to enter the invoices because they knew they would not be able to pay them anytime soon.

The reports that had been printed to show the cash balance and the accounts payable balance (bills to be paid from the cash balance) did not even show these bills.

These invoices went into a stack I call the “these will be entered closer to when they can actually be paid” stack.

I have seen this happen in many companies that have cash flow problems.

Accounting is forced to delay payment on some invoices and not pay others at all. Vendors then start calling to demand their money.

The vendor’s favorite question is, “When will I get paid?” After several calls, they start to sense that the company is in trouble. Then they get upset and rude with the person on the phone. That’s when it gets ugly—and a bit personal.

It’s hard for the clerk in accounting to take the heat from a vendor who feels like he is being cheated by the company. The vendor provided a product or service to the company and he wants his money when it was promised. The vicious cycle continues.

Accounting is now spending much more of its time fending off vendor calls. Another chunk of time is spent fending off people inside the company who are also irritated because vendors are starting to call them and threatening to cut off products or services.

The CFO to the Rescue

As the CFO, you have to jump in and manage this whole process strategically.

You have to be in front of the CEO every day with the facts about how vendor invoices are being managed.

One strategy I have used very effectively over the years is to measure the number of days of expenses sitting in accounts payable (DPO).

I include this number in my dashboards and reporting to the CEO so it is crystal clear how the strategy is impacting vendors. I do that long before the vendor complaints and hell-raising happen because it is all very predictable when you are monitoring the age of your payables every day.

Here is an example of a graphical cash flow dashboard so you can see how I implemented this. The second dashboard has the DPO metric in it.

Cash Flow Projections Provide Visibility

Another thing I do is include in my monthly cash flow projections the amount of cash needed to bring accounts payable back down to normal levels.

This helps management and owners see the impact on cash when we start paying vendors based on our normal terms. I want everyone to clearly see what it takes to get back on track.

It’s a great way to keep the number front and center for everyone to see and understand.

 Wikipedia defines financial modeling as the task of building an abstract representation (a model) of a financial decision making situation. 

I prefer a more inclusive definition:  financial modeling is the task of building a financial model, or the process of using a financial model for financial decision making and analysis.  I would agree that a financial model is an abstract representation of a financial decision making situation.  By abstract representation, we really mean a mathematical model, and to be practical, a computer based mathematical model.  The model usually represents an ongoing business, or a project that requires investment.  Financial models are not limited to profit making entities.  Non-profits, governments, personal finances – all can be represented by financial models. 

What is Financial Modeling used for?

 Financial modeling is used to do historical analysis of a company’s performance, and to do projections of its financial performance into the future.  Project finance is another area that lends itself to financial models.  A project (such as a real estate investment, or a new factory) can be analyzed using a financial model.  It does not have to be complete business.

 Financial Modeling is not just for the accountant or financial consultant, who are called upon to develop financial projections, but also for business owners and managers.  With improved user interfaces and heavy use of graphics, it is now feasible for non-technical people to use a financial model to test options and make decisions based on the projected impact on profits and cash flow.

 How does a financial model work?

Some financial models are “black boxes” with their logic hidden or poorly understood by the users of the model.  Most spreadsheet models fall into this category, because the time it takes to find and understand the relevant formulas is daunting for most users.

However, the more you understand about how a financial model works, the more confident you can be in using its results.  In the next four blog posts, I’m going to explain how financial models work for each of the four main kinds of financial models:

1. Transaction based models

2. Discounted Cash Flow models

3. Financial Statement models

4. Consolidation Models

But first (you can skip this part)..

My Introduction to Financial Modeling

Financial modeling is my passion.  I was introduced to it 35 years ago when I went to work for a company called Comshare, which sold computer timesharing services to corporate customers.  We targeted financial analysts, controllers, and CFO’s who were frustrated at having to go through their IT departments for management reports and analysis.   Some things never change.

Back then a new class of higher level software deemed “third generation” was all the rage.  (The first generation was assembly language, second generation was general purpose programming languages such as Fortran and Cobol.  Who knows what generation we are in now!)  Part of this new wave of software was the genre known as the financial modeling language.

These languages let you construct financial models using English like statements instead of obscure lines of code.  Today, some of us old timers consider spreadsheets – with their obscure cell formulas – to be a step backward, at least when it comes to constructing financial models that are maintainable and understandable.

In the first 3 or 4 years after getting a degree in Industrial and Operations Engineering (a fake engineer as my wife likes to refer to it), I bounced around from job to job trying to find my niche.  When I interviewed for the job in Comshare’sArlington,Va.sales office, I told them up front my goal was to start my own company.  (Good boy – correct answer, shows initiative).

I started in the Fall of 1977 as a customer support representative.  I learned FCS, the financial modeling language sold by Comshare that was growing by gangbusters in the late 70’s. Some of the other popular financial modeling languages at the time were Prophit II and IFPS.

