How do you manage the financial aspects of your company? Do you plan for future events or do you react as events occur?
Most companies do a reasonable job of preparing monthly financial statements. However, these report on what has already happened. History! A financial forecast provides a forward looking view that can be an incredible tool for managing your company.
A financial forecast is a living document that is monitored and updated monthly. A forecast uses big picture assumptions to model what your financial statements may look like based on your current knowledge and expectations. It does not get into the details of the financial data.
Following are steps in developing a financial forecast:
Identify your vision and goals for the company in the coming year. Is the company planning to grow significantly, or not. Is the company planning to move into new markets or types of work, or continue with projects similar to the ones in the past?
As you create a vision of where the company wants to go, you’re thinking about the future rather than re-hashing the past.
Create assumptions for what you think is likely to happen financially. Here you consider the goals, but evaluate what is realistically likely to happen. This is not wishful thinking. Expected profitability, cash flow, etc. must be identified and projected for the forecast period.
If your goal is to increase gross profit from 15% to 20%, you must look at the work in progress to determine if this is realistic. What is the strategy for improving job profitability? Is the company planning to bid a different type of work? Is it going to increase prices?
Turn the numbers into a management tool. Now that you have the forecast created, how do you use it? What information is needed to make decisions for the company? What does management think about every day?
Summarize the financial forecast into the 3-5 key performance indicators for your company. Keep it simple. Highlight the key performance drivers so management can clearly see if actual results are not aligning with expected results and take action where needed.
Jim Christian, CPA, CCIFP leads the Jones & Roth Construction Team serving general contractors and sub-contractors. His practice focuses on contractor profit improvement, evaluating financial strength to maximize bonding and credit and proactive tax planning..