You could scour the whole world, but you’ll probably never find an entrepreneur who actually enjoys dealing with financial forecasts. It’s understandable that you’d want to keep focused on the more interesting aspects of developing and managing your business, but financial forecasting is something you really can’t afford to overlook. Here’s some of the best advice out there for making your forecasts as accurate as possible…
Use Several Scenarios
For a lot of entrepreneurs, particularly those who have just about managed to get their idea off the ground, there’s a strong temptation to be optimistic when they’re forecasting the growth of their operation. Looking to avoid this, other business owners will often apply much more conservative forecasting. In reality, your projections should be somewhere in between these two extremes. Make a point to invest your time and effort in several different scenarios, some optimistic and others more defeatist. This is especially important if there’s a range of different factors that could impact the cash flow of your business, such as new competition, government regulation, and a fluctuating economy.
Start With your Expenses
By and large, it’s always easier to predict your expenses than your revenue, so these are what you should start with. When you’re building your business’s forecast model, start off by planning out your fixed expenses, such as utilities and rent, or owner’s’ expenses like mortgage payments, and fees for repair companies like a commercial roofing contractor. You can usually be fairly certain over whether or not these expenses will occur in the coming year. After that, you should think about the expenses that could go up and down relative to your revenue. If your revenues grow by 10%, you can usually expect your cost of sales to also go up by 10%. Obviously, there are going to be some fluctuations and uncertainties, but there are a lot of expenses like this that will tend to mirror revenue fairly accurately. Finally, work on projecting expenses that you have the most control over. This is one sure-fire area where having multiple projections can come in exceedingly handy. Think about the kind of costs you can slash when business takes a downturn, or where you’ll invest for growth if your cash flow exceeds expectations.
Pin Down your Assumptions
From Max Pixel
Financial forecasts, any type of financial forecasts, requires you to make some kind of assumptions about factors that are outside your control. The best way to manage these kinds of assumptions and avoid any kind of subconscious bias is identifying them and documenting them. Some common assumptions that you should list include the way your market is due to shrink or grow, any changes in the number of competitors you’ll be up against, as well as technological advances that may have an impact on your niche. You may think that you’re not prone to broad, sweeping assumptions, but these can easily creep into anyone’s analytical mindset. By identifying and writing down your assumptions, and keeping them in mind, you’ll be able to adjust your financial forecasting for much greater accuracy.
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