We’ve turned the page on 2022 which means it’s time to start looking ahead towards the new fiscal year and a new annual forecast.
Creating a comprehensive financial forecast provides you with insights into your company’s yearly budget. It also allows for you to predict future cash flow, profit, and revenue while keeping the wheels moving on other financial responsibilities. This includes your debt load, operational costs, investment decisions, and emergency funds.
As you move towards creating your new annual forecast, keep the following tips in mind. The more complete you can make your projection, the better off you’ll be as you move through the upcoming months.
Track Yearly Forecast Patterns
To know where you’re going, you’ve got to look at where you’ve been – and your annual forecast is no different.
You can use your company’s past expense data to estimate your future costs, needs, and performance. Look at last year’s finances but also previous years as well (if applicable). By identifying patterns and averaging costs, you can create a more accurate prediction how much you’ll need to set aside for each business expense.
For example, do you spend more on air conditioning in your office during the summer months? How about heating in the winter? Do you hire additional help over the holidays to handle the rush? Or have an annual year-end party to finish off the end of every year? Knowing these things are coming and planning for them prevents you from having to shell out money you’re not ready or able to spend.
While you can certainly create a budget without a forecast, you’re more likely to hit your targets if they’re based on past data. So make sure you’re looking back as you move forward – your forecast will be all the better for it.
Determine Your Monthly Expenditures
Your business has a lot of moving parts, from fixed and variable expenses to knowing if, when, and how to invest money back into your company.
To create an accurate yearly forecast, begin by determining what you’re spending every month in terms of your business expenses. For forecasting, you’ll want to look at your expenses from previous years to create an estimate for the upcoming one.
After figuring out your monthly averages, compartmentalize your expenses into two categories: necessary vs. discretionary.
Necessary expenses are what you absolutely can’t go without in terms of growth and operations. This includes costs such as paying for office space and your utilities.
Discretionary costs are the things that are nice to have but wouldn’t impact your company’s ability to move forward if you cut back on them. For example, using cheaper off-brand office supplies rather than more expensive brand name ones.
Knowing your numbers will help pinpoint areas where you can either (1) allocate additional funds or (2) cut back on expenses. It can also help you settle on whether a task is best done by you, or if you can afford to outsource the work. This includes tasks such as accounting, bookkeeping, media management, and content creation.
Factor In One-Time or Indirect Business Expenses
There are expenses that won’t reoccur throughout the months or may be part of your overall plan to reinvest into your business. These are the costs that are most often overlooked when it comes to creating an annual forecast.
To avoid this, begin by listing your annual and stretch goals. This includes your annual targets, your vision for company growth, and what you’d like to see from your business 5 years down the line.
Once you know what your focus is, start looking at your priorities and estimating the costs associated with each of them. From there, you can plan how much of your budget to allocate to each of your objectives.
Remember to take into consideration the trade off for indirect business expenses, like coaching, that can potentially help you and your team be more structured and productive. Sometimes you’ve got to spend money to make money, and sometimes it makes more sense to put cash back in reserve. As a business owner, it’s up to you to consider the costs associated with moving towards your targets.
Need Support Creating Your Annual Forecast? Reach Out!
Creating an annual forecast takes thought and planning but it’s an invaluable tool that can help you safeguard your future. By following a set of simple steps, such as managing cash flow and maintaining financial balance, you can keep your business on the right track and ensure that you have cash put aside for when you need it most.
If you’d like assistance creating your company’s annual forecast, or would like a professional opinion on what you have outlined so far, we can help. Our team of Chartered Professional Accountants would be happy to help you on your way to a simplified and financially stable 2023.
