Tending to your business finances is certainly an integral part of your long-term success. However, while you need to develop a strategic approach to tackle your business finances today, it’s just as important that you decide how to predict what the future has in store.
Calculating financial forecasts can guide your actions and optimize your performance, setting the stage for further growth and success. But do you have an effective system in place to make these predictions? Let’s take a closer look and gauge whether you’re all set, or if your financial forecasting could use a bit of work.
Taking Your Business Into Account
Before we get into the specifics of financial forecasting, it’s essential first to evaluate your business’ accounting system. Once you have a keen understanding of how to balance your budget, you will be able to act more decisively on key elements such as revenue and cash flow.
Believe it or not, many business owners do not pay their accounting enough attention. This means their financial moves may be based on outdated data, keeping them from positively affecting their companies as much as they’d like.
If you don’t understand how to manipulate your finances, you’ll never be able to successfully forecast what may happen next. So although we recommend a more in-depth review, here are at least the basic concepts you need to know to gain financial control of your business.
- Accounts payable: Accounts payable involves your business expenses and any outstanding bills you need to pay. While you’re often at the mercy of the market when it comes to your profits, expenses are much more in your control. Choose wisely how you spend your capital, and understand where to make cuts — this just might save your business at some point.
- Accounts receivable: Bringing the money you earn into your business is much more involved than it initially seems. You need an invoicing process in place to ensure payment is collected promptly. Be smart about who you get into business with and the systems you use to ensure you get what’s owed to you for services rendered.
- Reporting: The reports you run regarding your finances — from balance sheets to cash flow statements — will reveal a ton about the current state of your company and how you can improve. In particular, you’ll need to not only maintain a close eye on how much money you have but also key figures like assets and liabilities.
- Reconciliation: From time to time, you need to do a thorough analysis of your transactions. Check that all payments have gone through and that you have no lingering unpaid invoices. Hopefully, everything is moving along if you set it all up correctly, but it’s always a good idea to check your work.
Financial Forecasting to Anticipate Growth
Though it’s a common goal for business owners, growth can be an unpredictable beast. No matter how much you think you’ve invested in your company’s future, you might still run into trouble you never anticipated — which can cause financial ruin if you aren’t careful.
Forecasting your revenue numbers is invaluable in shaping your decision-making process and leading your business down the right path. Here’s how to get started:
- Analyze your data: Start by calculating all financial and sales data from the current and previous period to determine your average expenses and income. If your business has a significant history, it will be much easier to anticipate what comes next. But if you’re a new business, begin by breaking down your expenses and developing a wide swath of projections.
- Look at the big picture: As you begin developing your growth forecast, beware of a potential pitfall: Don’t forget to consider the market around you. Even if your business is doing everything exactly right, you may face limitations simply because of the current financial environment. Think of both your industry as a whole, but also how tough your immediate competitors are.
- Consider the possibilities: With forecasting, you can often offset a range of negative possibilities by thinking through a number of scenarios that your business might encounter. Put aside your confidence in your product for a moment, and develop both hopeful and conservative projections for how your finances may be affected in the immediate and long-term future.
- Decide which system works for you: Once you have figures to work with, you can explore various forecasting methods to decide which one works best for your business. Generally, you have two types of models to choose from. Be open to trying both (or a combination of the two) to figure out which system has the best results. For now, let’s discuss the two primary forms in a bit more detail:
- Quantitative: This model is probably what you think of when you picture financial data. You’ll compare and contrast numbers such as revenue, expenses and profit margins to calculate which elements of your budget offer the best return on investment, and consider how pricing or any adjustments will impact the overall financial stability of your company.
- Qualitative: Rather than just relying on numerical data, this more conceptual model takes into account the human factor, and considers investments that might sharpen your company’s image, boost morale or maximize customer retention without directly affecting revenue. However, this approach is most effective when applied to short-term projections.
- Check your work: Regardless of which forecasting system you decide to stick with, remember to check your numbers regularly to ensure they are updated with what your business, your industry, and the market are currently up to. If you neglect to revisit your forecast monthly, you could be operating under faulty information and put your entire operation at serious risk.
Going With the (Cash) Flow
Forecasting your revenue — and any subsequent growth — may be at the forefront of your focus. But it’s not the only aspect of your business finances you should be looking to predict. Your company’s cash flow is an incredibly integral metric to your future success, so don’t overlook it. Here’s how to prepare your business to build a cash flow forecast you can turn to anytime.
Find Your Data
Before you’re ready to forecast, you need to gather detailed data on your company’s performance. If you lack a long history, don’t worry: You’d be surprised how much you can learn from a fairly limited amount of information. You’re primarily looking for total sales and revenue (broken down by multiple metrics, including time periods and revenue types), expenses, marketing ROI and any other analytics you can muster.
Note any trends you can find, and look for correlations you can leverage going forward — you’ll want to apply these conclusions to shape your subsequent growth plans. The approaches you have in place to boost sales might stem from what you learn in this data collection phase, and you’ll need to incorporate any anticipated investments you’re planning to make to open the doors for growth.
As with revenue forecasting, you’ll need to look outside your company to truly gauge how your cash flow might be affected. Only with this level of research can you gain the insight you’ll need to make accurate decisions about how your industry and your market will impact your business. Keeping up with relevant news is a start, but you’ll also need to consult other market research reports as well as updates from your closest competitors and those whose success you admire.
Prepare Your Forecast
Once you have the data you need, the time has come to formulate your cash flow forecast. With your historical data serving as a baseline (and accounting for any noted trends in your analytics), see if you can find any connection between your marketing events and your numbers.
Can you see how your marketing efforts affected your revenue? With this knowledge, you can predict how your upcoming marketing might impact product demand and explore how any other changes might play into your business’ future.
This bigger picture will influence what investments make sense (e.g., staff additions, product launches) and allow you to build a cash flow forecast. Perhaps your takeaway will be to stock up on more cash to safeguard your business against any negative effects — but you might also identify an opportunity you otherwise would have missed.
We’ve given you the tools to supercharge your accounting system and begin building a financial forecast that applies to both your revenue growth and your cash flow. But none of that knowledge will translate into higher profits and greater opportunities if you don’t take action.
In our experience, the best time to make swift updates to your business is as soon as possible. This may take a bit of time out of your immediate schedule, but the long-term effects of accurate financial forecasts can be game-changing. If you get started now (and adjust your approach as necessary), there’s no telling where you may be able to take your business.
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