In the previous article, we discussed the difference between a budget and a forecast. For a quick review, the budget is the original financial plan, actuals show what has happened, and the forecast combines those actual results with your best estimate for the remaining months. Once your forecast is complete, the next step is to use it. Numbers alone will not improve your financial position. Decisions and follow-through will.
Identify What Requires Attention
Start by identifying the variances that will have the greatest effect on cash flow, profitability, and operations. Not every difference between the budget and actual results requires action. Focus on the items that are material, likely to continue, or within your control.
For example, suppose revenue is $75,000 below budget because a customer moved a project into next year. Reducing office supplies will not solve that problem. The business may need to delay a planned purchase, increase collection efforts, adjust staffing schedules, or find replacement revenue. Your forecast should show how much each action helps and whether the combined changes are sufficient.
Create More Than One Scenario
A forecast is based on assumptions, and those assumptions can change. Create a reasonable case, a better case, and a more difficult case. You do not need a complicated model. You need enough information to understand how your business may perform under different conditions.
For example, a manufacturer may expect a large order before year-end but does not yet have a signed purchase order. The reasonable case might include only confirmed orders. The better case includes the new order. The difficult case assumes that an existing customer also reduces its purchase. Management can then decide how much inventory to order and whether overtime or temporary labor is justified.
Assign Each Action
Every financial decision should have an owner, a deadline, and an expected outcome. “Reduce expenses” is not an action plan. “Renegotiate the software contract by October 31 and reduce monthly costs by $1,500” is an action plan; it is specific and measurable.
Consider a business whose payroll is over budget because employees are working frequent overtime. The next step should not be to automatically terminate an employee or hire another. The manager should first determine why the overtime is occurring. Better scheduling, cross-training, or changing a workflow may reduce your cost without impacting capacity. If demand is expected to continue, hiring may be the better long-term solution. Update the forecast for each option, including wages, payroll taxes, benefits, recruiting, training, and the time required for a new employee to become productive.
Use Strong Results Carefully
A healthy forecast creates choices, but it does not mean every available dollar should be spent. Compare opportunities based on their effect on cash, operations, and future results.
For example, a business may be considering a $60,000 piece of equipment. The purchase may increase capacity and reduce repair costs, but it will also reduce cash. Before proceeding, review financing options, installation costs, training, maintenance, and the expected return with your accountant.
Review, Measure, and Adjust
Review your forecast at least monthly through year-end. Compare your revised forecast to actual results, confirm that assigned actions were completed, and update your assumptions as conditions change. Carry what you learn into next month’s analysis and next year’s budget. A missed sales target, recurring overtime, or higher supply costs should not come as a surprise twice.
Your forecast shows where your business may finish the year, while your action plan determines whether and how you can improve that outcome. Focus on the decisions that will have the greatest impact, assign responsibility, establish deadlines, and measure the results. As always, seek advice from a trusted advisor who can help you evaluate the financial, operational, employee, and tax impact of your choices.n
Angela Piñon (apinon@stcpa.com) is the Outsourced CFO & Advisory Services Manager at Schmersahl Treloar CPA.