Proactive financial forecasting is a competitive advantage for many professional services firms. It promotes healthy cash flow health which is essential to mitigating ever thinning profit margins and competition. Management teams need to regularly review and understand the following five basic financial metrics in order to ensure healthy cash flow:
1. Balance Sheet -This is the quantitative summary of a company’s financial condition at any given point in time. It gives management a snapshot of assets, liabilities and net worth. When viewed over time, it helps owners understand how profits are being used to finance operations and if the company has enough cash for growth.
2. Income Statement -Otherwise known as “profit and loss,” this statement records all revenues during a given period, as well as the operating expenses. Aside from helping identify areas that are over or under budget, the income statement, along with balance sheet, is one of the basic elements required by banks and lenders to determine credit limits and loan rates.
3. Overhead Allocation -How rare it is to find properly allocated overhead costs, In fact, you are more likely to find companies that don’t allocate overhead costs at all. But without overhead allocation, it’s impossible to know actual profit or loss on your jobs.
4. Job Cost Reporting – A good job cost report can provide an immediate answer to the question, “Am I making or losing money on this job?” And it should be timely enough to answer that question before it’s too late! With the right amount of drill-down detail, the job cost report can identify areas that are over budget-as well those that are under budget-and identify areas of strength and weakness in budgeting and scheduling.
5. Percent-Complete Reporting-In professional services, it’s not uncommon to see over billing or under billing. It’s all part of what the balancing consultants do to manage cash flow. The important thing to understand is exactly where you stand in terms of billing and percent-complete on the job, regardless of the method you choose to calculate the percentage of completion (from actual dollars versus estimated or others). Ignorance of this situation can be fatal to your business. Strong financial reporting software can help with that, automatically adjusting the income statement to over or under billing so that revenue is not inflated.
Preparing accurate financial forecasts is one of the most important management tasks for financial executives. Major business decisions are driven by these forecasts — from how many employees to hire and whether to borrow money to how to control costs and take advantage of expansion opportunities.
You’ll reap many benefits by taking the time to prepare a financial forecast, including better cash flow management, more accurate and consistent project financial results, and higher profitability.
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