Question:
I’ve been in business for some time and I feel like I’m managing my finances day to day. How can I gain a more long-term perspective to see the bigger picture?
A: That’s a perfect question as running a small business is truly a balancing act and every decision you make has a future financial consequence. This is where financial forecasting comes into play, providing you with greater clarity, control and a sense of direction over your future.
A clear, documented financial forecast not only builds confidence and helps to manage risks, but also signals to investors and lenders that your business has the foresight to succeed. Below are the building blocks to your financial forecast:
- Historical Data: Pull together your past financial statements, analyzing for seasonality and growth trends. Evaluate the cost relationships (direct and overhead) as a percentage of revenue for contraction or growth.
- Forecast Assumptions: Document your key business elements, such as the economy (i.e., access to labor, leasing trends, state incentives), the competition, customer feedback and changes to your costs and capital structure, like taking on an investor or consolidating any debt.
- Revenue: Cast forward your prior years of revenue, by month. Make adjustments with seasonality and inflation in mind. Ensure that the growth “profile” can be supported and attainable.
- Cost: For both direct and overhead costs, document your basis of estimate, meaning how the cost was estimated. This will add credibility to your forecasting, aids with your forecast-to-actuals analysis, and establishes a known baseline should your strategy shift.
- Insight: Plan to weather any unanticipated changes by inserting a reserve into both direct and overhead costs. This can protect against unknowns and can be removed or pushed forward.
- Consult: Meet with a free small business advisor professional at Central Oregon Community College to help craft and implement your financial forecast.
About the Expert:
Dave Grotjahn is a business advisor with Central Oregon Community College’s Small Business Development Center (SBDC). He is a retired senior finance leader from Boeing Commercial Airplanes where he led investor relations, estimating & pricing and financial planning teams across many programs. He also supports Habitat for Humanity as a financial mentor, assisting clients in attaining home ownership.
The SBDC offers free, confidential professional business advising and a variety of low-cost courses to help entrepreneurs through the business lifecycle. Visit cocc.edu/sbdc to learn more.
