Magazine article The CPA Journal

Blueprint for a Successful Business

Magazine article The CPA Journal

Blueprint for a Successful Business

Article excerpt

Entrepreneurs often attempt to build a business without a blueprint-a comprehensive financial forecast or financial projection. A financial forecast assumes the business' operations will continue on a set course, with no major changes. The operative phrase is "set course." Preparing a monthly financial forecast sets the course for a given period of time, usually a year. Once done, actual monthly results should be measured against the monthly forecast. If there are no significant deviations, the business is under control. Otherwise, the plan needs adjusting.

Many business owners attempt to build a business without a financial forecast because they trust their instincts. This may provide short-term success, but can result in long-term failure. Often a company has financial problems long before the owner or management realizes the extent of the trouble, at which point it's usually too late to turn the company around.

Although financial forecasts do not guarantee success, a forecast does signal for immediate attention to problem areas. Responding to problems quickly increases the business' chances for long-term success.

A projection is different from a forecast. A financial projection, unlike a forecast, assumes the business will undertake some major change. Generally, financial projections should be prepared for start-up businesses as well as existing businesses that are contemplating a major investment, such as the acquisition of another company, the development of a new product line, a major equipment purchase, or some other significant capital expenditure.

Financial projections enable management to make smart business decisions before expending company resources or incurring debt. Given certain assumptions, management can assess the risk of debt payback for a significant capital expenditure. For example, assume a business is considering an acquisition and the financial projection indicates the debt payment will be tight. With this information, the owners can renegotiate the purchase price, renegotiate the payment terms, or reconsider the purchase altogether.

A comprehensive financial forecast or projection includes the following documents, broken out on a monthly basis:

* Forecasted or projected statement of operations;

* Forecasted or projected statement of cash flows;

* Forecasted or projected balance sheet; and

* Statement of significant assumptions.

Some companies prepare only a forecasted statement of income, erroneously believing that this will be adequate to provide them with the information they need to be successful. …

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