Generating accurate and reliable financial forecasting, particularly for your small business, can be very challenging and often takes a bit of magic. Most often, the process takes “hoping’ and “guessing” that what is projected going to be accurate.
The following are several ways for small-business owners who want to come up with reliable financial projections:
- Make sure the projection has all the basics. A good laundry list includes: gross profit, unusual occurring items, provision for income taxes, income from continuing operations, effect of discontinued operations, net income and significant changes in financial position. It should also include a summary of the assumptions made by the accountant or other preparer, and a summary of the accounting policies that were used.
- In thinking about the future, try to include all the possibilities. For instance, is there a chance the company might go public? Will the management continue to be able to devote all of its attention to this enterprise? What changes are expected either among the competitors or in the market itself? What effect might price changes of supplies have?
- Don’t be intimidated if a projection seems hard to understand. A trait of a good forecast is its simplicity. If the terminology or methodology is too hard to follow, ask to have the forecast put in simpler terms or with more explanation. Preparers who can’t or won’t do that may not be telling you everything about how they came to their conclusions.
- A good projection should be heavily tailored to your industry. For instance, for some companies revenues are more important than market share, while in others the opposite may be the case. Test the knowledge of your preparer. The right one for you understands your industry — and likely will take notes. Problems can arise if the accountant uses a cookie-cutter projection format and does a few minor tweaks to make it fit your business.
- Check the reliability of the final numbers. Do the assumptions seem in line with historical or industry trends, and do they reflect the details that were discussed about the business? The forecast should include some sort of summary of at least the most wide-ranging assumptions.
