Wednesday, January 12, 2011

Importance of Financial Forecasting

Happy New Year to everyone!

As we turn the calendar to 2011, we look forward to a fresh start and hopefully better times ahead.  Many, if not most or all, businesses know what they are looking to accomplish over short, intermediate and longer time horizons.  They are looking to arrive at a destination and mile markers along the way.  In order to track how the organization is doing in achieving its financial goals, a roadmap should be created.  If a business goes astray in achieving its financial goals and has no barometer to measure against on a line item basis (think income statement line items) to determine why it is off course and by how much, it runs the risk of not being able to timely identify the problem areas and take corrective action.

As we’re mid-way through January if you aren’t done, or at least close, to getting a final financial budget in place for 2011 you should begin immediately.  It really isn’t too difficult a task and it provides a great tool for the business owner to measure actual against expected results.  Rather than simply looking at the bottom line on the interim financial statement and wondering why it’s not what it should be, the budget, used in a regular and timely fashion, provides the much needed benchmark management should have to run the business efficiently and profitably.

In addition to creating a financial forecast/budget, it’s also very important to create a cash flow forecast.  A typical time horizon is 13 weeks, updated on a rolling basis, however you can also create a longer view cash flow forecast as well.  There are few industries, if any, where cash flow forecasting is more important than in the construction industry.  Knowing when, and where, your cash is coming from and going is vital.  Additionally knowing if, when and how much financing from your bank partner, in the form of the working capital line of credit and other debt facilities, is also of the utmost importance in helping you run your business.

There are other advantages to creating these plans as well.  Important business partners for most of our clients include the bond company, the surety broker as well as the bank.  These businesses that extend credit to contractors obviously prefer to work with contractors who have their “act together” in terms of running and managing their businesses.  How do you think your bond company or bank would react if, during your annual or semi-annual meeting with them, you handed over these plans in addition to other management reports that are critical for those business partners to continue extending, and maximizing, the credit you need?  How many of your competitors would you guess actually hand over these financial and cash flow forecasts?  The answer is some perhaps, but certainly not all.  You must take any advantage you can in order to maintain, and again maximize, surety and bank credit.

If you would like templates for either a financial or cash flow forecast, please contact me and I’ll be sure you get a copy.

1 comment:

Bank Lending Criteria said...

The process of creating financial forecasts allows you to understand the business more deeply and to ask new questions about how to spend and invest money wisely. This process is called due diligence, and for investors or executives this may be mandatory.