One of the most significant management tasks for business owners is to create an accurate financial forecast. Whether it’s borrowing money for future expansion, hiring employees, or internal budgeting and costing, crucial business decisions are dependent on the availability of timely and accurate financial data and forecasting.
Preparing accurate financial reports has significant business advantages, such as improved pricing strategies, ongoing cash flow management, and higher revenue. It also helps to predict your business’s future with the help of projected financial statements for upcoming years.
On the other hand, inaccurate and faulty financial reports can land the business in trouble. The company can face issues, such as mismanaged expenses, unsatisfied investors, and in a worst-case scenario, bankruptcy.
Generating faultless financial statements includes three elements. These are the income statement, balance sheet, and cash flow statement. These documents help assess the organization’s long-term direction and where it is headed based on past performance. To see the future of business and keep a check on its operations, you need to follow these three steps for creating a precise financial forecast:
- Collect financial statements from the past: to evaluate the company’s previous financial standing
- Collect current financial data: for a better and accurate projection of the company’s performance.
- Create new financial documents: for enhanced business decision-making.
It is essential to recognize and understand fundamental factors related to business finance before making accurate financial forecasts. If you want to ensure a smooth process, consider hiring a financial accountant or invest in personal learning via a masters in accounting online and undertake the responsibility yourself.
With that said, here are seven tips that will help you make accurate financial statements for improved financial performance and forecasting.
- Keep multiple realistic scenarios in mind
While forecasting the company’s growth, there is always a strong urge to be overly optimistic about prospects. Several business owners end up with immensely over-the-top estimations. But in the practical world, this can lead to numerous problems relating to a gap between existing financial resources and over-estimation.
It is always wise to find a balance between being optimistic and realistic expectations while planning scenarios. Consider numerous factors that can affect the business environment, such as new competition, government regulations, and overall economic growth.
Forecasting entails identifying assumptions that are out of your control. Recognize the significant assumptions and try to be more practical about real-life situations. You can explicitly identify and write these assumptions to keep away from subconscious bias. Suitable assumptions can include how much the market will shrink or grow, technological advancements, and an increasing competition that can affect the business. Once you have identified the correct assumptions, preparing appropriately realistic financial statements shouldn’t be too hard.
- Keep track of future drivers
Business drivers are the key activities and inputs which direct the financial and operational results of a business. Some examples of business drivers include price and quantity of product sold, number of stores, production units, website traffic, etc.
It is essential to understand essential business drivers to construct a financial model or make crucial business strategy choices. The CFO must keep a check on the changes that need to be implemented. Moreover, operating teams must be entirely responsible for the provided driver’s predictions.
- Be vigilant of Inventory Management
Poor inventory management can be a significant cost sink for any business and severely alter data representation on financial statements. Check-in with the company’s warehouse manager or bookkeeper if any deviation or abnormality occurs within a business’s stock of products. Certain irregularities such as more-than-usual inventory balance may result from a new or excessive number of items. Likewise, multiple products returning due to quality control issues by the supplier’s facility or manufacturing facility can off-set the overall figures in COGS and total inventory.
- Settle the difference in Accounting Records
It is mandatory to resolve differences in accounting records to avoid discrepancies in numbers and classify assets and liabilities accordingly. These include supplier invoices, bank statements, credit card statements, and other logs. Also, the amount of cash mentioned in the balance sheet should match the ending balance of your company’s bank statement. Furthermore, the total balance on long-term loan records should be in perfect sync with the long-term liability balance.
- Use of good business forecasting software
It would be best to use top-quality software to make accurate financial statements and reports. Not only will this help speed up the process, but it will also ensure that it is free of human errors.
Business analysis tools that are web-based are easy to update and can make scenario evaluation and budgeting extremely easy. Additionally, cloud storage can make the prepared financial statements accessible to anyone from anywhere in the world.
- Compare other industry-related data
A smart company will always have all of its financial data ready for timely and accurate projections, analysis, and decision-making. However, one that seeks to acquire a robust competitive edge will go a few steps further in the process.
It is essential to gather publicly available industry-specific data to understand where the company currently stands with respect to its competition, and where it sees itself in the future. Industry data helps to make better sense of economic trends and how they affect a company’s long-term financial performance. It will also help to create more accurate projected financial statements for planning into the future.
- Correct errors
Inaccuracies in data collection and forecasting may arise due to IFRS changes, numerical errors while entering values manually, or simply not following the correct financial and accounting rules. It is essential to correct all mistakes upon reaching the closing process of the company’s financial statement. This enables financial managers to discard mathematical errors before finalizing the company’s financial information and predicting future growth and money-related trends. Flawed financial information will eventually lead to inadequate forecasting and decision-making.
Conclusion
Preparing accurate financial documents and records is essential for managing the business altogether. Every successful business’s foundation rests on a transparent understanding of financial management and accurate data. These steps can help you make timely, error-free financial documents for strategic decisions, leading to increased profitability and ROI.
