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Forecasted Financials: Map for a Good Journey

I've met few entrepreneurs during my career who are burning to prepare forecasted financial statements! But I've never met an investor who will fund an entrepreneurial venture without them.

In this article, I hope to convince you of the importance of forecasted financial statements to the growth and success of a business. Forecasted financial statements are to a business what a map is to a trip.

To begin a trip, we must first determine our destination. Our plan could simply be to "Go west!" That would work if the trip involved only one or two people, and time and money were not an issue. The route could be changed as desired without affecting anyone else. But building a successful business is never a solo trip -- and both time and money must be spent wisely.

For an entrepreneur, the destination is profit, positive cash flow, and the ability to pay back financing and investors. Such a trip, from idea to successful business, is like a cross-country journey to the farthest coast, to travel as far as possible! And it will take a caravan of people, in several vehicles, joining in at different stages!

So there must be a way to communicate that everyone can understand. The map for a trip documents the plans and communicates these plans to everyone involved, showing directions and distances. Forecasted financial statements are the most common method of communicating the business journey. While both maps and forecasts include words, words alone cannot efficiently explain the trip.

The map also helps to plan "points of interest" along the way. In business, these are called "milestones", things that must be accomplished if the business is to continue to grow. For example, the marketing plan must be implemented to let potential customers know of your product before you can expect any significant sales. The forecasted financial statements would reflect the resources to be used for marketing and where these resources will come from.

A map is a document of the journey, not of the destination. While the destination is important, the journey must also have appeal, especially if you want others to join in. Each of them probably will want to help plan the trip as well. Similarly, the financial forecast should incorporate input from management team members and investors.

If you plan a cross-country walking trip, not many people will come along, regardless of the destination. The difficulty of the trip itself will be too great. And so it is in business. An entrepreneur must enjoy the process of building a successful business, or they may become frustrated by problems along the way and quit. Management team members also need to enjoy the journey. Building incentives into the forecasted financials can make a rewarding trip for all involved. The map can therefore serve as a tool to recruit others to join the fun. In business, the forecasted financials map the business journey, show how long it will take, and describe what participants can expect at the end. If the journey appears to be unrealistic or too difficult, however, the plan will not attract needed investors.

I could go on and on about the details of planning an elaborate trip and their similarities to planning a business. Practically every event, process, and decision will impact the financial statements, and these will, in turn, be affected by every other aspect of the business plan. Just be very careful when starting the trip that you do not to leave the map at home! This may sound silly, but too many times I have seen companies leave the business plan on the bookshelf. Then, down the road, they waste time and money dealing with issues the business plan addressed.

While it isn't necessary to know how to make a map, it is important to know how to use one and to realize its value for planning a trip. It also is not necessary for entrepreneurs to know how to prepare forecasts, but I hope I have convinced you that they are important!

I have heard entrepreneurs make all kinds of excuses for not preparing forecasts. Most entrepreneurs have excellent sales and/or product development skills, but do not have strong financial analysis skills. Nonetheless, forecasting is a "must" to accomplish their goals. The more complicated the trip, the more you may need to hire a professional who has planned many other trips and can anticipate possible problems. Maps alone cannot indicate road conditions, construction zones, accidents, or other events beyond the traveler's control. Similarly, it may be a good idea for the entrepreneur to hire a professional, such as a C.P.A., to prepare the forecasts for the business plan.

Just as a travel agent can assist a smooth trip, so a C.P.A. can assist a business venture. Both are professionals who use your input to plan how best to get you where you want to go. An entrepreneurial venture is complicated. It involves many people. The risks of failure are high. Good plans greatly increase the probability of success. Forecasted financial statements are an integral part of a good business plan. They are the map of its journey to success.

By: Gary J. Hessenaur, C.P.A.

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