The 2 problems that we solve

We have one answer, that can handle two questions:

CashFlow Forecast
Investment Evaluation (calculation of the profitability of a proposed investment)

The answer that our software tool provides

We calculate and give you, the company’s “FUTURE ACCOUNTING BOOKS“. Thru them, you can view, audit and verify, the result, as well as, every step of the calculation.

The basis of our calculation method, and the format of the answer, are already known to you, under the name “ACCOUNTING 101“.

CashFlow Forecast

We need to determine the need for future working capital, establish future Bank loan balances, and calculate “Interest Expense” and “Interest Income”. Examples are:

Let’s say that we are in Feb 2027, and we want to see, what our Bank balance will look like, from Feb 2027 until Dec 2027 (a horizon of today plus 10 months)
We are in Sep 2027, and we are working on the Annual Budget of 2028. We want to see, what our Bank balance will look like, from Sep 2027 until Dec 2028 (a horizon of today plus 15 months). The problem is more complicated, not because we have more months, but because we have a new Fiscal Year, and so, we must calculate several year-end values for FY 2027, like “Dividends Payable”, “Income Tax Payable”, “Advance Payment for Income Tax of Next FY” etc.

Investment Evaluation (calculation of the profitability of a proposed investment)

We evaluate the possibility to

create a new company from scratch.
in an existing company, to add a new sales location.
in an existing company, to add a new factory.
in an existing factory, to add a new production line.
in an existing production line, to add a new product.
etc.

Plus, there are other questions that are associated with that problem (Break-Even point, Sensitivity Analysis, What-if scenarios etc.).

What we must do, before the calculation

In both scenarios, we begin with the collection of values, that are expected to happen. Let’s call them “FORECASTED VALUES“. Examples are:

Sales
Salaries
Ads
Travel Expenses
Rent
Interest Rates
FX Rates
Etc.

On their basis, we must calculate other values, that are dependent on them. Let’s call them “CALCULATED VALUES“. Those should NEVER be treated as a “matter of forecast”, but only as a “product of calculation”. Examples are:

Interest Expense
Interest Income
Purchases of merchandise, raw materials, packaging materials etc.
Direct labour expenses
Payment of VAT
Payment of Income Tax, and advance payment for next year’s Income Tax
Payment of Dividends
Almost all kinds of Taxes
Etc.

What is the C2BII approach and calculation method

We are creating an automated simulation of the company’s “FUTURE ACCOUNTING BOOKS“.

First, we turn the “FORECASTED VALUES” that you have supplied (Sales, Salaries, Ads etc.) into Accounting entries (Accounts that are debited and Accounts that are credited), and we enter them into the company’s “Future Accounting Books”.

Then, we calculate the relevant “CALCULATED VALUES” (Interest Expense, Interest Income, Purchases of Merchandise, Purchases of Raw Materials, Payment of VAT, Profit & Loss, Payment of Income Tax etc.) and we also enter them into the company’s “Future Accounting Books”, as new Accounting entries.

As a starting point, most of the things that you will be required to perform, are based on the Accounting know-how, that you already have and use (Accounting 101 – Assets and Liabilities – Debit and Credit).

What you will receive (or in other words, the “Final Deliverable”), is CLASSIC ACCOUNTING BOOKS, that you already know how to read, and how to audit and verify them (thru a method known as “Auditing 101”). For example, the “Future Ledger of the Bank Account”, is obviously the “CashFlow Forecast”. The “Profit & Loss” will be found in exactly the same spot that you already see it, in your company’s actual Accounting books. The steps of the method to calculate it, are exactly the same ones that you are already using, in your company’s actual Accounting books.

C2BII is not a “Black Box” operation

It is an absolutely transparent calculation method, because (essentially) it is an implementation of “Accounting 101”. Every single number produced, can be backtracked to the “Forecasted Value” that gave birth to it, thru a chain of Accounting entries (just like in your company’s ERP). The method to audit and verify every single number that we will give you, is already known, since it is being taught in Universities, under the name “Auditing 101”.

