Crystal Ball Boosts ExperCorp's
New Venture Planning for Recreation Markets
ExperCorp is a business-planning consulting firm located in Naperville,
IL. The company specializes in new venture strategy and marketing
research for entrepreneurs designing entries for the fitness, recreation
and sporting goods markets. A key to small business planning is
the development of good risk and reward estimates.
Following a determination of the size of the available target
market, realistic assumptions for unit sales, realized selling price,
production costs, and operating expenses in the first year of operation,
ExperCorp wanted to develop a pro-forma income statement. The objective
was to create a profitability distribution of gross revenues and
profits/losses.
An income statement template was developed incorporating Crystal
Ball to create appropriate distributions for unit sales (triangular),
production costs (uniform), operating expenses (triangular), and
profits/losses (normal).
The most critical and difficult aspect of venture planning is
developing estimates of cash flow. Developing realistic statements
for the first and subsequent years of operation along with determination
of cash reserves is a task that all diligent planners must face.
Today, this job has been simplified with cash flow templates that
plug into spreadsheets. The objective was to increase the precision
of cash flow forecasts.
Crystal Ball was used to enhance cash flow models by replacing
point estimates with probability distributions of cash flows for
key variables. Using the relevant data from first-year income statements,
ExperCorp made assumptions about the percentage of receivables collected
in 30, 60, and 90 days. They let Crystal Ball create triangular
distributions for these intervals. The total projected cash flows
for each month were calculated using a triangular distribution.
Using Crystal Ball to create distributions for key financial input
instead of relying on single point estimates increased the precision
of forecasting under the conditions of uncertainty that new business
planners typically confront. Rather than running the standard set
of sensitivity analyses, they produced robust forecasts in less
time with more accuracy using Crystal Ball. It gave ExperCorp's
clients and their financial sponsors a better picture of their venture
landscape. They saw the probabilities of risk and reward. This is
a confidence boost for them and for us - light years ahead of groping
for the "right" point values to plug into their models.
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