The Joys of Forecasting
I am really excited about this Finance Friday entry. I hope you all enjoy it as much as I do. Today we are going to move from analyzing what has happened to predict what will happen.
I worked as a financial analyst in corporate America for over eight years. In this role every month we went through what was called “The Close.” The Close is filled with long days of never-ending work. In finance and accounting, The Close process is used to record all the revenue and in the correct period. For publicly traded companies this is really important because it will impact your financial statements that are issued by the company. Most of the close is horrible, it really is, but there is one part that is a pure joy and that my friends is the forecast process.
Completing a forecast for your company is important no matter how big or small new or old your business is. When you complete your forecast, you are acting like a fortune teller at the fair, except you have actual knowledge, experience, and insight into what you are predicting.
So everyone, get out your crystal balls, wipe off all the dust and tell me how your business will perform over the coming months. Ok, I am just kidding, you do not need to use a crystal ball. What we will use is the data we have been collecting every month on revenue and expense.
When we looked at revenue and expense earlier this year, we talked about creating a method to track this data. Tracking the data is important because you can use this data to now to project what will happen in the future. As time goes on you should be able to construct a more accurate forecast because you will have more data to build your assumptions.
There are many ways to create a forecast, one method I like is to use Excel to outline all known revenue and expenses by period. I like to forecast monthly, but depending on your business you may use a longer or shorter period. It is important to understand your business cycle, when expenses hit throughout the year, as well as, fluctuations in your revenue. A good forecast will combine the historical data with the knowledge you have about the future of your operations. Are you opening a new store? Do you have a sale coming that is expected to increase revenue? Are you starting a new marketing program that will increase both the expenses and revenue?
Once you have outlined all the necessary elements of your forecast, you want to review the details for accuracy. Do the assumptions make sense? Do the numbers make sense? Once your have vetted the data you should have a pretty good view of what is going on with the future of your business. A financial forecast should be working hand in hand with your operations planning so that all members of your team are working together to meet and exceed the goals you laid out.
Once the month or period has ended, it is time to review your forecast against the actual events that took place. Completing a comparison between the actual results and your forecast is probably one of the best parts of the process. You get to see how good you were at your forecast. Did your assumptions play out the way you expected? If not, what changed to impact the final numbers. Once you have reviewed the actual numbers for the period, you then can start the process over for the outgoing months. This time when you update you can use the information you have learned from the most recent period along with the historical data and knowledge of the future.
Have a Great Weekend!
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