Financial forecasting is key for the success of any small business. Unfortunately, today’s economy has made it much more difficult to achieve this, but the basics of financial forecasting still remain the same. Our Miami Accounting Firm can help determine what the future holds for your business through financial forecasting, projections and cash flow models.
In order to perform an accurate financial forecast, the business owner must develop a comprehensive set of projected financial statements. These financial statements, or pro forma financial statements, will assist with future forecast levels of balance sheet accounts as well as profits and projected borrowing. Ultimately, these pro forma financial statements represent the business owner’s financial plan.
A financial forecast allows the business owner to compare actual events against the financial plan and make any necessary adjustments as the year progresses. Usually these statements are vital in terms of keeping the business out of financial trouble; also if the business is in need of a bank loan or other type of financing, pro forma financial statements are typically required.
Small businesses can develop their pro forma financial statements for different time periods – the most common of them being either six months or a year. Pro forma financial statements for three or five-year time periods are often developed for banks or equity investors who are seeking financing.
The best method when preparing a comprehensive financial plan is to first prepare a pro forma financial statement. Next, a cash budget must be established along with a pro forma budget sheet.
The pro forma income statement provides a forecast of how much profit the firm expects to earn over a given time period. Generally, small business owners should follow four steps when developing the pro forma income statement:
Expenses that you deduct from sales include: general and administrative expenses, taxes, dividends and interest expenses. When those have been eliminated, it will show the gross profit estimate – the ultimate goal of the pro forma income statement.
Once the pro forma income statement and cash budget have been established, the business owner will have all of the information necessary to develop the pro forma balance sheet, which illustrates the cumulative changes in the business over time.
The information from the previous year’s balance sheet is also necessary when forming a pro forma balance sheet. If the firm’s assets increase from the previous time period, then the firm’s owner has to look at the liability side of the balance sheet and find where the increase is in liabilities to support the increase in assets.
For more information, contact Verdeja, De Armas & Trujillo, LLC today!