You work hard and your business is stable and growing, but in these uncertain times, it feels like no business is safe. Forecasting helps alleviate anxieties about the future security of your business. Our founder, Cindy Hovig, recently gave an interview on forecasting and how small business owners can benefit.
Understanding Forecasting
Jess: What exactly is forecasting?
Cindy: When we are talking about forecasting for your business, it really goes back to: “What do you want your story to be?” and “How do you want to change your story? “ It is taking a planned approach to mold what your business is going to look like in the future.
Jess: Many think of forecasting as scary, but why should they do it?
Cindy: I think everyone can benefit from forecasting to some degree. We understand that forecasting may seem really scary, but isn’t it better to make an educated guess as to what might happen than to just put your head in the sand? Forecasting gives you an opportunity to make changes before a problem occurs.
Many are surprised to find that forecasting actually can be empowering because you are able to see the way that things may play out. It can give you peace of mind and can help you to make really smart decisions. For example, you could determine that you want to build more of a savings cushion, plan to save for taxes, or possibly you may decide you are not ready to hire that next employee.
Jess: We recently wrote an article about cash flow. Are cash flow and forecasting the same thing?
Cindy: Cash flow is one type of forecasting. I think cash flow is more of an accounting term and that term can scare business owners. Perhaps a better term to use could be “cash forecasting.” But there are other types of forecasting too.
In talking with our clients, the first place that we generally forecast is cash flow, because knowing how much cash you have available is more of an immediate concern. Cash forecasting can answer questions such as:
- How much money do I have?
- Do I have enough money to pay my payroll?
- Do I have enough money to pay my bills?
- Do I have enough money to pay myself?
We can think of cash forecasting as Phase I. For Phase II you want to ask yourself: How do I build on that?
For example, if you are two months away from the end of the year, you might ask yourself:
- What does my net income look like at this point in time?
- Does it look like I am going to show a huge profit or am I going to show a loss at the end of the year?
- Could I do anything different between now and the end of the year that could affect that outcome?
How to get started
Jess: What does a business owner need to know before they start working on a forecast?
Cindy: You need to have good records of what has happened in order to help you make informed guesses about what’s going to happen. This means that your bookkeeping needs to be up to date, it needs to be accurate, and it needs to be categorized in a way that you understand it.
For example, if you lump too many expenses together, it could make it difficult to take that information to make educated guesses for future expenses. On the other hand, if you have too much detail, you could get overwhelmed and it may be harder to really see the big picture. There has to be a balance.
Jess: So I’m a business owner, and I’ve decided I need to create a forecast. My books are clean and up to date. Where should I start?
Cindy: Again, it goes back to what it is you are trying to forecast. Going back to the cash forecasting piece, you want to start with where you are now, where you are today. Then, you need to build on your good information as to what happened in the past to build a model of what is a reasonable expectation for what is going to happen. You are determining the amount of money coming in and going out, and when that money is coming in and going out. For instance, if you have a seasonal business, you may have more cash coming in for three months out of the year and not so much the rest of the year.
It also comes back to knowing your needs and your wants. You need to determine what expenses need to be paid and the things you would like to have (your wants), and separate items between those two buckets.
Additional Help
Jess: There are a lot of different tools for doing cash flow and forecasting. Do you need an app to build a forecast?
Cindy: Using an app can help you update things much easier, but no, you don’t need to have a fancy tool to run a forecast. You can do it in any spreadsheet, but it will take some work to build it and it to continually update it as you go along. The advantage of an app is that it can bring in the historical information in a more automated way.
Jess: How can your bookkeeper and accountant help you with forecasting?
Cindy: So all the things we talked about, having clean records, having a plan of what you reasonably expect, those things are all good. However, you need to ask yourself: Do I have the experience to really understand how changing even one small item within that plan could really change my outcome? Many business owners would answer that question with a firm “No.” This is where your accountant or bookkeeper can really help you.
“Many are surprised to find that forecasting actually can be empowering because you are able to see the way that things may play out. It can give you peace of mind and can help you to make really smart decisions.”
First, your accountant or bookkeeper is going to come with an unbiased approach, without the emotion tied in. Second, because accountants and bookkeepers are working with numbers every day, they can see patterns that you may not see. They can see areas where you can make changes that potentially could help you. Third, they can keep you accountable. This kind of forecasting is not something you do once. You constantly have to be updating it, reviewing it, tweaking it, so that it can help you. Overall, you are going to have a better experience if you involve your bookkeeper or accountant.
Hopefully Cindy provided some insight into how to forecast for success. If you are interested in feeling more empowered and making smarter decisions within your business, contact us for a consultation on how we can help!