Developing a realistic profit forecast

Business owners are faced with many perplexing questions in the day-to-day running of their businesses. Among them are: Why do growing businesses tend to have less cash than businesses in decline? How do you continue to profit during bad economic times? Why do banks refuse loans businesses money when the business profitable and growing?

C. Steven Hegg, senior vice president of Business Resource Services, Seattle, told an audience of retail jewelers that the answer to all of these questions and more lie in the creation of a detailed financial plan. Hegg, a one-time business owner and banker, presented some of the details of making such a plan on Friday during a four-hour seminar titled “The Best Tool to Develop A Realistic Profit Forecast” to an audience of retail jewelers at the JCK Show ~ Phoenix.

Hegg says that 80% of businesses fail within the first ten years. And that 90% of those failures can be broadly traced to poor financial management. More specifically, common causes of business failure include:

* Failure to plan properly before start up

* Failure to monitor financial position

* Failure to manage cash flow

* Failure to manage growth

* Failure to borrow properly

* Failure to plan for transition

Avoiding these pitfalls requires having a detailed financial plan and making the plan flexible enough to meet future business conditions, whether they are internal or external.

Owners need to define and formulate their businesses’ true net worth, their working capital, and how they use after-tax profits. Owners need to thoroughly understand their income statement and balance sheet and through those tools understand their “financial operating cycle.”

Once accurate financial information is gathered the information needs to be packaged in a way to see the relationships or what Hegg calls the “cause and effect relationships leading to financial distress.”

With this “roadmap,” business owners can calculate financial ratios and use those ratios against internal and external benchmarks.

Most importantly, business owners with this information can analyze the cause of financial problems, formulate a plan, implement it, and monitor the results.

“With this plan, we’ll be able to take care of the normal dips, making sure that we are not participating in it,” he said.