Article Submitted by: Lance Cody-Valdez
You have big dreams for your business and want to make a healthy profit, but you'll struggle without realistic budgets and financial forecasts. Such planning helps you weather market fluctuations and unexpected challenges.
At iMar Learning Solutions, we’re dedicated to helping students have a better understanding of financial literacy, but we also understand how businesses could use a boost too. We offer the following tips to improve your forecasting.
The Importance of Financial Forecasts
Your projection can lay the foundation for your company's expansion. The document outlines estimates for income and expenses. With a clear understanding of the numbers, you minimize waste and maximize resources. Use your financial projections to make excellent management decisions.
Precise forecasts save you from tax troubles. You better estimate your gross income and can set aside the correct amount for end-of-the-year payments. Don't forget to file an annual report if your state requires it. Neglecting to file the report can lead to fees or loss of good standing. Lack of compliance could mean you lose your business license and the right to run your operation in the state.
Wise investors always ask to see financial projections before committing funds to your company. The historical performance gives potential shareholders an idea of the possible return on investment. Likewise, creditors review your economic forecasts with your business plan to determine your creditworthiness for a loan, which affects your terms and rates.
Software That Makes Things Easier
You don't have to be a math wizard to create comprehensive projections. Businesses should find analytical tools to compile their revenue data into an intelligible dashboard for understanding the numbers. The information can clarify vital factors, such as customer retention, churn, and loyalty.
Using a customer data platform to help with financial forecasting can also be beneficial. It can provide the user with better visibility into their customers’ spending habits, which can inform strategic decisions about where to focus marketing efforts. Furthermore, solutions related to CDP - customer data platform provide more accurate projections of company growth, revenue and profitability by providing more data points to analyze. A CDP also typically includes predictive analytics capabilities that enable users to quickly identify trends and develop more reliable forecasts.
Documents and Metrics That Help You Create a Forecast
Your profit and loss statement, cash flow statement, and balance sheet give you the necessary data for sound projections. The P&L shares an overview of your revenues, expenses, and net income. The cash flow statement details the outflow and inflow of all capital. Understanding cash flow is crucial since reports show that most defunct small businesses can attribute failure to a lack of cash flow. Your balance sheet is a financial portrait of your net worth showing assets on one side and liabilities on the other.
Your financial spreadsheet needs these additional metrics:
Amortization and depreciation
Cost of goods sold
Your analytical software or accounting team can handle much of the heavy lifting in determining these figures.
Mistakes To Avoid When Forecasting
With all the calculations and documentation, it may be easy to misgauge things. Use sound judgment to make reasonable forecasts. For example, many businesses have seasonal fluctuations. Don't expect sales or expenses to continue on a steady trajectory based on a few months of data. Review industry specifics to find where lulls and spikes in activity occur throughout the year.
Never rely solely on your intuition. All of your decisions and predictions should have a foundation in facts. Every projected growth or dip needs a well-reasoned explanation. You should account for risk factors and errors common to your industry and market segment. Customers in different locales do not respond the same to products and marketing, and compliance requirements in overseas markets can affect your operations.
Consider Accounting Courses
Taking online accounting courses or going back to school for an accounting degree can be a great way to get a better handle on your business's finances. With an online counting degree, you have a more flexible schedule so you can learn at your own pace while continuing to run your business. Going back to school can provide more comprehensive instruction and also give you the opportunity to network with other professionals in the field. Learning proper accounting principles can be invaluable when managing your business's finances and will give you the confidence and knowledge needed for sound decision-making.
Forecast for Growth
You're never too small to create financial projections. A solid strategy helps you dodge significant problems and take advantage of fleeting opportunities. Plus, you will need these numbers when you create your state-required annual report. Although it takes time to compile these forecasts, you will see the benefit as your business grows. Because when you use well-crafted financial forecasts, you see opportunities to grow a successful business.