Bookkeeping Tips for Establishing Reliable Financial Projections

June 16, 2011  |   Blog,General   |     |   0 Comment

Financial forecasting reminds me of the weather – you make your forecast at a moment in time based upon the information currently available. You draw a conclusion and state your financial forecast. But then, the information changes, now it’s raining, and you’re caught without your umbrella!


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 Tip #1: Review actual year-to-date results


Start by looking at where you’ve been. Check the financial transactions that occurred year to date. Reconcile them 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 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 and 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 2010.


Bookkeeping 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 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 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 tips, set your financial projections on paper and revisit them frequently, you will achieve your goals faster.









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  • Bookkeeping Tips for Establishing Reliable Financial Projections
    June 16, 2011

    Financial forecasting reminds me of the weather – you make your forecast at a moment in time based upon the information currently available. You draw a conclusion and state your financial forecast. But then, the information changes, now it’s raining, and you’re caught without your umbrella! Financial forecasting, unlike the weather, isn’t a science but […]