As I settled in, I thought I had died and gone to heaven. It seemed the perfect confluence of interest and passion for me:  computers, business, and customer support.  (Some say it is a character defect, but I genuinely enjoy helping people).

One of our customers back then was the Marriott Corporation – who used financial models to do cash flow projections for hotel projects.  They had a great formula for growth.  They would find investors to put up the money to build a hotel, and then take a management fee for running it and including it in the Marriott network.  Marriott had a dynamic young Treasurer at the time named Al Checchi, who pushed for financial discipline and fact based analysis.  Financial modeling was a great tool for crunching the numbers and analyzing the returns to both Marriott as well as the investors.

Another customer was the First American Bank ofMaryland.  They used a financial model for overall corporate planning.  They put in assumptions about interest rates, average loan balances and deposits by category and by branch – and computed a complete income statement and balance sheet for each branch and the consolidated bank.  The model had to handle the simultaneous equation involved in computing the bank’s cash position each month.  In banking, since cash is also inventory, they have accounts called Fed Funds Purchased or Fed Funds sold depending on whether or not they needed to borrow from the Fed.  I could never remember which account meant you had excess funds.  I seem to remember it was counterintuitive.  The financial model sorted it all out.

Yet another customer was Fairchild Industries, a Fortune 500 aircraft manufacturer and NASA contractor.  They had several independent divisions, and used financial modeling to consolidate the financial reports on a monthly basis, and to prepare budgets.

In addition to helping the customers learn the modeling language and developing models for them, I worked with Comshare’s sales representatives to go out and find new customers.  I’ll never forget a sales call we made at McCormick, the spice company inHunt Valley,Md.  They asked if FCS could interface with their General Ledger (i.e. accounting software) that ran on their mainframe computer.  My answer (with a straight face) was yes, of course it interfaces.  You print out the financial reports from the general ledger, and type in the numbers on the computer terminal. I seem to remember that we did not get the business.  That was the state of the art of automated interfaces at the time.

The disadvantage of financial modeling back then was something we referred to as the “ouch point.”  Computer timesharing was priced based on usage.  In Comshare’s case, there was a charge for the length of time you were “logged on” to the computer, plus some measure of CPU seconds.  These charges included a fee to go to the software company that developed the financial modeling language.

Since financial models gave the finance department freedom from the internal IT department, things got done quickly, and usage soared.  The “ouch point” occurred when the monthly timesharing bill was big enough to be noticed by senior management.  Any IT manager worth his pocket protector would try to use the expense as an excuse to bring the application in-house, and the renegade users back onto the IT reservation.  This was a pre-cursor to the Personal Computer vs. Mainframe battles soon to come.

Comshare made a big mistake and promoted me to branch technical manager in early 1979.  All of a sudden I had all the headaches of being a manager, but not much difference in the amount of pay.  I figured if I was going to put up with the BS, I may as well do it on my own.  So I put in my notice, and to make it a smooth transition, I wound down my involvement from 5 to 4 to 3 to 2 days a week in the waning months of 1979, and was fully on my own by January, 1980.  This was just in time for the steepest recession since World War II, the 2^nd Oil Price shock, and a prime rate that peaked just shy of 20%.  Timing has never been my forte.

The company I started was called Ferox Microsystems, Inc.  Ferox was short for ferrous oxide.  Iron oxide.  Rust.  My name is Rusty.  So yeah – it was my ego trip: I wanted to get my name into the company without sounding like a one man band.

My original plan was to develop small business accounting software or something else simple enough to fit on the Apple II computer I had bought that summer.  With a second mortgage, a working wife, and no kids – I had about a 6 month horizon to make it work.

To make a long story short, I found that the Apple computer was much more powerful than I anticipated, especially when they released Apple Pascal, a programming language that allowed you to write programs that were bigger than the computer’s memory.  It did all the swapping for you behind the scenes.  At the same time I had some consulting customers who were reaching their “ouch points” and pushed me to find a lower cost way to do financial modeling.

The result was RCS – The Micromodeler, a financial modeling language that ran on the Apple II computer, and sold for $1,500 a pop in mid 1980.  RCS was short for “Rusty’s Computer System.”  Entrepreneurial ego knows no bounds.

A year or so later I sold the North American rights to a book publisher, who renamed the product DSS/Finance or DSS/F for short. Yet another example of my proclivity for poor timing, or just plain poor judgment.

Fast forward to 2002, and I decided to start Luhring SurvivalWare, Inc. to adapt big company financial modeling technology to small company cash flow problems.  I had gone through some roller coaster years with Ferox, and wanted to help other entrepreneurs avoid some of the mistakes I had made.  By this time, I had shed the second mortgage, my wife was working part-time, and we had 4 kids, the first of which had started college.

