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4 Reasons Your Small Business Must Do Monthly Projections

Many business owners fail to review their businesses and implement corrective action early.  I have small children.  As part of my parental duties I teach them right from wrong and guide them away from danger.  As children at times they think they know better but my experience and foresight protects them.  So I tell them stop at the stop sign, don’t run near the street and chew your food slowly, say please and thank you to name a few.  I am constantly monitoring them to steer them away from danger and teach them the vital skills needed as adults.  A small business is just like a young child.  We must monitor it, feed it, nurture it so that it will become strong able handle the challenges of the world. Many small business owners don’t look at it that way.  Business owners and financial stewards of many organizations fail to monitor and guide the fiscal health of a business.  In many cases they wait until the end of the year to see bottom line results. At that point they “hope” they are profitable.  This is not monitoring small business growth or nurturing the bottom line.  It is simply a “hope”.  Every small business should be forecasting their bottom line on a monthly basis.  The forecasts should then help initiate actions to help business owners and financial stewards steer towards a desired bottom line.  The following are a few key reasons why forecasts should be made monthly at minimum.

  

Pinpoint and react to financial issues

One of the principal reasons to forecast on a monthly basis is so leaders of an organization can be alerted of fiscal issues right away.  For example, we recently completed a forecasting project of a non-profit organization.  The organization had a subscription based model which gave members access to its services and events for an annual fee.  While working on this project we uncovered that revenue was “soft”.    Revenue was not coming in at the pace which it was anticipated.  This means the organizations’ bottom line target would be in jeopardy if something drastic didn’t change.  In response to this information with our help they initiated several strategies to save costs and boost revenue. They searched for cost effective vendors for vital commodities and ran a promotion to encourage members to recruit new members into the community.  These two initiatives in tandem helped the organization minimize the anticipated shortfall.  Had the organization taken a “wait and see” attitude it would have been in for a huge surprise at the end of the year.

 

 Promote Long Term Growth

I once heard an entrepreneur say that “my business is doing well our revenue has been stable for a few years…the problem is our revenue has been stable for a few years.”   A business by definition must grow.  An organization that is stable is on the verge of decline then fall.  Forecasts should be made on a monthly basis to promote long term profit growth.  Forecasts help focus the attention of leadership toward a common goal.  At the end of the day business owners want their organizations to turn a profit.  Ideally that profit should be more than the previous year. A small business may be doing well, turning a profit from year to year and providing a consistent salary to the owner but, is it growing.  Will the organization do better than last year? Is the organization working toward that goal? Or is there a “wait and see” attitude?  Small business owners who routinely forecast months and even years in advanced will be able to meet long term growth goals.

 

Industry Benchmarking

Another reason monthly projections are necessary is to support industry benchmarking.  Industry benchmarking is the process of comparing your company performance to peers.  The ability to benchmark against industry peers is a vital part of running an organization.  The only way we are going to know that our organization is doing well is if we have a point of reference.  Benchmarking information can be found in industry association publications, Risk Management Association or Census to name few.  It is surprising how much free information is available perform this type of analysis if one knows where to look.

 

 Minimize Tax Impact

One politician once quibbled “We want you to succeed because the more you make, the more we take.” While this statement provoked much laughter there is much truth to it.  The projection process can be a mechanism by which the business owner reduces taxes paid to the government. For example, rather than paying taxes on a projected profit of $60K per year why not reinvest in the business.  Reinvestment can take on the form of additional advertising opportunities, critical technology upgrades or research & develop of new products/services.  These additional business expenses will help reduce the tax liability and poise your business for greater success in the following year. We as business owners need to manage our tax commitments through the forecasting process.

 

The forecasting process has many benefits for the business owner as we have outlined here.  The time and effort in creating projections is bound to help the business owner react to financial issues, promote long term growth, benchmark against competitors and minimize their tax impact.  These strategic actions together will help a small business reach new heights of growth.

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