The Power of Planning: Expense forecasting

Last week’s post on cash flows briefly touched on forecasting expenses, but this topic deserves a more in-depth look.  Of course, expense forecasting is important, providing your business with insight that can help it grow and even outpace the competition.  But there is some argument about whether it can be a do-it-yourself arrangement or if you should get help. There’s no easy answer to that, but this post will list the pros and cons of each so you can make an informed decision on how to best proceed.  Let’s go!  The consequences of expense forecasting Expense forecasting provides clarity, allowing you to anticipate problems and take advantage of growth opportunities.  And it’s grounded in data you probably already have, helping to remove guesswork from an already dynamic entrepreneurial environment.  Arguably, the most beneficial aspect of expense forecasting is that it moves your business from reactive to proactive. This shift not only improves your bottom line, it reduces stress for you, your employees, and even your family.  So, how do you create an expense projection? Let’s take a look.  Creating an expense projection Doing this part is a little like telling someone what vehicle to buy. There are a ton of variables, so it’s almost impossible to offer a one-size-fits-all solution.  Your projection will depend on a myriad of factors, including industry, geography, and business goals, but there are a few commonalities.  All business types will need to decide on a time frame for their projection, whether it be a month, quarter, year, or even multiple years.  Then, you’ll need to gather as much historical data as possible, including all past expenses, both fixed and variable.  Finally, you’ll need to consider any future changes. Try to determine micro and macroeconomic factors that could impact your bottom line, such as changes in fuel prices.  You’ll also want to account for any future growth and expansion plans. For example, if you are expanding your team of employees or your physical plant, account for the additional expenses.  This is pretty broad advice, to be certain. And it begs the question: Should you do an expense projection yourself or get help from a professional like a CPA?  The answer is a definite maybe. It depends on a few factors we’ll examine now.  Pros of doing an expense projection yourself Arguably, the most significant argument for a DIY expense projection is cost savings. If you don’t employ a CPA yet, you’ll save time shopping for one.   And, of course, you’ll also save the actual expense of having a CPA complete the expense projection.  The DIY approach is also an opportunity to gain better firsthand knowledge of your finances and build some financial literacy along the way.  Of course, there’s a downside to this approach, too.  Cons of a DIY expense projection Expense projections take time—it’s that simple. You’ll want to conduct an opportunity cost assessment before diving into this project.  You’ll also bring potential biases into the process. These can influence assumptions, lead to inaccuracies, and render the expense projection worthless.  Expense projection can be complex, too. It’s easy to miss important factors or struggle with financial scenarios that make the projection results suspect.  The Bottom Line  If you want to gain control of your business finances, reduce stress, and meet goals, then expense projections are indispensable.  When you do one, you can use the information here to help determine if outside help is warranted.