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I want to have all of my finances up to date at all times. Therefore, I would like to start and/or forecast my finance info each month. Where do I start? What do I need to do in order to ensure it's accurate?
Thanks Cathy
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Cathy,
There are variouis methods to forecast financials. The right method for you will depend on your acceptable level variability in your figures. No forecast is perfect. Most companies start by forecasting just their Profit & Loss (Income Statement) and then as they get more comfortable move into a Balance Sheet forecast, which allows for a Cash Forecast.
To forecast the Income Statement, I like to first forecast Sales. That is your starting point. To forecast Sales, you will need to identify what your key Revenue Drivers are. What truly drives Revenue? Number of people who enter the store? Number of outbound phone calls made? If you have a sales team, you may just be leveraging their personal sales goals and quotas that are already in place. Whatever the driver is, you can estimate what your growth will be for the next 24 month period. Then you want to ask yourself if the market can live up to your predictions.Once Sales is forecasted, you are ready to forecast expenses.
First, identify which expenses are Fixed and which are Variable. They will be Fixed only for a relevant range of growth, but generally for a 24 month forecast, Fixed is relatively Fixed.
Once you have identified those expenses that are fixed (don't vary with Sales) and those that are variable (change with a change in Sales), then you can apply a forecast approach to each group of expenses.
For the variable expenses, a common method is to "Common Size" your financials and just look at your expenses as percentages of Sales. For example, you might see that COGS is consistently about 40% of Sales with a 60% Gross Margin. So, for COGS you will simply apply the 40% to your Sales figures that you already forecasted. You will do the same with all your variable expensers--just keep them at the same % of Sales.
For the Fixed expenses, you will likely just incur the same amount of expenses next year as you did this year (perhaps with a little bit of growth based on your understanding of the business). For example, your manager salaries are probably going to be the same next year as they are this year, but you may want to increase the number by 3% due to raises. You could get super detailed and forecast each salary individually but that goes back to the level of precision you need to have data that will help you make good business decisions. You may not have the resources to keep up with such precision so average estimates are used quite a bit.
Once you've gone through all of your variable and fixed expenses, sit back and ask yourself if it all makes sense.
I hope that helps. Call if you need further help. We have plenty of small business consultnats at our firm that can help.
Reuben Cook
Squire & Company, PC
801-494-6046
www.squire.com
Cathy,
You question spans a few topics.
What do I need to ensure its accurate: perform the monthly closing procedures across each of your modules...
Forecasting monthly financials: GP has some rudimentary account budgeting capabilities natively. Its easier to create a budget in Excel and import it into the system. GP can only record a summary value for each finaincial period per GL code.
I have launched a product Dynamic Budgets, which is a bottom up budgeting tool, allowing you to input line item detail to build a budget for an account, and provide a monthly variances analysis window to allow you to compare detailed budget assumptions to actual transaction details. If something like that would assist your efforts take a look at http://dynamicbudgets.com. (Convergence 2011, Booth 1344)
Zubin Gidwani
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