Understanding financial records, and using them to help predict future performance, can be an important part of a small business’ strategic planning. Do you know how much your business will take in next month? How about for the coming quarter? This year? Some business owners may not completely understand their own company financials, making it more difficult to use this data to plan for the future.

Without analysis, this critical data has less value in helping to grow the company.

The Source of the Problem

Small businesses may contract with accountants, lawyers, financial planners, and business consultants to oversee the company books. These experts may function independently based on company protocols that isolate each expert, with little communication between them.  Each one may see only a small part of the overall financial picture.

Company Financials and Forecasting

Financial forecasting – using past company performance to predict future performance – depends on the insights developed by experts working collaboratively, developing an analysis that can be used to plan for short- and long-term business development.

It’s not just about profits. It’s not just about the rate of cash flow through the business. It’s a detailed study of empirical data that enables business owners to use the past to help forecast the future.

Solutions to Better Use “The Company Books”

Some experts recommend the formation of a financial forecasting advisory committee that includes the company accountant, legal, bookkeeping, outside consultants, and company management. With input from a variety of sources, company management can more easily identify challenges and opportunities to improve business efficiencies and grow to greater profitability.

According to Rosemary Carlson Peavler, Professor Emeritus in Business/Finance at Morehead State University, a comprehensive set of projected financial statements is important when creating a forecast.

According to Peavler, “These projected financial statements, called pro forma financial statements, help forecast future levels of balance sheet accounts as well as profits and anticipated borrowing.” Pro forma financial statements can be used by small business owners to help them develop realistic financial plans, identifying potential “log jams” before they create serious business consequences.

Pro forma financial statements should cover a definitive time frame – a month, a quarter, an annual review. The most common time frames are six months or one year, depending on the nature of the business.

Peavler suggests a strategy for creating useful information from company financials:

Create a pro forma income statement – the projection of anticipated income for a specified period of time. The income statement includes:

  • realistic sales projections, not pie-in-the-sky expectations;
  • a workable production schedule based on past production levels;
  • a detailed statement of company expenses;
  • a projected profit forecast for the time frame of the pro forma income statement.

Next, develop the company’s cash budget for the same time frame. A cash budget, usually prepared each month, is an essential ingredient in financial forecasting.

Create a Pro Forma Balance Sheet

Once the income statement and cash budget have been developed, the business advisory group can develop a pro forma balance sheet. This document will create a useful picture of changes within the company within a specific time frame.

Once pro forma balance sheets become part of routine business activity, company managers and advisors can review last year’s balance sheet. Each business line item – from salaries to marketing – is available in the pro forma income statement, the cash budget, or the pro forma balance sheet.

If you don’t have a “head for numbers,” consider hiring people who do. Form an advisory committee made up of professionals – accountants, attorneys, business planners, company managers, outside consultants, and others who can interpret the company’s financials to enable you to better plan for your company’s future.

If you don’t know the real status of your company’s fiscal condition, effective planning may be all but impossible, so take the time and expend the energy to understand your business’ financials.

 

The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice.