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Guessing versus Forecasting – Use Historical Data to Predict Future Performance

If every business could peer into the future to see how they will perform, there wouldn’t be a need for historical data and performance benchmarking.

Unfortunately, nobody has a perfect view into the future, so it becomes necessary for business owners to plan and forecast. By making educated guesses with valuable information gleaned from the past, companies can establish the path they will take to growth and profitability.

Accounting professionals are great at producing accurate historical financial performance information. The value in this historical data is only partially found in the periodic reports and financial statements generated. The primary value, the insight delivered from this historical data, is the information it reveals about the business operation over time. It is from this historical data that certain trends are identified, providing a basis for making the educated guesses necessary to learn how the business will look in the future.

Forecasting is very important for businesses, as it provides the framework for laying out your expectations for the business. It is a way to (hopefully) predict what your business finances will look like in the future based on forecasted growth. And armed with the forecast, you can now more confidently build a reasonable plan to reach your stated business goals.

While there are myriad approaches to creating a business forecast, it makes sense to simplify the process and focus on the area you likely spend most of your time attending to: sales. Use your sales goals and projections as the basis for establishing a forecast, setting realistic goals for the current year and for a few years after that. Once you’ve forecast the new sales goals, you can more easily appreciate what it will take in personnel and other costs to support that growth.

Recognizing that the forecast is simply an educated guess, it is important to regularly compare actual performance to the forecast to see if the business is on the right path to reach the established goal. If sales are not growing as projected, then the business may need to adjust in terms of personnel hiring and other plans to ensure that costs don’t outpace sales.

Without a path to follow, business owners will not necessarily know if the operation is “on track”, as there is no track to be on – there is nothing to measure success against. Certainly, profitability is the goal, but it is a matter of degrees of success, and the business will not know whether it is being as successful and profitable as it might be.

Mendelson Consulting provides the tools accounting professionals and their clients use to create realistic forecasts and organize the information so they can formulate a plan for the business owner to follow. On an ongoing basis, Mendelson Consulting delivers continued value by supporting business owners and accounting professionals as plans and needs change.

Helping the business owner recognize and respond to changes in the business and adjusting plans as necessary to keep the business on the right path. This is a far better plan than just guessing and hoping for the best.

MARIO NOWOGRODZKI, CPA.CITP

MARIO NOWOGRODZKI, CPA.CITP

Mario Nowogrodzki, CPA.CITP, is founder and principal of Mendelson Consulting (www.mendelsonconsulting.com), an accounting technology firm that assists entities with planning, selecting and implementing business management systems. The firm was selected as Top Technologist by the Sleeter Group and Top Integrations Advisor by Insightful Accountant. Nowogrodzki is a member of the Florida Institute of CPAs Business Technology Section; a contributing author and speaker for Intuit, Accountex, and the Woodard Group. Contact him at mario@mendelsonconsulting.com or at 954-447-0250.

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