Small business owners: Discover the huge value of financial forecasting
Article by Michael Noon
Banks and financiers commonly require small and medium businesses to provide financial forecasts when reviewing their current debt positions.
Such a request can be met with resistance or enthusiasm. This generally depends on the quality of the business’s accounting and information system.
But preparing a small business financial forecast on an annual basis should be a priority for almost any business owner.
How can a financial forecast benefit your small business?
In our experience, many small business owners do not prepare annual financial forecasts. This may be due to a lack of certainty around their future trading performance and/or not having the necessary in-house skills to prepare the forecast.
Furthermore, when pushed to prepare a financial forecast by their financiers, they will often contact their accountant to assist. This can result in a somewhat rushed and stressful process.
But, for a small business owner, a financial forecast is a great opportunity for the business to derive great value. It’s a chance to review operations ahead of the next 12 months and assess the financial implications of their strategic and operational plans.
How do you create an effective small business financial forecast?
Unfortunately, like all financial reports, the quality of financial forecasts varies widely, depending on how they’re prepared.
As already noted, the business forecasting process is often rushed to meet a particular deadline from a financier or board. This generally results in ill-conceived assumptions being used.
This, in turn, can cause the forecast to feature overly ambitious forecast sales, ever-improving gross profit margins, optimistic credit terms, and a lack of provisioning for probable expenses.
Broadly speaking, preparing a financial forecast each year is more effective.
When a small business commits to doing this, the underlying analysis in preparing the report and the quality of the document produced are often superior to that of an ad hoc forecast enforced on a business by a financier.
Cloud accounting means that it’s never been easier for a small business to prepare an accurate annual financial forecast at a reasonable cost.
You’re now able to work efficiently with your external accountant to produce a report that accurately reflects your expected trading performance and, importantly, is in sync with your strategic initiatives.
What should your financial forecast include?
Your small business financial forecast should include:
- A Profit & Loss statement
- Balance sheet
- Statement of cash flows
- Statement of assumptions
Once your financial forecast is prepared, it is important to regularly review actual business performance against it.
There will always be variances between actual performance and the forecast.
However, great value can be derived from analysing the variances and making necessary adjustments to your business operations mid-year, and resetting elements of the forecast to achieve the desired annual financial outcomes.
If you need assistance in preparing or reviewing your small business financial forecast, please contact me here.