Being able to accurately develop projections and financial forecasts is a critical financial planning skill for business owners. Purposes of developing financial forecasts include: assessing future financial needs for ongoing business operations and possible expansion, planning for production and hiring, or planning workforce reduction requirements.
The time period typically considered in developing financial forecasts is three to five years. Ensuring that projections are both realistic and attainable is an important key to developing accurate forecasts. Growth rates utilized should be sustainable, and forecasts should be based upon supportable evidence such as analysis of historical financial results. It is also important to utilize industry-supportable estimates and consider the state of the economy in which the business operates. It is imperative to include accurate cost-of-sales expenses and general and administrative expenses. When considering projected sales growth, business owners should also consider what capital expenditures will be necessary for expansion and how those capital assets will be financed.
Budgeting is another area of financial planning that should be integrated with the development of an accurate business model. The budgeting process considers both financial and operating targets and provides support for the overall operating strategy. Integrating budgeting and forecasting allows business owners to revise assumptions based upon actual results. Changes to the forecasts and budgets can be made regarding the operating strategy, capital expenditures and workforce compensation.
For assistance with business modeling, please contact Joel Rosenthal, Shareholder, at (412) 697-5387.
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