Financial forecasts and projections are useful tools in the planning process for your business. These forecasts and projections, when developed using a sound methodology, help reduce uncertainties and provide the backbone for management’s key business decisions.
The forecasting process forces you to proactively identify, analyze and document the strengths and weaknesses of your business. Further, it allows you to consider the external forces facing your business –both opportunities and threats. Combined, this SWOT (strengths, weaknesses, opportunities and threats) analysis not only allows you to evaluate the impact of various factors but more important, form the impetus of your response tactics.
Stick to the core
Focusing on the key areas of your core business is vital to the business’s growth and survival. With good forecasts and projections, you can identify optimal ways to allocate the limited resources you have.
It may highlight the need for additional resources, such as obtaining financing. It may expose whether you should be operating in a particular business sector that is generating marginal returns. In short, the discipline involved in forecasting guides you into employing optimal strategies to achieve your stated goals.
Forecasts provide you the freedom to simulate alternate business scenarios and to perform sensitivity analyses of the outcomes without sacrificing real resources. For economic and other reasons, this is ordinarily difficult to accomplish within the live operating framework.
Management can evaluate potential outcomes of various alternatives, for example, assessing whether a specific product mix is viable.
Keep in mind that the assumptions used in developing forecasts and projections have to be sound. All key factors and drivers relating to your business or expected outcome must be considered, and the assumptions need to be reasonable and not contradictory.
Goal communication and accountability
Forecasts and projections form the mode of communication of your goals and act as a barometer that measures employee performance against these goals. Employees should be made aware of what is expected of them and have the opportunity to bring up concerns they may have regarding attaining those goals.
Performance measurement against goals will force a culture of discipline and accountability.
Various methods and approaches can be used, ranging from statistical to judgmental. Examples include the availability of the information that feeds into the forecasting models, the reliability of the information and the availability of resources to perform the forecasts.
Statistical methods rely on historical performance to develop trends using regression analyses. Hence, in order to develop an accurate trend, the accuracy of the information that goes into developing the trend is crucial.
Nonstatistical or judgmental approaches are developed using experiential input from management. It revolves around management’s knowledge of the business, the industry it operates in, competitors, seasonality, distribution channels, etc.
Technology has made it relatively easy for business managers to develop forecasts and projections, including tools such as simple spreadsheets and complex integrated software systems, depending on your needs and financial clout.
Forecasts and projections should be used proactively or not at all, and their value to your organization should be understood. Preparing proper forecasts and projections requires discipline, and it is that discipline that will force you to consider the unexpected and think outside the box, helping you to reduce uncertainties.
Indeed, if you want to see the future, you need a crystal ball first.
Kamal Parag, CPA, CA ([email protected]) is a senior manager in Tauber & Balser PC’s forensic accounting services team. Kamal has more than 10 years of experience providing litigation support to clients in various litigation matters involving accounting and auditing issues, and providing audit services to small- and medium-sized entities, both closely held and publicly traded, operating in various industries, including services, manufacturing and distribution. Reach Parag at (404) 814-4989.
