And you have to always know when your year ends && there's something called the fiscal year, and most companies have a calendar year, meaning that's their last quarter, the fourth quarter, ends in December, okay.
But some companies actually have fiscal years that end during different months.
And I know it sounds very strange. So, retail companies, for example, they tend to have their fiscal year ending in January, meaning the fourth quarter for them ends in January.
Why? Because they want to account for the holiday shopping and returns after the holidays as well. And so, a lot of retail stores will have these Black Friday events, which is, I think, the last Friday in November in the United States, where there'll be a lot of deals, and it's right after American Thanksgiving, and people line up around the block all night long, and they get to buy stuff from stores very cheap, for very low price. And this is called Black Friday because most retail companies in the United States are in the red for the whole year, meaning they're losing money, until Black Friday, when they break even, they're in the black.
I know it sounds unfair, but there are companies out there that have quarterly numbers, and they have to make those quarterly targets or Wall Street punishes their stock. And some companies will actually pull revenue in from the next quarter into the current quarter, meaning each quarter, instead of having 90 days, has 95 or 96 days, which obviously it doesn't, and they break the law. And a lot of these people go to jail. So, just be really careful when you're forecasting and when you work with others that forecast as well.
So, how long can we measure, or how can we measure how long it takes for assets and liabilities to actually turn into cash? Well that's something called the "cash conversion period ratio."
So, here's the example, if we have $5000 of inventory, right, or banana watches, we have $5000 worth. And the average daily cost of goods sold for our banana watches is 100 bucks, then that means we have 50 days worth of cost of goods sold in inventory.
Okay, so another way to think about this is, if we put another one dollar into inventory, it won't be converted into cash, or cost of goods sold, for another 50 days, okay So inventory is just gonna absolutely destroy a company.
so producing too much stuff in inventory is a big mistake. And the Japanese kinda perfected this process back in the '80s called a "just-in-time," or JIT. Where they only produce stuff the second you need it.
Okay, another ratio is the inventory to sale conversion period. And that's basically average inventories divided by cost of goods sold, divided by 365. And that's to kinda measure on a yearly basis. If you want to measure on a quarterly basis, of course you'd use 90 days instead of 365.
Okay so, if we sell our product on credit, right, meaning we don't get cash, somebody pays us with a credit card.
Can we track how long it takes for us to collect the cash? We sure can. It's called the "sale to cash conversion period," and you basically take average receivables divided by sales, divided by 365.
It's actually good practice, like I've mentioned before, to pay your bills as late as you can, without upsetting your business partners or incurring late fees. And there's a way to measure this, and that way is as follows:
it's called the "purchase to payment conversion period," and it's average payables plus average accrued liabilities divided by cost of goods sold, divided by 365.
All right, so short term forecasting is primarily about cash flow estimates.Many assumptions are made and many assumptions are based on sales. Right, so, forecast sales first, and then everything else is just a percent of sales going forward.