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Monthly Financial Forecasts – Explained

22 June 2022

Our last post discussed big-picture business goal forecasting. Today we’ll talk about financial forecasts for your business.

You should have monthly, reviewable, updatable financial forecasts to help you steer your business – sometimes the waters you have to navigate can get murky.

The quickest, easiest way to create a financial forecast involves projecting future revenues and expenses based on your business’ historic trends – so much projected increase for revenue, expenses, costs of goods sold, etc. That’s one reason a financial forecast often includes past actual results, though this forecasting method is perhaps more akin to budgeting, which is not the same as preparing a comprehensive financial forecast.

Because “quickest and easiest” is often not “best.” There are so many factors which contribute to your business’ financial health beyond simply tracking sales and expenses and projecting reasonably appropriate incremental increases.

For example:

Are you the verge of signing a huge new customer?

  • If so, that revenue needs to be factored in – and so do the attendant expenses.
  • Will you need additional staff to handle the increase in business?
  • What level of experience and expertise will be required for the new team members, and how much will their salaries and benefits (and your increased payroll taxes) add to your expenses?
  • Can your current suppliers handle the increased orders you will need to place? Will you need a new supplier? Will prices remain relatively consistent, or will they increase or decline per unit purchased? We have seen a lot of this issue during COVID.

Are you contemplating a major capital expenditure?

  • How will the purchase improve efficiencies? This nuanced point should be factored into a good financial forecast.
  • How will it be paid for? In a lump sum or over time? If the latter, then any interest or finance charges need to be factored in, as well as the purchase costs, and any maintenance expenses.

Are any of your key team members planning to retire?

  • How much more (or less) will you have to pay a replacement? Will one replacement serve? If the retiring individual has quietly been doing work that normally would be need two people to accomplish, you may need more than one new hire to replace his/her output. On the other hand, replacing a long-term employee with a fresh, enthusiastic newcomer can bring both an injection of energy into your team, and costs savings, as you can often pay a new hire less than someone who’s been with you for 20 years or more.

What are the emerging market trends in your industry?

  • Do they auger well for your business, or will you potentially need to modify your approach? And, if the latter, how might that affect your revenues and your bottom line?

If you are the hugely busy owner of a closely held business, you may be tempted to go the “quickest and easiest” route in financial forecasting, but the above points, which represent only a few of the many factors to be considered in a well-prepared financial forecast, indicate you might do better to hire an outside expert.

Further, you may well be acting as your own CFO – and that may not be the best fitting among the many hats you have to wear during your workday.

A virtual CFO can step into this role, take this hat out of your work wardrobe, and provide the expertise that will help you navigate your business toward even greater success.

S/he can ask the right questions, identify the variety of salient factors, the opportunities and potential pitfalls facing your business, analyze them, and prepare a financial forecast for your unique business that is comprehensive and mindful.

Your business’ financial forecast should be reviewed by both you and your virtual CFO together on a monthly basis and compared with the actual results (more on this will come in a later post). Your virtual CFO will then revise the forecasts for the coming months.

In this fashion, the forecast becomes an ever-more-accurate roadmap toward your short- and long-term business financial goals.

If your business would 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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