Joseph F. Fragnoli https://jfragnolicpa.com 5m 1,294
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Perform a Detailed Financial Forecast
In terms of managing a business properly, there are a lot of factors to consider, many of those falling into a monetary category. These factors are essential in knowing where the business’ current standing is depending on what category is being evaluated. One of the best tools that a business can utilize to evaluate its standing and where it needs to go to achieve its financial objectives and goals is the financial forecast.
Business Dictionary defines financial forecast as “[a] prediction concerning future business conditions that are likely to affect a company, organization, or country.” Additionally, a financial forecast “identifies trends in external and internal historical data, and projects those trends in order to provide decision-makers with information about what the financial status of the company is likely to be at some point in the future.”
Planning for sales declines should be taken into consideration. For example, your business may experience a decrease in sales in the rainy season, and solutions should be made to overcome these obstacles e.g. start a more rigorous marketing campaign before the rainy season starts, or offset the season’s/quarter’s sales target to next season/quarter.
To perform projections and forecasts, various financial statements should be accessed – including past records, cash flow, and fund-flow behavior, the applications of financial ratios, etc. together with considering the economic condition of the industry which the business operates.
Learn more about the impact of financial forecasting, how can help you make a better decision for your business, how to familiarize yourself with its fundamentals, and the preparations you need with this infographic:
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Make Better Business decisions
Perform a detailed Financial forecast
One of the best tools a business can utilize to know where it currently stands and where it needs to go to achieve its Financial objectives and goals is the financial forecast.
What is the financial forecast?
A financial forecast is a fiscal management tool that presents a systematic projection of expected actions you are Finance operation should take. A financial forecast is like plotting the route you need to take to arrive at your destination.
Planning for sales declines should be taken into consideration.
For example, your business may experience a decrease in sales in the rainy season, and solutions should be made to overcome these obstacles.
To perform projections and forecast, various financial statements should be accessed – including past records, cash flow, and fund flow Behavior, the applications of financial ratios, Etc together with considering the economic condition of the industry which the business operates.
The financial forecast is an aspect of a larger planning process within an organization. It has an immense impact on the overall decision making process. Such advantages of financial forecasting are:
- Validates the financial viability of a new business venture i.E. Allowing you to create a model that proves how the business my game significantly if certain strategies, actions, and plans are performed.
- Allows a business to measure its actual Financial operation against the forecast financial plan, and adjust where necessary.
- Provides better control over the business cash flow.
- Provides a benchmark where performance can be measured against with.
- Spot any potential Financial Risk and shortfalls to avoid financial trouble.
- Helps explain the requirement of additional funds for the business.
- Helps prove a business capacity to repay a loan to its investor, suppliers, and Banks.
Now that you understand how Financial forecasting can help you make a better decision for your business, it’s now time to familiarize yourself with its fundamentals.
Financial forecasting includes the preparation of the following:
Pro-forma income statement
- A projection of expected Revenue, cost, profits, and other Financial items.
Pro-forma balance sheet
- That depends on the information available in the pro-forma income statement.
- An estimate of how much cash will be required during a specific period In the future.
Here are a few tips that help you ensure that you creates an accurate Financial forecast:
1. USE DIFFERENT SCENARIOS
To make your forecast more realistic, you should use at least two different scenarios – one optimistic and another cautious.
Having a forecast based on worst case scenario can really be helpful, especially if your business is operating in a hostile environment changing government regulations, new competition, or even stale economic growth.
Doing so also helps you maintain flexibility and strategic planning, allowing you to react to obstacles much faster.
2. START WITH EXPENSES
It’s easier to estimate your expenses than your revenue. So, to make forecasting a lot easier, start building your forecast model by outlining your fixed expenses such as rent, utilities, salaries, taxes, insurance, etc.
Then identify the variable cost that could fluctuate with your Revenue e.g. cost of sales.
Finally, estimate the expenses which you have the most control i.e. cost you can out without much impact on your operations when your business is rough, or were you can invest if you exceed your financial expectations.
3. IDENTIFY YOUR ASSUMPTIONS
Do to make assumptions that are outside of your control.
To manage these assumptions and avoid bias, list down all the assumptions you can think of that can affect your financial position in the future, such as how the market will grow or Shrink, changes in the number of competitors, and technological impacts that may impact your business.
4. BENCHMARK RESULTS TO INDUSTRY STANDARDS
To assess The credibility of your forecast, you can compare it against the results from within your industry. You paragraph examples of information that you should consider are financial ratios such as gross margin, return on equity, return on assets, and total headcount for customers.
However, finding these data can be a challenge. To help you out, here are some resources where you can get the data you need:
- The US Census
If you’re forecast are in line with industry benchmarks, we would say that’s a safe forecast. But, there are cases where your business may measure more favorably in comparison to the benchmarks.
If you run your business more efficiently than the average business in your industry, or you have certain proprietary systems or processes not available or used by others in your industry, that may make your business much more competitive.
5. REVIEW YOUR FORECAST REGULARLY
Finally, make sure to regularly measure your actual operating results against your forecast. Doing so will keep your forecast up-to-date, allowing you to make more informed decisions.
It will also hone your skill on forecasting cost and revenues of your business, thus making you be more confident about making a future Financial forecast for your business.
Preparing these financial statements and cash budgets for the financial forecast is seldom enjoyed by many business owner – especially those who owns small and medium-sized firms.
That’s why many SMBs these days are turning to accounting experts to create a Quality Financial forecast on behalf of their company, so they can more focus on running their business.
There’s a lot more to learn about financial forecasting. If you want to know how Joseph F. Fragnoli, CPA, PC. can provide your business with a quality and accurate financial forecast, please call us at +(615) 678-4751 or send an email to [email protected]
About the Author
Joseph F. Fragnoli is a Certified Public Accountant licensed in both Tennessee and California. Joseph has a passion for helping entrepreneurs build the business of their dreams and help businesses and individuals strategically plan to minimize their respective income taxes and keep as much of their hard-earned money as is legally possible. His strong belief is that money in the hand of hard working people is far better utilized than money in the hand of the government. Visit his website at jfragnolicpa.com.