|
The truth may hurt, but financial
projections should be brutally honest
By Kyle
Parks • Bankrate.com
 Every
small-business owner asks these questions:
- How many employees should I add? Or cut?
- Where should I keep costs so I can get the
profit margin I want?
- Will I need to find more capital?
- Are my revenues going to grow fast enough
for me to gain market share?
The answer to every one of them is found in
one document -- the financial projection.
Too bad so many of them contain imaginary numbers.
Honesty
should be the policy
All major business decisions flow from the forecast, which looks
ahead several years -- three to five is usual -- and projects sales,
costs and other key numbers that affect a business owner's bottom
line.
To be useful, a financial forecast should be
an honest, no-holds-barred projection. Unfortunately, many are no
more accurate than a magic
8-ball.
"This is not some business plan you are using
to convince someone to give you money," says small-business author
and expert Robert
Sullivan. "This is for you. And if it's a terrible projection,
at least you will know that and you can plan accordingly. It won't
do you any good to falsely make it look good."
"The business owner has to be both honest and
realistic," says Robert Penn, a principal with the Houston accounting
firm of Mann
Frankfort Stein & Lipp. "I can't tell you how many times
we have gone through a preliminary forecast that looks unbelievably
good, and then we have to go back to the management and try to get
them to think about it."
Using
the forecast
For Mitch Mirchandani, chief executive of a small Boca Raton, Fla.-based
technology company called Palmasoft
Inc., the best part of a financial projection is the help it
gives him in figuring out what type of work will account for his
company's growth. By looking back on the revenue stream, and tracing
the lines out into the future, the projection can help him figure
out how he should tweak his business's priorities.
Right now, for instance, much of the company's
business is coming from working on databases for other businesses
and from designing Web sites. But a growing piece of Palmasoft's
$650,000 in annual revenues is coming from designing e-commerce
solutions. Mirchandani now knows that this should be a priority
for the future.
"In our business, things change so fast it really
only does us any good to look ahead for one year," he says. "The
big thing for us in planning ahead is figuring out our staffing,
because our big investment is in our people."
Hire
a CPA or do it yourself
Though many small-business experts think hiring a certified public
accountant is the best way to do a financial projection, some small-business
owners decide to do it themselves. If you go that route, the Small
Business Administration's Web site includes instruction for financial
projections in its online
business plan tutorial.
You also should consider finding friends or
consultants who can look at the numbers behind you. Perhaps that
might be someone at the local Small Business Development Center,
or someone in your industry who isn't a direct competitor.
Make
certain it's complete
Giving the accountant or other preparer complete information is
as crucial as giving honest information.
When Kenneth Templin ran a small envelope company
in St. Paul, Minn., called Quality Park Products, he would tell
the accountants about everything from the quality of his competitors
to how he planned to price his products in the future.
"You have to have some stretch in the forecasting,
because it provides an objective you strive to reach," says Templin,
who now helps business owners through the SCORE
program of retired executives. "But it also has to be realistic,
with a real sense of how you are going to get market share and what
making your products is going to cost you."
Templin's business depended a lot on the cost
of paper, a sometimes volatile commodity, and now the envelope business
is having to deal with a new competitor -- e-mail and e-commerce.
"Think about what goes into increasing your sales, if you are planning
on that," he said. "Don't be overly ambitious in the projections,
because it takes time to close a sale and time to deal with the
increased business."
For small business expert Sullivan, a solid
financial forecast -- and indeed, a good overall strategic plan
-- is crucial for any business. "It fits into one of my favorite
truisms," he said. "Fail to plan, and plan to fail."
Kyle Parks is a freelance
writer based in Florida
To comment on this story, please e-mail the
Bankrate.com
editors
-- Posted: April 6, 2000
|
