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Small Business Bookkeeping Tips: Annual Profit & Loss Estimates

bookkeeping_tips

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Bookkeeping tips on measurment

Often times, business leaders need to make decisions that will impact their bottom line. How strong is my reserve, what are inventory levels like, and what expenses are overloading the budget? To know how to answer these questions your business bookkeeping must be accurate.   

So what exactly is a financial forecast? 

According to the Business Dictionary, a financial forecast is a prediction concerning future business conditions that are likely to affect a company, organization, or country. A financial forecast identifies trends in external and internal historical data, and projects those trends in order to provide decision-makers with information about what the financial status of the company is likely to be at some point in the future.

Why do I need to forecast for my business?

  1. Lack of planning and lack of control of cash can cause a business to fail or put the business at risk.
  2. Like a map, a forecast is a starting point to help you know where you are and where you want to be in your business.  This allows you to plan and use your resources wisely.
  3. Helps identify any key variables that may be barriers in achieving your goals
  4. Assists you to secure any funding you may need.  A bank will not be backing a company that doesn’t have any positive expectations or goals.
  5. Most forecasts are inaccurate and inexact especially for a newer business or newer market, but that’s the wonderful thing about forecasting, you can re-forecast at any time using the new information you have acquired. 

How do I create a forecast?

  1. It is the best guess of what will happen to your business over a specific time period.
  • Quantitative 
    • Previous year trends in your business
    • Previous year trends in your industry
    • The state of the economy
    • The growth of your industry
  • Qualitative
    • Based on personal judgment
    • Based on consensus of management team (or other team members)
    • Based on an expert in the industry (long standing member)

It is best just to start with the best guess based on one of the methods above, but remember these are forecasts and they can and will change.  Our advice for small business bookkeeping is to re-forecast as needed, but if you see that you are needing to re-forecast month after month, take a step back and see if the method you are using to forecast is the best method to use or even use a combination of methods.  Each business/industry has their own ways of coming up with their forecasted numbers, you just need to find the best way to fit your business and bookkeeping tasks. To get more helpful bookkeeping advice visit our blog where we discuss this and more on Tulsa bookkeeping.

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