One of the biggest hurdles to overcome as a business owner is a concept of “working on” your business versus “working in” your business. The former will set you up for continued success as a business owner while the latter will set you up with a job (and prison) of your own creation. As an entrepreneur, it’s your responsibility to identify new opportunities and lead your business to a brighter future. This can be difficult when you are busy with day-to-day tasks or when you’re unfamiliar with the financial side of entrepreneurship.
The good news is you don’t have to be in the dark any longer, and you don’t need an MBA to take control of your business finances. There are a few essential tasks that can help you create a stronger, more profitable, more resilient business. One of these tasks is financial forecasting for small businesses, and you’re about to get a crash course. For more tips on how to better manage your business finances, take a look at this reference.
Need help with managing your business expenses?
Contact Larry L. Bertsch, CPA & Associates, LLP today!
What is financial forecasting?
Before you can learn how to financial forecast, it’s important to know exactly what it is.
Financial forecasting refers to the process of looking at data from the past and the present, examining marketplace trends, and then using this information to predict the organization’s financial performance in the future.
This is sometimes broken down into three types of forecasting:
- Top-down forecasting – Looks at high-level, big-picture data first and then works down toward specifics on revenue.
- Bottom-up forecasting – Examines specific customers and offerings and then expands to look at revenue.
- Hybrid – This takes the best aspects of both top-down and bottom-up to give a clearer picture of the financial situation.
Financial forecasting utilizes pro forma statements (financial statements that use hypothetical data to predict the future) as data points. These pro forma statements include (but may not be limited to)
- the income statement
- the cash flow statement
- the balance sheet
While small business forecasting can give you a bird’s eye view of your future financial situation, it can also be applied to various parts of your business including your cash flow, sales, operational expenses, start-up and expansion costs, etc.
Financial forecasting vs budgeting
Financial forecasting and budgeting go hand-in-hand, but they are not the same thing. A financial forecast is an educated prediction about the financial future of your business. Budgeting, on the other hand, is something you will do with the information you’ve gathered during your forecast. Budgeting is a plan of how you will spend your money based on your predicted financial future and how you expect your finances to look over the next year.
For example, with the financial forecast done, you may find you’ll have an extra $10k to work with for the following year. You may increase your ad spend in your future budget or put the money into some physical improvements for your workspace or storefront. If you find you’ll have less money going forward, you may need to reallocate money from a less essential expense to another, more critical line item.
Top 3 benefits of financial forecasting
While the last thing you want to do is add another task to your plate, creating a financial forecast has a number of benefits for a business and will provide a hefty return on your energy investment. These include:
It’s a roadmap for your business’s financial future.
The pandemic threw just about every business owner for a loop. While it may have been impossible to plan for that situation, there are more predictable challenges that can pop up for any business. Depending on your industry and offerings, cash flow could vary throughout the year. Will you have enough cash to pay your employees, subcontractors, and vendors? Will you be able to buy the supplies you need to fulfill orders? Small business forecasting can help you understand when money is likely to come in, how much is going out each month, and how you can limit last-minute scrambles for capital throughout the year.
What would you do in the event of another shutdown, or more likely, with the ebbs and flows of the market? Create a roadmap and lessen the number of sleepless nights.
It provides insight for more informed business decisions.
While no business owner has a crystal ball, forecasting will help you identify potential pitfalls that may be around the corner, and create an emergency plan in case they happen. You’ll also learn to “read” the future (so you’re not doomed to repeat the past) by examining past/existing clients and comparing them to potential clients.
Considering hiring new employees or renting a larger space for your operations? Take a look at your financial forecast before you make any big decisions. When you understand what could be coming down the pike, you’ll make more educated decisions and lessen the chance of putting your company and your future in jeopardy.
It can prevent surprises at tax time.
The last thing you want to see is a huge, unexpected tax bill. Since your taxes are based on your income and your expenses, it makes sense that having a solid idea regarding your projected financials and estimated taxes due would allow you to plan better.
Don’t get caught off guard. Understand what your tax liability will be early on in the year so you can budget accordingly.
Want to set your business up for a brighter financial future? A licensed CPA can help!
Now that you understand financial forecasting and what it can do for your business, you don’t have to go it alone. An experienced CPA has created thousands of financial forecasts throughout their career and can do the same for you. Larry L. Bertsch, CPA & Associates creates financial forecasts for small businesses in Las Vegas. Small businesses just like yours. He is available to help you make sense of your business and create a brighter, more profitable future. To learn more about getting the help your business needs, contact us today.