Why Bookkeeping Fails – Forecasting: The Future Is More Important Than the Past

For many small business owners, accounting can be intimidating. Many owners are strong with numbers and record keeping, but few are financial professionals. Concepts like enhanced bookkeeping or cash flow management can seem difficult and unapproachable. Financial forecasting, in particular, can conjure up feelings of dread for business owners.

But, as the saying goes, ignoring a problem doesn’t make it go away. Simply put, traditional bookkeeping, which is backward-looking and reactionary, is not enough for today’s business owners. To keep pace with fast-growing competitors, owners today must make use of forecasting. In this article, we’ll discuss the ways that you can avoid falling behind the competition. 

What is forecasting?

Forecasting, in simplest terms, is the process of estimating the financial performance of your business. It takes into account past and presents financial data as well as industry and marketplace trends. It is closely related to the concept of budgeting. 

There are 2 major types of forecasting: Cash flow and business. While the 2 are closely related and often done together, they do have differences. Often owners may take advantage of one type of forecasting but ignore the other.  For forecasting to be impactful, both types should be done together. 

Cash Flow Forecasting 

Cash flow forecasting is a very detailed, nuts-and-bolts forecast of where cash is moving within your business in the next 90 days. A cash flow forecast will predict the costs your business will incur in this period down to the dollar. It will also account for predicted revenues from all channels as well. This kind of forecast allows business owners to spot short-term opportunities to make use of their cash, or to avoid cash flow pitfalls when costs are forecasted to add up.

Cash flow forecasting is vital to the short-term planning for your business.  Too many owners wake up to find that they will run out of cash in a week.  While cash flow forecasting may not avoid that same scenario, it will show owners when this will happen so they can plan around it to bridge the gap. 

Business Forecasting

Business forecasting, in contrast, is a higher-level approach. A business forecast makes use of a business’ balance sheet and cash flow statement to make rolling predictions for a period of 12 months. A business forecast is what owners, with the help of financial professionals like virtual CFOs or controllers, use to form an overarching financial strategy for their company. Business forecasts also allow owners to test the accuracy of their forecasting, as they can compare actual to forecasted results over a significant period of time.

Quick Note – Why 12 Months? 

When developing a forecast, I have owners who say, “I want to see the next 2 or 3 years”.  I strongly discourage this.  First, by their nature, forecasts become less accurate the longer the range.  While I feel comfortable saying that forecasting is fairly accurate within a 12 month period, the accuracy drops quickly after that.  For most, forecasting more than 12 months is a waste of time.  The most common reason you may forecast more than 12 months is for investor purposes. 

So how accurate should a forecast be?  I tell my clients that if we can estimate revenue within 5-15% we are doing pretty well.  Looking at most Wall Street Analysts, they are often within this range, with a lot more data at their disposal.  

Why is forecasting important?

Forecasting is a crucial part of any successful business plan for growth. Businesses that don’t use it are flying blind and hoping that things work out. This is not something that probably seems appealing when it comes to your business. Businesses that rely solely on traditional bookkeeping and reporting are, without knowing it, leaving the future up to chance.

Forecasting Builds a Foundation for Strategy

First and foremost, forecasting is the foundation on which your business will build its plan for future success. You simply cannot create a sound financial strategy without a forward-looking approach.  This approach must take into account how your business’s finances will look in 6 months, or in a year.  If not, you risk falling behind competitors who have such a plan. 

Imagine the position of a manufacturing business owner whose traditional bookkeeping approach doesn’t allow him to see that inventory costs will be rising across the industry in the next year.  This is a fact that most of his competitors who are forecasting know and have planned for.  While the owner might not be able to do much about rising costs, they can plan how to adjust their business model.

Eliminate Bad Surprises

Nasty surprises like insufficient cash flow or an unexpected tax bill are something that forecasting will help your business avoid. Forecasting lets you plan proactively, and seize opportunities that you may otherwise have missed. You may not even know that your business is in a position to seek out investments if you haven’t been developing and refining forecasts.

How Close Are You to Your Goals?

Finally, forecasting is the way that you can measure progress towards goals. How will you know if your year-end balance sheet represents a success or a failure unless you have a plan to compare results against? Forecasting will tell you what moves represent successes and what ways that you failed to live up to expectations over a period of time — and let you plan to correct mistakes and improve. 

Articles in This Series

We’ve put together a whole series of articles like this. Are you interested in learning more about why traditional bookkeeping doesn’t work?  Are you ready to join the hundreds of thousands of other owners that are getting more out of their accounting services? Keep reading.  Here are links to our other articles.

·  Traditional Bookkeeping Doesn’t Work Today

·  Why Bookkeeping Fails: Your Current Reporting Can Be Better

·  Why Bookkeeping Fails:Forecasting – The Future Is More Important Than the Past

·  Why Bookkeeping Fails: Enhanced Bookkeeping is the Future

How Krieger Analytics can help

After article three in our series, you know the basics of enhanced bookkeeping. Led by a CFO or virtual CFO, enhanced bookkeeping services will help gear your bookkeeping toward the future. It can make it easier to create an overall financial strategy for growth by making use of concepts like forecasting. In short, your bookkeeping can be smarter and can help you make crucial decisions for your business. 

When most business owners hear this their first reaction is “sure, but at what cost?”.  There are two ways to respond to these questions.  First, the cost isn’t much more significant.  It’s not about doing your bookkeeping differently — it is about adding an element that your bookkeeping has been missing. It’s about adding the “brains” to your bookkeeping — forecasting, strategy, and analysis.  Most business owners would be surprised that this can be accomplished for just a few thousand more each year.  

Here is the second way to answer the questions – it’s at the cost of your business.  Your competitors are doing this (at least the ones who are growing).  The “big boys” who seem to have endless budgets are doing this.  How can you afford not to?  How can you afford not to have strategic goals and financial insight into your business?  

Krieger Analytics specializes in outsourcing accounting services for small businesses. From bookkeeping to virtual CFO and controller consultations, and our background in entrepreneurship and finance means we know what running a business entails. Our goal is to meet your accounting needs without burdening you with the costs of a full-time accounting staff. And, we understand your position as a small business owner, because we have experience running businesses ourselves. 

Have questions about anything discussed in this article? Interested in what valuable insights a CFO and business owner has for your business? Conversations are free, so don’t hesitate to reach out at [email protected], and let us explain how our services could be the right fit for you.