My original thought was to focus on detailed cash planning to help entrepreneurs survive a cash crisis – but I quickly found this market segment not particularly receptive to parting with their scarce, hard-earned cash.

SurvivalWare has evolved quite a bit since those humble beginnings to include the full range of financial modeling power to do financial statement projections, consolidations, and benchmarking analysis.

Coming up next: Transaction Based Financial Models

KPIs help you figure out where there are opportunities for improvement. 

Remember, “What gets measured, gets done.”  So your challenge is to select the KPIs that matter most to your business, and discard any that are not relevant or may promote bad performance.

Example of a Good KPI

Gross Profit Margin (Gross Profit as % of Sales) – this is a measure of how much Gross Profit you bring in for each dollar of sales.  In general, the more the better.  When would would a higher Gross Profit Margin not be better?  When it costs you sales.  If you raise prices to achieve a higher gross profit, it could be that you drive customers into the arms of your competitors. 

Another way to increase this measure is to focus your selling effort on those product lines with the highest Gross Profit Margins.  This usually is a good way to generate more gross profit.

Yet another way to increase this Indicator is to find alternate suppliers, or buy in larger quantities, or pay cash up front to existing suppliers.  You can see real quickly that focusing on a single KPI can cause things to run amuck.  That is why we have dashboards to monitor a number of KPIs at the same time.

Example of a Bad KPI

Lines of code per day

Back in the early days of computing, a measure of programmer productivity was the number of lines of code written per day.  All things being equal, this may not have been a bad measure.  We observed one company where the programmers started making their programs longer and less efficient when told that their performance was being measured based on the lines of code per day.  The lesson:  be careful what you ask for.  People respond to how they are measured.

KPI Libary

While researching this article, I came across a website / company devoted to KPIs.  They have a collection of over 6,000 KPIs from all sorts of businesses around the globe.  Some of them they offer in sets according to the type of business, or department within a business.  They collect benchmark data as well to help you see how you compare to others.   Highly recommended: www.kpilibrary.com

SurvivalWare

Of course, beware of self-reported KPIs that do not include the detail.  We recommend SurvivalWare as the first line of attack – for getting accurate data out of your accounting system and combining it with other operational data to form the backbone of your KPIs and Dashboards.  The mapping feature of SurvivalWare is what saves you from the laborious and error-prone keying of data into spreadsheets.

As with Cash itself – more is better when it comes to Days of Cash.  In my view, you can never have too much.

What are good and bad values for Days of Cash?

One interpretation of Days of Cash is that it is the number of days you can stay in business if you don’t make any more sales or collect any more money from customers.  Here are some ranges of values from bad to good:

Less than zero – this is bad.  It means you are holding back checks you have written to send after the cash arrives.  Your payables are understated on your balance sheet as a result.  This is a highly stressful time.

0 to 15 days – you are still in financial distress and having to spend too much time worrying about it and managing what gets paid when

15 to 45 days – you have some breathing room, but still need to keep an eagle eye on cash flow

45 days or more – this is good.  You have more important things to worry about.  However, things can change quickly, so you still need to track Days of Cash on a regular basis to make sure it stays in the good zone.

How to calculate Days of Cash

The simple definition is to take your ending cash balance and divide by daily cash operating expenses (Total Operating Expenses less Depreciation and Amortization). 

Cash is really cash and cash equivalents – stuff you can use to pay your bills.  So it includes your bank account and short term investments that can be converted to cash quickly.

Daily cash operating expenses are calculated differently depending on the time frame you are looking at.

There are four commonly used time periods when doing financial analysis:

1. Months

2. Quarters

3. Year to Date (1..12 months)

4. Years

The trick is to calculated Annualized Cash Operating Expenses for each of these time periods, and then divide by 365 to get a daily number.

For a single month:  Daily Cash Operating Expenses = (Monthly Cash Operating Expenses * 12 ) / 365

For a quarter:  Daily Cash Operating Expenses = (Quarterly Cash Operating Expenses * 4 ) / 365

For a year-to-date period: Daily Cash Operating Expenses = ((Year to Date Cash Operating Expenses / Number of Months) * 12 ) / 365

For a year: Daily Cash Operating Expenses =  Cash Operating Expenses  for the year / 365

Then:

Days of Cash = Ending Cash Balance / Daily Cash Operating Expenses

Example Days of Cash Calculation

from Company A’s financial statements: 

Annual Revenues:  $150,000

Total Operating Expenses for October: $10,000

Depreciation for October: $1,000

Cash as of October 31:  $3,000

Calculations:

Monthly Cash Operating Expenses for October = $10,000 – $1,000 = $9,000

Daily Cash Operating Expenses for October = $9,000 * 12 / 365 = $108,000 / 365 = $295.89

Days of Cash at the end of October = $3,000 / $295.89 = 10.1 Days