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Financial forecasting, unlike the weather, isn’t a science but it’s not pure guess work either.  It is a combination of:

knowing your business;

understanding your marketplace;

setting goals; and

using common sense.

As a business coach, I know that every small business needs to make reliable financial projections at one time or another.  Forecasting is critical during the following stages of a company’s life span:

when seeking financing

gauging the profitability of a new product or service

determining the impact of staff expansion or cutback

assessing other business decisions

The many components of forecasting boil down to the following five bookkeeping business tips that for years I’ve shared with business coaching clients:

Bookkeeping Business Tip #1: Review Actual Year-To-Date Results

Start by looking at where you’ve been.  If you use an accounting program like QuickBooks you can print out a Profit & Loss statement showing year-to-date results.  Check the statement for all financial transactions that occurred up to the date of the report. Reconcile the report to your bank statements.  (If you don’t use an accounting program or bookkeeping service, then take the difference of the total year-to-date cash receipts and total expenditures.  This should equal your profit or loss.) Examine each line item to make sure that it makes sense – is your year-to-date revenue figure where you anticipated, or has it fallen short?  Are expenses higher than expected?

Bookkeeping Business Tip #2: Establish Goals and Incorporate into Your Forecast

What do you wish to accomplish by year’s end?  Do you want to introduce a new product or service, increase revenue on existing products or services, decrease spending, hire a new employee, outsource a bookkeeping service, or launch a marketing campaign that will position the company for the beginning of next year?

Write out your objectives and then choose three to five which are the most important to accomplish by the end of the year. Determine the needed steps to achieve the objectives. Which Profit & Loss line items will be impacted? Adjust your forecast accordingly.  For example, your goal may be to increase revenue 10% by year’s end or to launch a marketing campaign now so its benefits will be felt in the first quarter of 2009.

Bookkeeping Business Tip #3: Forecast Variable Costs

Variable costs are costs that change in step with revenue change.  For example, you are selling more widgets; therefore, your labor costs and materials costs will increase in relation to the revenue increase.

Using the concept that Forecast = Projections + Predictions, combined with the knowledge that variable costs change in step with revenues, forecast each month’s variable costs.  Forecast each line item separately. Look for opportunities to reduce costs, and be aware of likely future influences on each cost.

Bookkeeping Business Tip #4: Forecast Fixed Expenses

Fixed costs are relatively stable costs that recur every month.  Examples of fixed costs are rent, telephone and bookkeeping service fees. Forecast the month’s fixed expenses by using the same concept used to forecast variable costs (Forecast = Projections + Predictions) and the knowledge that fixed expenses tend to be relatively stable and do not change in step with revenues.  Again, forecast each line item separately, looking for opportunities to reduce costs, while keeping in mind any likely future influences.

Bookkeeping Business Tip #5: Forecast Net Profit

The final step is to evaluate your forecast for net profit.  Is the profit forecast is reasonable and acceptable?  If not, re-evaluate each line item including revenues and make appropriate adjustments.  Also, anticipate non-operating income and expense items, and include them in your forecast.

Your financial projections may not be perfect at first, but we didn’t learn to walk without falling down.  As a business coach I’ve seen others get a few bumps along the way. But I guarantee that if you follow these bookkeeping business tips, set your financial projections on paper and revisit them frequently, you will achieve your goals faster.

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