As a professional service provider, you offer guidance to your clients on how to manage current opportunities and challenges, as well as plan for the future. However, your firm should be providing the same level of careful guidance for itself. One key way to do this – especially as we start a new year – is by developing a full set of forecasted financials for the upcoming fiscal year.
Forecasted financials, if done properly, provide your organization with relevant data that can be used as a road map to plan for the impact of operations for the upcoming year. Based on planned operations and the resulting impact on cash flows, this information helps organizations understand the negative and positive consequences of anticipated activities, and build a strategy to manage them.
Features of a practical financial forecast
Many organizations base their forecasts and plans off their income statement alone. While revenue and profitability levels are important, the impact of operations on the resulting cash flows is equally important. A full set of forecasted financials should include consideration of the income statement, balance sheet and cash flows. This picture provides a more accurate indication of the financial impact of planned operations for the upcoming year.
Forecasted financials are most relevant when they are prepared from a realistic and conservative standpoint. In other words, your organization’s projected results need to be achievable in order for the data to be valuable. Financial forecasts should also be prepared based on assumptions that are supported by the historical performance of the organization and by known factors expected for the upcoming year, including revenue growth or decline, gross margin, utilization, realization, profitability and balance sheet changes.
How can financial forecasts benefit your organization?
1. Understand the financial and economic resources needed to achieve planned results
A full set of forecasted financials tells you what resources are needed to achieve your anticipated results. The data will show:
- What your organization’s cash position will be as a result of the planned operations
- What additional capital or financing is required to support the operations
- What staffing levels and equipment are needed to achieve the planned results
2. Clearly communicate your organization’s financial objectives and goals
Financial forecasts not only provide a budget for the organization, but they also offer a clear picture of the financial goals and drivers for the upcoming year. This helps ensure the entire organization understands what is expected of them and which financial measurements are most important. This also frames the organization’s financial story that can be communicated to external stakeholders (e.g., shareholders and financial institutions).
3. Measure progress toward objectives and goals
Preparation of an annual financial forecast provides a budget to compare anticipated assumptions with actual results, and will allow your organization to analyze whether or not its operations are consistent with the expectations and gauge progress.
4. Be more proactive
The information from a financial forecast allows you adequate time to effectively carry out planned operations and develop alternative scenarios based on changes in assumptions. Based on this information, you can be proactive in your decision making. For example, tax planning can be done based on anticipated levels of taxable income. Expenses can be controlled to achieve specific financial objectives. Cash used to reinvest in the organization can be evaluated based on the cash flow from anticipated operations.
A well-prepared financial forecast will help you see how the expectations and decisions of today will impact your organization’s profitability and cash flows in the future and provide a road map for the entire organization.