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Keep it Going – Forecast v Actuals

29 June 2022

Last week, we discussed the importance of financial forecasting for your business. In this post, we discuss the process of comparing actual results with the forecast.

Results should be compared with your forecast on a monthly basis, usually by yourself and your CFO. The most important thing is not whether there are differences in the numbers – because of course there will be, life being messy. The point is to find out why those differences exist – this helps make both forecasts and business decisions better in the future.

For example:

If your business is in an area, such as the Gulf Coast, which has by nature the significant threat of hurricanes, did you figure any potential impact to your business for storms?

  • If yes, and you experienced no hurricanes, that’s a potential expense you didn’t actually incur.
  • Conversely, if based on the highly speculative nature of whether any hurricane might impact your business in a given hurricane season, you did not leave room in the forecast for the potential damages, and a hurricane did hit, that’s an expense you did incur but had not allowed for.

One very important point is that, whether you include line items for such expenses in your forecast or not, you and your team need to consider them as potential expenses which your business may incur in any given year.

Natural disasters aside, there are always smaller areas of variance, and often there are perfectly reasonable explanations –

  • Was an anticipated expense incurred in the months prior to or after the forecast’s projection? If so, such a variance is likely immaterial, providing the expense cost roughly what it was forecast to.
  • Did an uptick in sales result in a lesser increase than anticipated in related expenses such as cost-of-goods sold? That is material, in that the forecast may need revising in light of lower expense projections.

Other variances may need further investigation – because the important thing is to know why a material variance exists, so that the forecast may be improved in light of your business’ reality. It matters less whether a material variance is positive or negative than that the reason behind the variance is taken into account, not only in preparing better forecasts, but in making better-informed business decisions going forward.

Keeping up with your forecasting, your actual results, and the factors which need to be taken into account, will provide you with invaluable information on the road to your short- and long-term business goals.

If you think your business might benefit from the services of a virtual CFO, we invite you to consult with us. We are at your service.

Please click here to let us know how we can help you.

Until next time,

Peace,

Eric

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