So, bottom line:

The theory might sound simple. However, the implementation will need to structure the work in a specific manner and framework, that is relevant to the needs of working with forecasted data, be 100% compatible with “Accounting 101” and “Auditing 101”, and still look and feel easy and practical. That can be found in our US Patents.

If you are curious (and you should be) about how all this works in practice, then for a first taste and technical description of the new calculation method and the software tool that implements it, please first read the articles in the blog. Do not accept our claims at face value. Read the more detailed descriptions in our blog, in order to examine and understand the workings and the technical aspects of the calculation method, and its verifiability.

Then, please contact us for a demo.

What Finance professionals need

When we say that “Forecasted Sales = 10 mil USD”, we know that the actual final sales figure, is not going to be “exactly 10 mil USD”. The forecasting process (by definition) has a built-in inaccuracy. Generally speaking, let’s call it a ±Α% built-in inaccuracy.

Now, when we receive a “result number” that was produced thru a calculation method, the first step is always to put it thru scrutiny and verification. With the current situation in the “state-of-the-art”, you will most likely come across dozens of incidents, like the following:
Question 1: How did you calculate this? Answer 1: About the size of ….
Question 2: How did you calculate that? Answer 2: An amount close to ….
Question 3: How did you calculate the other thing? Answer 3: In the region of ….
Question 4: How did you calculate the next thing? Answer 4: That’s peanuts. We omitted that calculation.
Question 5: How did you calculate the other thing? Answer 5: That’s small potatoes too. We didn’t do that calculation either.

If the calculation method has built-in inaccuracies (and the current spreadsheet-implemented way of working, has many – let’s call it a ±B% inaccuracy), we end up with a result whose inaccuracy is ±(Α*B)% .

The above, is a pseudo mathematical expression, and its usage is meaningful, only for the purpose of communicating and visualizing the concept that, one level of inaccuracy, gets piled on top of another, in order to create an even greater level of inaccuracy and uncertainty. Mathematically inclined readers, are encouraged to refrain from contemplating the above pseudo math implications, and focus on the business aspect/thinking of the situation.

What we need, is a calculation method, whose inaccuracy is ZERO (B=0).

https://www.ceo-on-financial-analysis.com/index.php/2010/09/08/sensitivity-analysis-how-the-right-idea-can-get-spoiled-by-the-problems-of-the-implementation/

Actually, such a calculation method, has existed for many centuries. However, its implementation in forecast mode (until yesterday) was neither easy, nor practical or feasible.

In University, we were taught that method, under the name “Accounting 101“. Everyone will agree that “Sales” means that we Debit this account, and we Credit that account. That is a common language that we all know/use, and we accept it as accurate and trustworthy.

At a first casual glance, one might be tempted to think that, since “Accounting 101” is so successfully being implemented, thru the numerous ERPs that exist, it would be a good idea to use one of them, in order to create the company’s future Accounting Books. Just try it, and in five minutes (or less) you will discover that (on a practical level) ERPs cannot work in forecast mode, because there are too many calculation incompatibilities, between processing actual data, versus processing forecasted data. For more on that, please read the following article in our blog.

Our two aims

OUR FIRST AIM, IS TO DIMINISH THE ±B% (THE INACCURACY OF THE CALCULATION METHOD).

That is being achieved, by implementing the most accurate and unassailable calculation method known (“Accounting 101”). Of course, that means that the user is expected to not forget to factor-in some tax, or anything like that. Knowledge about the legal and the business environment that you are operating in, is expected of the user.

We all agree that the ±B% part of the inaccuracy of “Accounting 101” is ZERO. However, reasonable attention, as well as knowledge of one’s trade (i.e. Financial concepts and rules), is still expected on the part of the user.

That is the reason that we say “Diminish the ±B%”, and not claim outright, that we make it go away.

OUR SECOND AIM, IS TO GIVE YOU TOOLS, TO ACCURATELY ADDRESS THE ±Α% (THE INACCURACY OF THE FORECASTS).

