2013 Business Strategies. All Rights Reserved.

Chapter 11

Instructions for Making Financial Projections and Cash Flow

In business plans for all companies, an entrepreneur needs a rationale for forecasting the
potential revenues and expenses (here P&A and distributor fees). This is not only to convince
your investors that the film will be profitable, but also to put the potential into context for
yourself. The investors want to believe that you are being realistic. For your own knowledge, you
want to make assumptions that are as close to reality as you can. Here you are given fictional
comparative films. The purpose of the exercises is to understand how the process of forecasting
works.

Complex math is not involved. As stated in the book, if you can add, subtract, multiply, and
divide you can do these exercises. You also have to understand ratios. A ratio simply shows you
the relation of one number to another. It is a comparable that shows you whether the trends are
up, down, or static, and guides you to making the forecast. For example, a Box Office of $10
million for a film with a Budget of $5 million indicates that the Box Office (sometimes referred
to as B/O) is twice the Budget, or 200 percent, or 2.0 times the Budget.

On the other hand, common sense is an important element when we get to forecasting. Will
Rogers is famous for saying, Common sense aint so common. I find that filmmakers often let
what they would like to be true get in the way of what is likely to happen. I have had students
look at the ratio of the Domestic Home Video dollars/Box Office dollars go consistently down
from 2008 to 2010 (i.e. 1.6 to 1.3 to 1.1) and then forecast the Domestic Home Video for their
film to be three times the Box Office. If you are wondering why they would do that, then you
have common sense. It is simply practical thinking that makes sense that will prevent you from
making the mistake of insisting so much on what you want to be true that it blinds you from
seeing the bigger picture. It is as much a factor in making a forecast, as all the statistics that I will
have you calculate.



1. The financial tables are in Excel. You can also use Lotus 1-2-3 and convert the tables. It
would be possible to do the entire project by hand; however, you need the spreadsheet
software to see my calculations.

2. Tables 1 and 2 have the comparative film information (source data) to be used with
Worksheets 1 and 2. Table 1 has the worldwide numbers for films for three years. Since these
tables were constructed in 2012, Table 1s data is for 20082010. Generally, it is best to go
back only five years for all the data. Table 2 shows the two most current years, which are
20112012 for our purposes.

Note: When setting up your own Table 2, put an asterisk next to any films that are still in North
American (domestic) distribution and include a footnote on the chart: As of [date], film still in
North American distribution. If you are using a film with extraordinary results, such as
2013 Business Strategies. All Rights Reserved.


The Help, the Box Office is 678.8 (169.7/25.0 =6.78, 6.78 x 100 =678.8) times the Budget. You
can put it on your chart, but do not include it in any calculations. Add an additional footnote
indicating that the film has not been included in any calculations due to its extraordinary
results. Otherwise, you are not only fooling your investors but yourself as well. It is not sensible
to make that films results your forecast, as much as you would like to. This is a good example of
the application of common sense.

3. Using the ratios, we are going to make projections for each revenue category and the Prints
and Advertising (P&A) dollars. For convenience, we will use M as an abbreviation for
millions next to a number, for example, $1.5M instead of $1.5 million.

Step 3A: Download Worksheet 1 to make calculations based on the comparative films in Tables
1 and 2. The worksheet has all the data from Table 1, so that you can extend your calculations on
the same page. Due to the wide variance in the results of individual films, simple averages of
data are not appropriate.

Step 3B: Calculate the Box Office revenues as a percentage of the Budget. For each film, divide
the Box Office by the films Budget. It is best to use decimal places for this calculation. Put the
results in the appropriate column on Worksheet 1. For example, in the first column in Worksheet
1, Box Office/Budget, the result for Cat Surfers is 6.20 for a factor of the B/O times the
Budget.

Step 3C: For each film, divide each of the remaining revenue categories by the box office for that
film.

Step 3D: Divide the P&A by the Budget.

Cat Surfers

Box
Office
Rentals Other Foreign Total Budget P&A
Actual
numbers
(mil.)
12.4 6.2 17.0 18.9 42.1 2.0 2.7
Revenue
divided by
B/O
0.5 1.37 1.52 3.39
B/O and P&A
divided by
Budget
6.2 1.35

4. Since revenue projections should be conservative, it is necessary to eliminate odd
fluctuations so that films of different budgets can be compared to one another without too
much skewing (inaccurate bias) of the data.

Step 4A: Eliminate the films with the highest and lowest ratios. For example, in Box
Office/Budget for 2008, I eliminated the films with the lowest (I Hope They Have Fish in
Heaven: 2.33) and highest (Cat Surfers: 6.20) ratios. It happens that those two films are
2013 Business Strategies. All Rights Reserved.


eliminated in calculating the mean/average ratio for the Box Office; however, they will not
necessarily be the films eliminated in each category.

Step 4B: Add up the remaining box office dollars (in the example of 2008, B/O for Eat, Pray,
Groom, Evil Reptiles, and Twilight Butterflies (b17 +b18 +b20) and divide by the respective
Budget dollars (L17 +L18 +L20). Your answer is 3.60.

Step 4C: Repeat Steps 4A and 4B for Domestic Rentals, Domestic Other, Foreign
Revenue, and Total Revenue, dividing by Box Office instead of by Budget.

Step 4D: Repeat the process in Steps 4A and 4B for P&A, but dividing by Budget as you did
with the Box Office. In each column, remember to eliminate the films with the highest and
lowest ratio.

Note: The real dollars must be used. Do not simply add the percentages from Column 1 and
divide by 3 to find the average. It is incorrect mathematically to average percentages.

5. Download Worksheet 1 Answers to check your own results.

6. Download Worksheet 2.

Using the films in Table 2, divide Box Office by Budget for each film in the list. Since it
generally takes two to three years after initial distribution for all the revenue to come back to the
distributor and you, worldwide data will not be available for most of the films.

Generally, Business Strategies relies on the data from Worksheet 1, as some of the films on
Table2/Worksheet 2 may still be generating box office dollars at the time projections are
calculated. However, Worksheet 2 will show you if there is a major change in the relationship of
the Box Office to the Budget. Note that three films have been excluded from Table 2. Although I
have not included a film with extraordinary results in the worksheet examples, in real life I have
used that footnote with films like Paranormal Activity (Budget $300,000 with Box Office of
$107.9M) and An Inconvenient Truth (Budget of $1.3M and Box Office of $24.1M). Films with
such high multiples skew the Budget much more than any ordinary high result. Do this
sparingly. There is no hard and fast rule. I usually feel that 90 or more times the Budget is my
measure for saying a film had extraordinary results. Dont leave in or take out films on a whim
just to get the result you want.

7. Take a look at the resulting percentages for each year in each category. Is there a trend up or
down over the years? In making projections, you will have to use your best judgment.
Remember that many investors have good judgment. They may know when one film is out of
synch with all the others. You want to be able to show that you have been prudent in your
choice of films.

8. When calculating projections (using Worksheet 3), Business Strategies always creates three
revenue scenarioslow (breakeven), moderate, and high. The results of the
moderate scenario are used for the cash flow in Worksheet 4. The high scenario can start
2013 Business Strategies. All Rights Reserved.


with any Box Office amount, but should be kept reasonable. Once again, common sense
should prevail.

9. U.S. Box Office totals have been included for you in Worksheet 3.

10. The low scenario is given to you. The percentages dont apply when projecting a bottom
line of zero. It can be tricky making the pluses and minuses add back to a zero bottom line.
By the way, I have only had two clients who wanted me to show the investors losing all their
money. Their money-raising activities were unsuccessful.