Your business’s financial forecasts are crucial tools in your quest for success. But, why? And, what do you need to create them? In today’s Penmark business knowledge blog, we will take a look at a few of the finer points of creating and maintaining financial projections.
What Is A Financial Forecast?
A financial forecast is essentially a projection of your potential incoming and outgoing cash for a specific time period. This might be three months, six months, one year, or 10 years. The further out you get, the less accurate your estimations are likely to be. However, financial forecasting remains a valuable tool for helping you track your company’s progress and make changes that will perpetuate your success.
Knowledge Base
Before we get into how to forecast, it’s important that you evaluate yourself to ensure that you have the skills and knowledge to do so. Numbers are definitely not everyone’s forte, but with a bit of research and education, they can be. Even if you already have a degree in business, if you plan to handle your company’s own books, it might make sense to get an online degree in accounting, too. Not only will this help with financial projecting but going back to school for accounting will also help you sharpen your business skills. Among other skills, you will learn to manage the inner workings of your company’s finances, such as budgeting and balance sheets, that will help you run a better business.
Getting Started
Financial forecasting is an important step in creating your business plan, which is necessary if you plan on taking on investors or simply need to understand your competition. Follow these steps to get started:
- Gather your statements. Many business owners aren’t quite sure which business statements they need when trying to get a handle on their finances. Fortunately, you don’t have to have every single report that your accounting or enterprise software can generate. The four you do need are your balance sheet, cash flow, equity, and income statement. According to LegalZoom, your balance sheet is essentially a statement of your net worth, your income statement is a snapshot of your performance, cash flow shows changes in your financial position, and an equity statement will help you identify shareholder positions so you can all decide how to utilize business capital and earnings.
- Project spending and sales for the next 12 months. When you have your statements and documents together, you can then perform a sales trend analysis. This is the process of looking back at what you’ve made per product this year versus last year. You know your business, so look for patterns that might indicate steady future growth, and then conservatively factor this into your projections, minus expenditures, for the next year.
- Look ahead at your company’s financial needs. As you dive deeper and deeper into sales, it makes sense to look ahead to see what types of spending you’ll need to do to perpetuate future growth. Do you need more equipment? Should you hire additional staff? Is your current building large enough to accommodate additional inventory? You must answer these questions and others and decide if you will have enough cash on hand or if you will need to borrow money to make it happen.
- Monitor your business. Finally, know that your financial projections don’t always come to fruition as planned. Everything from completing projects on time to unexpected expenses, such as having to hire a new staff member, can change your financial outlook. Keep an eye on your business so that you can be proactive instead of reactive. If you haven’t already, plan on investing in accounting and project management software. Both of these can help you keep up with your cash flow and manage your time.
Ultimately, your ability to make accurate and, more importantly, realistic financial decisions for your business depends not on what you make today, but your profitability moving forward. By creating a financial forecast, you put yourself in a better position to do just that. As a result, your business will have a stronger financial footing, you will always know when and how your money is working for you.
If you’re still struggling to look at your finances, it may be time to hire a CPA. We discuss this in a recent blog.