How is your business measuring the future? There are many key performance indicators (KPIs) a business can hold up as signs of forward progress – but let’s focus on the dollars on the bottom line. Profit forecasting as a routine business practice is a powerful tool that can enable your business to navigate uncertainties and set better goals for the future.
Building Financial Stability
The foundation of good profit forecasting is understanding the trends behind your historical information. Analyzing what activities of your business are the most profitable, as well as what the market trends are, is critical to projecting future profits. Think of this exercise as a pros and cons list, backed up with dollars and cents.
Example time! Sprague Pest offers a variety of service lines spanning from recurring preventative pest management services to one-time projects work like fumigation and bird mitigation. What is the average pricing structure for your recurring services and one-time projects? Is the margin on a one-off project higher than that of recurring services? Is that sufficient?
This information enables your business to digest what is currently happening, and to take proactive measures for the future such as adjusting expenses, identifying inefficiencies, or highlighting revenue streams that should be maximized. By analyzing potential scenarios and their impact on profit, businesses can also develop contingency plans and implement risk mitigation strategies helping your business navigate through economic fluctuations and other factors outside your control.
Setting Realistic Goals
Does your management team align on what the goal is for this quarter? This year? Profit forecasting can also help teams set realistic and achievable goals. By estimating future profits at a segment or organization-wide level, teams can establish performance benchmarks and align objectives accordingly. This process will also serve useful when budget season rolls around, as the team will be familiar with the process and have experience building a clear roadmap for the future.
Evaluating Investment Opportunities
Forecasting has multiple benefits when it comes to investment opportunities. Part of understanding a business’ financial stability is predicting the future cash flows and resources that will be available to reinvested in the business. By analyzing potential ventures or new lines of business and estimating the combined impact on profitability, businesses can prioritize the opportunities that align with their overall strategy and offer the highest return on investment.
If your organization is a family business, like Sprague, profit forecasting plays a vital role in succession planning. Projecting future profits, ensures a smooth transition of leadership and allows the incoming generation to assess the financial viability of the business, enabling them to make strategic decisions that sustain and grow the business through the next generation.
Profit forecasting is a valuable tool for businesses to make better informed, data-based decisions. By understanding the keys to financial stability, setting realistic goals, and evaluating potential investments, your business will be better equipped to navigate challenges and capitalize on opportunities.
By Allison Benabente, Controller