Annual Forecast – Week #31 of The Financial Operating System®

Accountants tend to look backward and tell you how you did in the past. The Financial Operating System also emphasizes the importance of forecasting future results as part of being able to plan and manage the business. It provides a guide on how to create and update an annual forecast, which serves as a crucial tool to know how you are pacing compared to your annual goals.

Key Points of the Annual Forecast

1. Forecast Setup:

   • The process begins by establishing a basic Profit & Loss (P&L) forecast for the year, broken down into monthly columns.
   • Initially, the forecast is the same as the annual budget. As the year progresses, adjustments are made based on actual performance.

2. Updating the Forecast:

   • The annual forecast should be updated at least once a month.
   • Each month, replace that month’s forecast numbers with actual data and refine the forecast for the remaining months based on any new information.
   • As the year progresses, the forecast moves from being an educated guess to a more accurate prediction of the year’s financial results.

3. Tracking Key Metrics:

   • Include key financial ratios such as gross profit margin, labor value multiple (LVM), and operating margin in the forecast to ensure you are tracking essential metrics alongside the P&L dollars.
   • Regularly review these metrics, at least monthly, to stay informed and use them to make financial decisions.

4. Comparing to Budget and Prior Year:

   • The forecast includes columns for comparing the forecast against the original budget and the previous year’s actual results.
   • This comparison helps identify progress and areas needing attention.

5. Scenario Adjustments:

   • If revenue is running higher or lower than the initial budget, then use metrics ratios such as LVM or operating profit margin to assist with hiring and other spending decisions that arise during the year.

6. Cash Flow Management:

   • If your business has seasonal cash flow or significant investment needs, include cash flow statement and balance sheet forecasts alongside your P&L forecast.
   • Forecasting cash flow alongside profitability helps the business anticipate any cash shortfalls and manage spending, borrowings, and distributions accordingly.

Best Practices for Maintaining the Forecast

• Use spreadsheet models with clearly defined columns for monthly forecasts, actuals, and budget comparisons.
• After closing each month’s books, update the forecast to reflect actual monthly results and any new expectations for the remainder of the year, which provides a more accurate projection as the year progresses.
• Continuously track and manage decisions based on the evolving forecast to ensure financial goals are met, including managing expenditures or investments based on the current forecast rather than the budget from the beginning of the year.

Takeaway

An annual forecast is a powerful tool for managing business performance. Regular updates ensure that business owners can make informed decisions and adjust plans as necessary to achieve their goals. The process involves consistent tracking of key metrics and adjusting forecasts in response to real-world data, ultimately improving financial decision-making throughout the year.

Next Step:

Business owners can self-implement The Financial Operating System. Chapters are available to download at smartbooks.com/resources or you can buy the whole book from Amazon (the marketing firm version or the general business version).

If you would like assistance with implementation or would like to accelerate results for your business, please contact author Cal Wilder at cwilder@smartbooks.com or book a free consultation with our team directly using this calendar link.