Questions & Answers

Q: I have a enquiry regarding the sensitivity values. I have entered 10% for both Optimistic and Pessimistic values. I also have sales declining in year 1 and then increasing to year 3. However, the year 1 & 2 pessimistic sales and business returns are greater than the expected return values and the expected values are greater than the optimistic values respectively. The year 3 sales are also in reverse order but the expected returns are correct. If I enter negative sensitivity values, the sales appear to be correct but the business returns are in reverse order. Why?

A: The forecast (expected, optimistic, pessimistic) is derived from the Relative Indicators. The sensitivity analysis adjusts the variance of the Relative indicator from the base value of 100. The Optimistic Sensitivity increases this variance the Pessimistic Sensitivity reduces this variance. When a relative indicator is less than 100 this can have the effect of appearing to reverse the values calculated optimistic / pessimistic. For Market Strength of 150% with all other indicators at 100% (no change year on year) Expected revenue of 500000 becomes 750 000 (Previous Year Revenue * Market Strength % * Business Market Position % / Level of Competition % which is 500 000 * 1.5 * 1 / 1 = 750 000). The Pessimistic Sensitivity analysis reduces the effect of variance of the indicator from 100 (the base value). For a pessimistic sensitivity of 20% a Market Strength of 150% becomes 140% (150 - 100 * (1 - 20%) + 100). If all other indicators are 100% (no change year on year) revenue of 500 000 becomes 700 000. If the relative indicator is less than 100 say 50% the Pessimistic Sensitivity analysis still reduces the effect of the indicator i.e. for a pessimistic sensitivity of 20% a Market Strength of 50% becomes 60% (50 - 100 * (1 - 20%) + 100). If all other indicators are 100% (no change year on year) revenue of 500 000 becomes 300 000. I hope this aids understanding of the sensitivity function a little. Regardless of sensitivity settings the Expected Values are applied directly from your relative indicators. If relative indicators of less than 100 are providing inconsistent optimistic/pessimistic values you can run various scenarios applying different Relative indicators to test a range of possibilities and forecast combinations.

Question and Answer Item 42 - Browse All Question and Answer Items

Q: My question is on the inputs page. The space for owner labor in my case is $35,000. The outside earnings box seems to ask for total outside earnings being given up without regard to the owner labor amount I plan on paying myself once cash flow allows (the 35k entered in cells C19 and C28). My outside earnings would only total about $60,000. When I enter 60k into cell c64, the valuation is a negative number. When I enter 25k in cell c64 (60k-35k) I get a positive value of the business. The cash flow projection allows me to pay myself partial salary the first year and full salary the second. So it seems to me that the 25k--which is all I'm giving up of outside pay is the number to enter as owner's external earning power (cell c64). Am I understanding it correctly? Thank you for your help. I'm helping a friend on his purchased model, but as a financial adviser, intend to purchase the commercial license on my very next business client.

A: The Owners External Earning Power (C54) is the amount of earnings given up when the owner commits to the business. If you could earn 60k outside the business then before the business can start providing a return on investment it must give you a return of 60k. Anything above will be a return on investment. The contribution you (the owner) make to the business in labor is included as the Owner Labor in the Variable and Fixed Costs. This is the cost of basically paying someone else to do what you do in the business. The actual amount you pay yourself does not really matter as any profit is the owners. So when we look at the Results page we see the Operating Surplus (which is the surplus available from the business without the contribution of the owner), and the Owner Cash Flow which is the Operating Surplus plus the value of labor provided by the owner. To determine the return on investment we then deduct the amount the owner gave up to wok in the business and deduct an allowance for depreciation leaving the Business Return. Which is the amount the business investment really provided for the owner. I hope this makes sense, if not let me know.

Question and Answer Item 43 - Browse All Question and Answer Items

Q: I am trying to use this tool for a retail business that has inventory. My questions concern accounting for inventory value as an asset (not to be depreciated) and 'cost of goods' an an adjustment to sales.

A: For non-depreciating items you can handle them as a component of the Other Investment (operating capital). This value is actually adjusted by the Valuation (depending on the return you set). Considering the Inventory when you generate a valuation the Other Investment value should cover the the cost of inventory (stock on hand). If there was no other investment component to consider then the Other Investment would consist of Inventory plus Goodwill. If the Other Investment is less than the inventory then the required return is not achieved.

Question and Answer Item 44 - Browse All Question and Answer Items

Q: I downloaded the Biz val model in April on my desk top and now have replaced it with a lap top and want to transfer the software and all functionality to the lap top. In what way can I do this?

A: You can simply copy your existing Business Valuation files to your Lap top or re-download the software and use your registration details to register the new download directly on your lap top. Download link is https://bizpep.com/businessvaluation.html .

Question and Answer Item 45 - Browse All Question and Answer Items

Q: I tried to print a report and notification of payment required was displayed?

A: To print you must register your software using the Registration Details sent by email after your purchase transaction. Follow the directions provided to register and you will then be able to print.

Question and Answer Item 46 - Browse All Question and Answer Items

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