Most small business owners create a financial forecast and then rarely look at it again, until something goes wrong. By then, cash flow is tight, growth projections are off, or a key assumption has quietly been wrong for months.
Reviewing your financial forecasts on a regular basis is how you catch those problems early and make better decisions before they become costly. But knowing what to look for, and how to interpret what you find, is where most owners get stuck.
These three tips will give you a practical framework for reviewing your financial forecasts with confidence, so you can spot variances, understand what’s driving them, and use that insight to build stronger plans going forward.
Here are some pieces of advice small businesses can use when they are revising their financial plan.
Use business insights: budget vs actual comparison
Setting expectations is important, but to glean real insight about their processes, businesses need to compare their projections with realized financial results by making a budget vs. actual comparison. Thus, to properly identify financial problem areas within their operations, small businesses need to first have a financial plan that gives a realistic 12-month scenario, and then they need to keep track of their actual revenue and expenses. It can be extremely difficult to pinpoint an issue, if a business doesn't have a baseline for comparison.
Expect to see differences
Very few small business owners will see that their budgeted results and actuals are always the same, and this is to be expected. This information can be used to see the reasons for the variances in the actual budget to what was expected. The real goal for small business owners is to test their understanding of the relationship between business drivers. There are several trends that will take place throughout the year that will allow small business owners to see why their budget changed, which will help them build a strong budget in the future.
Embrace the review process
After understanding the budget vs. actual comparison, small business owners can make the necessary changes to their budgets. The conclusions drawn from the review phase will allow them to refine future expectations. Throughout the years, this process will help small business owners further understand budgeting, which will hopefully lead to more informed decisions and expectations.
