When you’re running a business at a fast and furious pace like most small business owners do, it’s more likely you’re focusing on decisions that affect today or evaluating ones that were made yesterday. The last thing you want to do is slow down and think about three or six months from now. The key to predictability is consistently and effectively looking ahead and measuring results based on what was expected. Forecasting has widespread benefits that over time can yield a more profitable product or service.
Ensure that your sales team is pricing your product or service accurately. This is where the viability of your company all begins. If pricing is not modeled after the nuts and bolts of the operation and the operation is not executing based on the financial parameters of the contract you’re relying on luck and gut instinct for success. Many businesses celebrate new business but don’t take the time to turn the contract into a forecast and measure results against it. This can lead to inaccurate pricing in the future and increased risk as the contract is performed.
How Accurate are the Financial Statements?
Utilizing a forecast is one of the best ways to evaluate the accuracy of the monthly financial statements. Evaluating what you thought you were going to do against what you did will not only help you manage the business but will vet out accounting discrepancies and alert your sales force to pricing nuances they may have missed.
Developing a forecast doesn’t mean you have to run out and buy new accounting software or build massive and complex spreadsheets. It is an iterative process that can be improved upon as you go. Start by looking at the company as a whole or by main division or silos of work. Another way to ease into forecasting is by projecting all the revenue and expenses directly related to your product or service only and saving typical SG&A expenses for later.
When you compare your actual results to the forecast for the first time pose as many questions as you can to a variety of disciplines. This means bringing in sales, operations and accounting to generate substantive dialogue. Hand out quick assignments not meant to drag the organization down but to drill into variances and determine the cause. Not only will you begin to forecast accurately but your accounting practices will improve as well.
About the Author: Lynne Berreman is a senior financial executive and CPA with extensive experience in building or transforming middle market organizations focused on growth. She is an expert in the management of multiple business units and locations, with skills encompassing the full suite of finance, accounting, and business operations.