The fundamental aspects of business finances need to undergo continual planning and fine-tuning as a means of helping to make important business decisions and improvements. Last week, we took a look at business and financial plans. Once these plans have been created, they must be modified consistently. The easiest way to make the distinction is to think of the business “plan” as fixed and to envision the fine-tuning as an ongoing process of “planning” that should always relate back to the plan. In essence, the plan remains the same while planning continues on revolving around that plan. Beck and Company Certified Public Accountants and Business Advisors have vast experience helping clients with their financial business planning needs and would be pleased to offer a complimentary accounting consultation. Let’s take a closer look at how to go about planning and fine-tuning business finances.
Rolling Forecasts: Planning for what is ahead
The ongoing planning that results from your business and financial plan is essential to sound financial management. You must take constantly changing circumstances and situations into account. Your planning process evolves along with these changes. Rolling forecasts act as this sound financial roadmap. Essentially, these rolling forecasts create an ongoing cycle of planning, evaluating, and updating organization-wide operations such as finances. The goal is to have this process help you understand problems, challenges, and trends sooner. The predictions made in rolling forecasts allow you to make changes before predicted outcomes are actually observed that ultimately save your company money and time. In its simplest form, it is a more “live” version of a budget that is also simplified so it can be generated and applied much quicker than a traditional budget could.
A rolling forecast provides many benefits to an organization in terms of reaction time, alignment of operations, and timelines. Management can better focus on making decisions that truly matter and have far-reaching implications that propel a business toward its strategic goals and overall plan. If a rolling forecast is done correctly, it will provide a competitive advantage in a rapidly changing business climate.
Here are five core components that make up a rolling forecast:
- Extends beyond the calendar/fiscal year or baseline set by the budget to be aligned to the actual business cycle regardless of its length
- Updates on a regular and pre-determined basis to keep a consistent rhythm that can be planned for and accommodated. Keep in mind that the number of forecast periods is dictated by real business drivers such as business cycle, competitive forces, price sensitivity, vendor reliance, and technology adaptation.
- Emphasizes key business drivers which are business decisions or influences that impact numerous areas and ideally link revenue and expense activities
- Rapid forecast creation by only focusing on key decisions not translating all business decisions into financial terms. Ideally, a rolling forecast solution will be able to generate an organization-wide forecast focused on a specific outcome in less than one business day.
- Blends actual performance along with the updated forecast by using the most recent actual data. The majority of effort should be spent on updating periods that were previously forecast and not on the new periods being added to the forecast because those are more variable and less controllable/predictable.
Fine-Tuning: What is working and what isn’t working?
Consider the following aspects that need to be continually fine-tuned no matter the type of business. In the process, assess the risks and then work to mitigate them.
-Required and Generated Cash
A few questions to ask yourselves: Are we burning cash? Are we generating cash?
-Revenue
Factors to consider: sources of revenue, predictability of revenue, other competition
-Profitability
Questions to reflect on: Are we profitable? How can we be more profitable? Have we prioritized correctly if our goal is profitability?
-Costs
Aspects worth assessing: Are we capital efficient? Have we prioritized?
The process of planning and using rolling forecasts in addition to fine-tuning essential business components can have a vast and positive impact on the way finances are managed within your organization. For more assistance with financial management, please contact us here at Beck and Company CPAs.