Financial forecasting is an important aspect of your business. It is a way of predicting how your company will perform in the future. Forecasting goes hand-in-hand with a budget and is vital to the success of your business. Budgeting determines where the company wants to go and forecasting tells if the company will be able to go in that direction. Creating a financial forecast can also assist with obtaining financing for projects or purchases. Potential investors and lenders will want to know you have a stable future.
Financial forecasting starts with three important reports:
- Cash Flow statement - This will depict how much money comes in and how much goes out.
- Income statement - Otherwise known as a Profit & Loss Statement, this will show how much money you make after expenses are subtracted.
- Balance sheet - Sometimes referred to as a Financial Statement, your Balance Sheet will illustrate your assets and liabilities.
The cash flow statement can be a major tool for financial forecasting. Review the current expenses and determine if any of those are going to increase. There are always areas that you will see an increase so bear that in mind. Also, you can count on some items becoming more expensive every year such as fuel, auto and liability insurance. If you have vehicles that are aging, you should consider costs for repairs and possibly, replacement. This can be true for many electronic devices such as cell phones and computers.
While some expenses may increase, others may stay the same or decrease. If you know your car payment will be the same for the next 5 years, you have a fixed cost. However, you may have a payment on a credit card that is going down as you pay off a part of the balance.
At this point, you can make a projection of your expenses for the next two to four years. You will want to construct a scenario for regular, best, and worst, thus creating a cushion that will eliminate any surprises. It is wise to make a note of how you arrived at the numbers.
Now that you have a firm grasp on your forecasted expenses, you can make a wise assessment about your sales. If you have ideas to increase sales, make sure you include the expenses to go with the increase—this may be additional employees or office space.
Now you have your forecasted expenses and sales. There are some additional items that need to be considered as this is a more complicated task. At this point, you may want to hire a professional to help you especially if your business has special circumstances such as inventory or cost of goods expenses. When it comes to your business, it is a good idea to consult with someone who is more knowledgeable.
Chandler & Knowles, CPAs, wants to help. In business since 1996, they have the experience and mastery of any accounting or tax situation you may have. If you are looking for assistance to figure out your financial forecasting, contact our financial planning team today.