An Educated Guess is Not a Crystal Ball – Forecasting the Future

An Educated Guess is Not a Crystal Ball – Forecasting the Future

If every business could peer into the future to see how they will perform, there wouldn’t be a need for historical data and performance benchmarking.  Unfortunately, nobody has a crystal ball, so it becomes necessary for business owners to plan for the future.  By making educated guesses with valuable information gleaned from the past, companies can establish the path they will take to growth and profitability.

Accounting professionals are great at producing accurate historical financial performance information.  The value in this historical data is only partially found in the periodic reports and financial statements generated.  The primary value, the insight delivered from this historical data, is the information it reveals about the business operation over time.  It is from this historical data that certain trends are identified, providing a basis for making the educated guesses necessary to learn how the business will look in the future.

Forecasting is very important for businesses, as it provides the framework for laying out your expectations for the business.  In essence, it is a way to (hopefully) predict what your business finances will look like in the future based on forecasted growth.  And, armed with the forecast, you can now more confidently build a reasonable plan to reach your stated business goals.  While there are myriad approaches to creating a business forecast, it makes sense to simplify the process and focus on the area you likely spend most of your time attending to: sales.  Use your sales goals and projections as the basis for establishing a forecast, setting realistic goals for the current year and for a few years after that.  Once you’ve forecast the new sales goals, you can more easily appreciate what it will take in personnel and other costs to support that growth.

Recognizing that the forecast is simply an educated guess, it is important to regularly compare actual performance to the forecast to see if the business is on the right path to reach the established goal.  If sales are not growing as projected, then the business may need to make adjustments in terms of personnel hiring and other plans to ensure that costs don’t outpace sales.  Without a path to follow, business owners will not necessarily know if the operation is “on track”, as there is no track to be on – there is nothing to measure success against.  Certainly, profitability is the goal, but it is a matter of degrees of success, and the business will not know whether it is being as successful and profitable as it might be.

Accounting professionals should help their clients create realistic forecasts, along with organizing the information and formulating a plan for the business owner to follow.  On an ongoing basis, the accounting professional’s involvement delivers continued value by helping the business owner recognize and respond to changes in the business, adjusting plans as necessary to keep the business on the right path.  And, no crystal ball is required.

Make Sense?

J

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