When you see headlines like “DOW to Drop 80%” as a small business, startup or early-stage company you may wonder “will my company survive?”
Good question. Here’s where your tried and true forecast comes in prepared with the assistance of your trustworthy CPA.
Forecasting Helps You If The Dow Drops
You may think that your company or organization is too small to worry about developing a financial forecast. Dr. Anandi P. Sahu points out in his post on forecasting that the “long-term success of any organization is closely tied to how well management of the organization is able to foresee its future and to develop appropriate strategies to deal with likely future scenarios.”
Many business owners, especially owners of small, startup, and early-stage companies, like to use “gut feel” or the “back of the napkin” forecasting approach. Now, there certainly is nothing wrong with these approaches, but they generally don’t provide you with the flexibility needed to meet changing markets and economic conditions. Which is what you need to effectively run your business and grow.
Having the right forecasting tool(s) can go a long way to ensuring your success as a business owner and manager.
Ok, so we’ve got to have a forecast.
How To Get Good at Forecasting
How do we go about doing this? Good question.
As I’m sure you are aware, there are various forecasting methodologies that can be used to create your forecast. For these, I’ll refer you to Dr. Sahu’s post on forecasting which is very informative and explains each of the different forecasting methodologies.
What I want to bring to light here is the need to have a solid forecasting model, whether this model is Excel-based, or built in a sophisticated forecasting software. The best way, that I have found in my experience, to have a solid financial forecast is to ensure it has these key attributes:
- Follow generally accepted accounting principles (GAAP) as much as practical. This will allow you to compare your actual results to your forecast easily.
- Capture the attributes of the key drivers of your business whether that be inventory turnover, product sales, customer acquisition costs, recurring monthly revenue, revenue per customer, or another meaningful variable that drives profitability and growth.
- Be flexible; you have the ability to change the values of your key drivers so that you can “see” the effect certain decisions may have on your business.
There you have it, your forecast should follow GAAP, capture your key business drivers and be flexible.
Need help with forecasting for your business? Set up a free consultation to find out how we can help your business create a more reliable and accurate forecast.
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