Forecasting – The Future of the Business
Written by the Controller | CFO Advisor Team
The age old question: What would we do today if we knew what was going to happen tomorrow? Since it is not possible to foretell the future, we make basic assumptions based on inherent survival instincts. In our business life we tend to act much the same way. “My gut tells me that if we buy this equipment our operating costs will decrease and the product line will take off”. The art of forecasting, done properly, takes the guesswork out of the equation.
Forecasting can be used as an indicator of things to come. The most comprehensive means of financial forecasting is to develop a series of pro forma, or projected, financial statements. We first construct a pro forma income statement based on sales projections and the production plan, then translate this information into a cash budget and finally assimilate all previously developed information into a pro forma balance sheet. A pro forma income statement provides a projection of how much profit the firm anticipates earning over the ensuing time period.
There are generally two types of financial forecasts.
- Pro forma Financial Statements
- Cash Flow Forecasts
Pro forma financial statements are simply a prediction of what the company’s financial statements will look like at the end of the forecast period. One way to accomplish this is to tie many of the income statement and balance sheet figures to future sales, since all variable costs and most current assets and current liabilities vary directly with sales. The key is to have an accurate sales forecast. The final step in constructing the forecast is to determine the amount of external funding that may be required. When complete… test the model – if you are faced with an important decision, share your results with business associates. As an independent third party, they will be a good check to see if they view the issues and solutions in the same light you do.
Cash flow forecasts are simply a listing of all anticipated sources and uses of cash by the company over the forecast period.
For most planning purposes and credit analysis, pro forma statements work best because they present the information in a form suitable for additional financial analysis. For short-term forecasting and management of cash the cash flow forecast is appropriate.
BIK’s outsourced Controller|CFO Advisors can help develop financial forecasts and a cash flow forecast for your business.
The BIK Controller|CFO Advisors:
Tony Battaglia
Tim Beck
Al Knox
Larry Schmitt
Together we can perform a variety of accounting and financial services to help your business run more efficiently and economically. Our objective will be to improve your bottom line through better processes and procedures. Contact us today at cfoservices@bikcpa.com or call 847-281-3209.
Visit our web-site at www.bikcfoservices.com.