Okay, we’re not actually suggesting that outsourced bookkeeping involves anything quite as spooky as a crystal ball, but it can help enormously in predicting your company’s financial performance down the road. Small businesses have predictable patterns. Once a history of precise bookkeeping has been established, any small business should be able to accurately forecast future results 12 – 18 months out, and have those forecasts be correct.
Predictive Bookkeeping – What is it Good For?
When you use your personal business data to help predict future performance, you’re in good company. Small and large businesses alike regularly make use of sales forecasting to assist with planning and decision-making in such areas as:
- budget preparations
- hiring practices
- inventory and production management
- overall growth and expansion activities
The premise behind financial forecasting is actually based on a best guess scenario, since no one can know with absolute certainty what will happen in the marketplace from day to day, let alone from year to year.
The prediction process doesn’t require specialized knowledge or training on your part. What it does require is common sense, and the motivation to research and assimilate the necessary information. Informed and educated guesswork is what leads to a workable business plan, but don’t let that notion scare you. We’re not talking about trying to maximize sales 10 years out.
Predictive bookkeeping is at its most valuable when developing a month-by-month forecast for the next year, then building on that forecast to create an annual estimate for the next 2-5 years.
The Big Picture
Successful sales projections rely on combining the data from past events (your bookkeeping) with information about future happenings (expected consumer demand and industry trends), in order to produce a practical and effective game plan for attracting more customers and increasing profits.
Bookkeeping aside, you need to consider and evaluate the bigger picture:
- How have products or amenities like yours been faring in the marketplace as a whole?
- How are they expected to fare down the road in terms of price and consumer demand?
- How have your competitors been doing?
- How is the economy trending overall?
Some of these questions may require a bit of elbow grease on your part to answer, but generally speaking, the more established and recognized a product or service you sell, the more information will be available for you to draw your conclusions from. These conclusions are important because they contribute directly to the income and cost predictions that you’ll be making for your own business.
The Little Picture
You can get started by using your bookkeeping figures to determine the average number of monthly units, hours, projects, etc. that you sold over the past couple of years. Then you should consider the answers to these questions:
- Has business been increasing or decreasing?
- What does the big picture we discussed earlier look like?
- Are you planning to adjust your selling prices in the foreseeable future?
Keeping any seasonal fluctuations in mind, you can now multiply your expected sales units by the appropriate end prices, and make an educated prediction about next month’s revenues - and so on from there. Of course, bookkeeping is all about considering both sides of the story, and any forecasting involving income must also consider costs.
Correctly tracking the past costs involved in getting your goods or services to market can help you to predict those costs over the months to come.
- Has the price of supplies been steadily increasing?
- Are labor costs decreasing as your efficiency levels rise?
These types of trends are easily spotted and accounted for in a business plan when you have accurate bookkeeping information to work from.
In the same way that your historical data can help you to forecast sales figures, it can help you to predict the associated costs of those sales. The difference between these two factors shows you the projected fate of your profits, and it can help you to make relevant decisions regarding the improvement of those profits.
Once you engage in regular financial forecasting, your bookkeeping will serve as a handy tool for monitoring and evaluating the outcome of that forecasting. Were your calculated sales projections correct, or were they off? Why? By consistently tracking your progress on a monthly and yearly basis, you’ll learn to self-correct your performance predictions and keep your business plan, and your decision-making, effective and up to date.