James D. Oates, CPA
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BUSINESS PLANS, BUDGETS AND FORECASTS
While understanding the financial statements is a positive step, the results need to be put into context. What had you expected to do in a month? Comparing actual to expected results then permits a better understanding of the results.

Business plans, budgets and forecasts are prepared for a variety of reasons.  The first of which is to provide a benchmark with which to measure performance.  None of us have a crystal ball.  However, the past is often a good indicator of the future.  A forecast is taking the past and by making adjustments to the past performance for changes in operations create an estimate of the future. 

There is seasonality to many types of business.  The seasonality will impact the revenue line and will also impact costs.  Is overtime required?  What is the impact on shipping costs?  What is the impact on cash? 

Planning for these allows the manager to be proactive and manage for the variability in the business.  Perhaps production for the busier times can be started earlier in the year and then overtime can be avoided or reduced.

There are several types of forecasts:
 
a) Cash forecasts Projecting what the bank balance will be in a week or a months time allows time to react and take corrective action should a cash shortage be forecast.
b) Profit forecasts These forecasts are used in addition to budgets, listed below, as circumstances change throughout the year. The financial forecast can also be used, for instance, when a larger than expected order comes along or some other unforeseen event.
c) Budgets What are the expected revenues and costs for the forthcoming year? A proper budget will also project what the changes in cash will be, as well as the changes to the balance sheet.  As noted above, a budget is then used as a comparison to the actual results achieved.
d) Business plans A business plan is the most formal of all of the forecast types and contains narrative as to what the sales plans, cost reduction strategies and any changes in operations expected in the next year. Often this document is required for any type of financing, especially for a bank loan.

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