A corporate finance expert offers tips for accurate forcasting and explains why it is so important.
Cash is what drives growing companies. That's why "you've got to know how to do accurate forecasts, especially of your cash position," says Bob Purtell, the managing partner of Boardroom Partners, a New York City- based planning and corporate finance firm. Purtell's tips:
· Document your forecast's underlying assumptions. "Everyone has assumptions, even if they're not conscious ones," he says. "But in a growing business and a dynamic business environment, those assumptions will and should keep changing -- so make certain your forecasts keep up." It's also important to test those assumptions (about, say, interest rates, sales growth, and so forth) at least once each year.
· Stress-test those assumptions according to best- and worst-case scenarios. "Reality will probably fall in between" those scenarios, Purtell notes, "but if the worst occurs, you've got to make certain your company's cash position is strong enough to handle it."
· Compare the accuracy of each period's forecast with actual business performance, before drawing up your next forecast. If assumptions aren't meeting reality, make adjustments accordingly. "One quick indicator of your forecast's accuracy is your weekly checking-account balance," says Purtell. "If its balance doesn't match your expectations, you need to figure out what went wrong -- and maybe even take some kind of action to prevent further problems." (For 10 tips on conserving cash, see "A Business-Survival Checklist," Finance, May 1995.)