5 Things Every Business Owner Should Know About Financial Forecasts

5 Things Every Business Owner Should Know About Financial Forecasts

If you think it’s hard to do Financial Forecasts – and lots of people do – what I as a Miami Accountant can tell you is that it’s a whole easier to forecast than it is to run a business without any Financial Forecasts.

So, with that in mind, here are five things that every Business Owner and there should know about financial forecasts.

 1.    Financial Forecasts are for business, not truth, or beauty.

Miami Accountants will tell you the business value of financial forecasts is about making good decisions. The forecast helps you anticipate business trends, allocate your spending right, and manage the flow of money.

The best forecast is one that helped you run the business by setting useful expectations and guiding the way to cash in the bank, business growth, and profitability (in that order) according to Miami Accountant.

What’s most important isn’t what you’d think: it’s not as much about guessing the future correctly as it is about setting up the connections between sales levels, costs, expenses, and cash flow. Financial Forecasts won’t be right – we’re humans, guessing the future, so they never are – but if it identifies the key drivers so you can watch plan vs. actual and fine-tune your budgets, then it’s vital to business health.

Accountant test the value of financial Forecasts, tracking the plan vs. actual results is obviously vital. But look deeper than the top line. Did the Financial Forecasts give you a way to identify where assumptions change? For example, did you see how prices ended up lower or higher than what you thought? Or conversions on the web? Did the forecast give you a way to drill down into the management assumptions?

 2.    Financial Forecasts don’t take an MBA, CPA, or Ph.D.

As an Accounting Firm I’ve been preparing Financial Forecasts for 25 or so years I’ve been doing business, 98 percent of the good forecasts I’ve seen were based on smart people, who know their business, making educated guesses.  The sophisticated mathematical models don’t beat knowing the business and making reasonable estimates. That’s especially true for businesses that have past history so they can use that as a starting point.

The most common problem in this area is the amazingly common assumption that if you don’t have the right Miami Accounting Service you can’t forecast. So what, you have to be a meteorologist to guess the weather? You can also look at the sky, the season of the year, and past patterns – with or without the degree. It’s not econometric modeling or thesis-level research. It’s a collection of interrelated educated guesses.

 3.    Financial Forecasts get old and rot faster than pumpkins.

Miami Accountant will tell you that Financial Forecasts aren’t supposed to last longer than a month or so. Well-managed companies run the forecast against plan vs. actual analysis after the close of each month, and there are always changes to be made. That forecast you did last summer? If you haven’t touched it since then, it means you’re not using forecasting to help you manage the business.

 4.    Financial Forecasts are really about lines, not dots.

I first saw the “lines not dots” phrase from Mark Suster, on his bothsidesofthetable.com blog. A line is changed over time, tracked, so you can see the significance. For example, your sales next month mean virtually nothing until you compare them to last month and the same month last year, and to your plan and budget. Your forecast sets the baselines so you can track all those surprises, and make adjustments to correct things as assumptions change. Having the equivalent of two months’ worth of sales in your accounts receivable balance doesn’t mean anything until you figure out whether that’s more or less than it used to be, and why the change occurred.

 5.    Financial Forecasts are for planning, not accounting.

It’s a natural confusion. Miami Accounting Firms forecasts are normally set up to look almost exactly like accounting statements, so it seems the same. But the difference between planning and accounting is a completely different dimension: accounting starts today and goes backward in time in ever-increasing detail, while planning starts today and goes forward in time in ever-increasing summary and aggregation.

The good news is that it’s easier to do when you understand it’s a collection of educated guesses and simplifying assumptions. For example, you don’t have to guess what assets you’ll need in 2014 to guess that you’re going to spend some estimated amount of money to buy them all. And you don’t have to know what all those assets will be to guess how much money you’ll be able to take, two years from now, in depreciation.

The key is simplifying assumptions. Financial Forecasts has only a few of the most important items, not all the detail in every line. It aggregates and summarizes.