Goldman Sachs Virtual Experience

As part of the Goldman Sachs Virtual Experience program, I had the opportunity to assist a hypothetical cupcake shop in developing a comprehensive five-year business forecast. This project allowed me to apply financial modelling skills to a real-world scenario, helping a small business plan for its future. Let me walk you through the process and what I learned along the way.

Building Forecast Assumptions

The foundation of any good financial model is a solid set of assumptions. My first task was to compile a comprehensive set of projections covering various aspects of the cupcake shop's operations, such as revenue projections, cost estimates, and cash flow assumptions. This process taught me the importance of balancing optimism with realism in financial projections. It also highlighted how important it is to understand the nuances of a specific industry when building financial models.

Creating a Forecast Profit and Loss Statement

With our assumptions in place, I moved on to creating a forecast profit and loss (P&L) statement. This was a crucial step in understanding the cupcake shop's potential profitability over the next five years. Here's what I included:

1. Revenue: Projected sales based on our assumptions.

2. Cost of Goods Sold (COGS): Direct costs associated with making cupcakes.

3. Gross Profit: Revenue minus COGS.

4. Operating Expenses: Rent, utilities, marketing costs, etc.

5. Operating Profit: Gross profit minus operating expenses.

6. Non-Operating Expenses: Interest on loans, taxes, etc.

7. Net Profit: The bottom line after all expenses are accounted for.

This exercise helped me understand how different factors impact a business's profitability and the importance of managing both revenue growth and cost control.

Calculating Net Cash Flow

Next, I developed a cash flow forecast. This was particularly interesting as it showed me that profitability doesn't always equate to good cash flow. I considered:

1. Cash from Operations: Based on the P&L, adjusted for non-cash items and changes in working capital.

2. Cash from Investing: Capital expenditures for equipment or renovations.

3. Cash from Financing: Any loans or owner investments.

Presenting Forecast Metrics

Finally, I translated all this financial data into visual representations. I created several charts to effectively communicate the forecast:

1. A Column Chart of Revenue: This chart depicted the projected revenue from 2020 to 2024, clearly illustrating the expected growth trajectory of the cupcake shop.

2. A Line Chart of Closing Debt: This visualisation showed the projected closing debt from 2020 to 2024, providing insights into the shop's progress in managing and reducing its debt over time.

3. An Area Chart of Closing Cash: This chart presented the projected closing cash position from 2020 to 2024, offering a comprehensive view of the shop's expected liquidity over the forecast period.

4. A Combination Chart of Sales Performance: This chart featured columns showing projected cupcake units sold from 2020 to 2024, alongside a line representing the average sale price during the same period. This dual-axis chart provided valuable insights into both sales volume and pricing trends.

Conclusion

This project was an invaluable experience in applying financial modelling techniques to a real-world business scenario. It reinforced the importance of thorough research, realistic assumptions, and clear presentation of financial data. Most importantly, it showed me how financial analysis can provide actionable insights to help small businesses plan for a successful future.