Simple Steps to a Simplified Financial Forecast

Operating a small business is like a hike in the woods where the trail is mostly familiar, but sometimes referring to a compass is key.

The entrepreneur’s compass is the financial forecast. These projections guide you in the course you want to take. And when the path twists you in a different direction, the forecast shows where you’re offtrack and how to get your bearings back.

Your forecasts allow you to set goals and milestones. More importantly, they permit you to measure progress toward your objectives. Many entrepreneurs avoid making financial forecasts because the process entails a lot of numbers, which seem cumbersome to calculate. However, forecasting can be a simple process. Use a spreadsheet to identify a few basic factors, with which you’re probably already familiar. These factors create your financial forecast.

1. Resources

The top line in your financial forecast is sales revenue. But determination of this figure requires an initial step of identifying your available resources. These elements are cash and time.

Cash: Assess available funds for inventory and other costs that must be paid before you collect from customers. The money on hand for these things represents a curb on how much you can sell.

Time: Your revenue is limited by the time you have to contribute to the business. Selling more than you can deliver individually means adding staff, and that brings you again to a cash need.

2. Direct Costs

Once you’ve determined your resources, start identifying direct costs. Begin with all direct costs, such as inventory or materials. Labor cost is also commonly a major direct factor in generating sales. For solo-operated service providers, the only direct cost is typically the entrepreneur’s time. The key dynamics are how much output the individual can accomplish every month and the amount of personal income desired for the effort. This owner compensation target is the major direct cost in many basic business models.

3. Sales Revenue

When your direct costs are identified, sales revenue is projected as a multiple of those expenditures. All you need is your ratio of direct costs to sales revenue. This may be calculated using historical data. Or you might simply identify a markup you aim to achieve. For example, you might have prices that are twice your direct costs – yielding a ratio of 0.5, or 50%.

Divide your forecasted costs by the ratio. The product is your sales revenue forecast. Subtracting direct costs from sales revenue results in an amount for gross profit.

4. Overhead Expenses

Every business has general overhead expenses. Even the solo entrepreneur working from home must at least cover the cost of internet and cell phone use. Larger organizations of course incur expenses for rent and office administration. Don’t forget costs for advertising and marketing, even if that’s only website development and maintenance. Subtract these expenses from your gross profit to obtain net profit.

Over time, update your financial forecast. Poor results will necessitate cutting overhead and capital expenditures. On the flip side, beating expectations gives you extra funds for expansion.

Make Bookkeeping Changes to Comply with New US Tax Law

Few things in life are more complicated than US congressional attempts at making things simple. This principle holds true for the latest tax simplification. To adhere to newly established standards, business owners must make some straightforward adjustments and some less-than-clear changes.

  • Businesses may no longer deduct expenditures primarily connected to entertainment or recreation (ballgames, theater tickets, fishing outings).
  • Manufacturing businesses no longer receive a domestic production activities deduction.
  • Enterprises with $25 million or more of gross receipts now have a limit on deduction of interest expense to 30% of taxable income.

The good news is that businesses will also benefit from new allowances in 2018. Specifically, bonus depreciation of 100% is allowed on purchases of both new and used assets placed in service from 2018 through 2022. Additionally, the Section 179 deduction for property purchases is now allowed for items costing up to $1 million. When applying these deductions, entrepreneurs would be wise to rely on the judgment of their tax professionals for accurate reporting.

Tax experts will certainly aid in handling the new 20% deduction of pass-through income from business entities. Company owners must navigate income threshold limitations, disregard shareholders’ salaries, and weigh business assets and wages paid-all to determine deduction limitations. Accurate accounting is now more crucial than ever for tax planning. To keep up with congressional efforts, business owners should stay in close communication with their accounting professional.