Comparing Actuals to Forecast – What is it and why is it important?

Tracking how your business is doing over time is crucial to achieving your goals for long term profitability and business growth. The discipline of stepping back from the “day to day” and looking at your numbers is crucial.

  • Am I on target to achieve the goals I set out in my forecast?
  • Where are the problem areas that need my attention to making corrections?
  • What needs to be investigated?
  • Do I need to shift any of my strategies?

Reviewing monthly financial statements and comparing the actuals to the forecast on a regularly scheduled basis offers the opportunity to make assessments and timely adjustments (before it’s too late)….. you may be able to renegotiate product costs paid to vendors, identify expense line items where reductions can be made, or raise sales prices…… to achieve the original plan for gross margins, expenses, and profit.

So you may ask yourself – how do I actually do this? Are there metrics to help?

In the process of constructing a forecast, you will need to set goals for sales, gross margin percentages by product line, expenses by line item that will all flow to forecasting a level of profitability.

It is crucial to construct a “Notes to Forecast” that documents the detailed assumptions of the plan. Knowing what your original assumptions were is critical when analyzing your actuals to forecast. For more information see our blog post on Forecasting and Planning.

A forecast is always based on assumptions. Comparing your actuals to the forecast puts those assumptions to the test. It is only by this comparison that you will know if your assumptions are valid or flawed and why. Making changes to the assumptions based on actual performance over time will result in forecasting more realistic and achievable goals for growth. Ultimately, this ensures that you make better business decisions based on more accurate information.

It will be helpful to construct, maintain, and review the following spreadsheets:

  • Comparison of Current Month Actuals to Forecast
  • Comparison of Quarter to Quarter Actuals to look for trending issues
  • Comparison of This Year to Last year comparisons of Actuals

Points to consider in review and analysis:

  • Evaluate each category of Sales by Product line, Gross Margin percentages by Product line, and Expenses by line item.
  • Look for trends by month and quarter for Sales, Gross Margin %, and Expenses.
  • Look for seasonality trends and issues (mostly sales and expenses) and determine if you have included all known factors into your forecast.
  • Compare this year to last year by quarter and determine if you have factored in all known issues.

Would it be helpful, but something you just don’t know how to set up or manage?

If you are in a quandary about how to implement a forecast because this is simply not your area of expertise, there is help available. The team at Resolution Accounting has the depth of knowledge and experience in this area of forecasting and planning. We can help you and compare your actuals to forecast and track on an ongoing basis. We also have expertise in financial statement analysis. We can walk with you in planning for profitability, and give you what every small business owner would enjoy and deserve—peace of mind.

Serving the entire Philadelphia region, including King of Prussia, Exton, the Main Line, Malvern, Chester County, Montgomery County, West Chester, Conshohocken, and more, Resolution Accounting offers Philadelphia-area small businesses accounting, bookkeeping, and cfo advisory services.

Find out why businesses and individuals highly recommend Resolution Accounting by contacting us today.