You will probably want to see what the effect will be, on profitability, or on Cash Flow, or on any other value that you are examining:

If we make only 92% of our sales forecast
If the days of credit to customers, turn out to be 19 days more, than what we anticipated
If the price of raw materials does this
If interest rates do that
If the “EUR to USD” rate does the other thing
If …. If …. If ….

In order to address the above “What-if” scenarios (which essentially are the ±Α% part of the inaccuracy), we have tools (“Variation Factors”, Exceptions, “Fixed Dates”, “Rules to Find Date” etc.) to easily model those changes, and quickly and accurately see the future impact that they will create.

The previous “State-of-the-Art” in calculation methods

Fact 1:

If we go to 100 companies, and ask to see, how 100 different CFOs (in other words, experienced high level professionals, with MBAs or ACCAs, or Master’s in Finance, or PhDs), we will receive 100 different spreadsheets, that implement 100 different calculation methods, that arrive at 100 different results, for the same problem, with the same list of assumptions.

Fact 2:

If we go to Wikipedia (with over 7.2 mil English articles), and search for an article, that lists the steps of a calculation method to solve those two problems, we will see that there is no such article. Instead, there are a handful of small articles, that describe some vague and high-level guidelines. But even as such, if you look closely, half of their contents cannot stand up to scrutiny. And a few of those vague and high-level guidelines, cannot even pass the laugh test.

From the above facts, it is easy to deduce that, currently, the biggest problem with the “State-of-the-Art”, is that:

There is no “State-of-the-Art”

Or, to put it in other words, there is no COMMONLY ACCEPTED CALCULATION METHOD, for Finance professionals to use and implement.

In order to make sure that we are on the same page, when we read the above statement, lets have a clear understanding, of what should be described as a “CALCULATION METHOD”. That can only be, a listing of actions that must be performed, that says:

Step 1 – Do this
Step 2 – Do that
…
Step 25 – Do the other thing
After you perform the above actions, then the final result, is to be found at such and such place.

As you can easily understand, simply listing some general guidelines and directions, does not meet the criteria of the above definition. So, situations like the “3 statements model” cannot be considered as a calculation method, due to vagueness, as well as lack of uniformity of implementation and result.

On the other hand, if we take a bunch of invoices, and we give them to 100 different accountants, we have a reasonable expectation to receive from all of them, the same accounting entries and the same “Profit & Loss” calculation. That happens, because they all use the same COMMONLY ACCEPTED CALCULATION METHOD (“Accounting 101”).

Who is to be blamed for that?

This whole situation, reminds of what took place 150 years ago in Medicine, when there were no antibiotics. Patients visited their doctors, in hopes of getting well, but instead, they died.

Were doctors to be blamed for that high mortality rate? No. The blame rested with the “State-of-the-Art”, which had not provided the appropriate tool (antibiotics) to the professionals of the field.

Today, Finance professionals need the appropriate tool to do their job. They need a COMMONLY ACCEPTED CALCULATION METHOD, whose result can stand up to SCRUTINY and VERIFICATION.

What is being implemented by others

Even though the number of problems and inaccuracies, in the way that Finance professionals are approaching those two problems, are legion, at the end of the day, those two tasks must be done. Someone, somehow, must produce some kind of result.

You probably know that the “3 statement model” is currently considered, as the top method. You will notice however, that many numbers that should be “CALCULATED VALUES”, in the “3 statement model” are being handled as “FORECASTED VALUES”. How comfortable does that make you feel? And that is only the starting point. A simple internet search, will reveal that the list of known problems and issues with the “3 statement model” is legion.

Let’s have a clear understanding, about what can be called a “RESULT OF A CALCULATION“. Only a number that can pass scrutiny and verification, can be called a “RESULT OF A CALCULATION“. If it cannot, in the best case scenario, it is an “APPROXIMATION“, and in the worst case scenario, it is a “JOKE“.

What is being implemented (thru spreadsheet), is a list (a.k.a. the “single entry“ method). For more on that, please read the following article in our blog.