Hardwood Floors October/November 2017

Forecasting for Your Future (Continued)

UNDERSTAND YOUR WHY Before you start any new goal or process, you need to think about why it is important to you or how it will help you or your business. Forecasting and nancial planning can have bene ts for one person that are very di erent for another. One person might want to maximize tax savings this year to be able to go on

chance of success. en see what action steps you can take to achieve your goals whether that is scheduling a meeting with your tax accountant or preparing a business plan to approach a bank or an investor for nancing.

a spring break vacation next year, and another might be deciding that they want to start a hardwood ooring business of their own and needs to understand the nancial impact. Take time to document why it is important to plan for the future. is will give you a clearer direction and a greater

WHAT’S IN YOUR TOOLBOX?

IDEAS FOR TOOLS INCLUDE:

1. Historical financial statements for your business. 2. Financial statements for an organization you aspire to be like. 3. Industry publications to identify industry trends and outlooks, and comparisons to those similar to you. 4. Leading indicators like permits and starts, and lagging indicators like completions. 5. Your tax accountant or bookkeeper. They will understand your finances and have the experience to help with forecasting. 6. Discussions with friends that have done the same things as you.

Just like you would do before beginning any project, with forecasting you will need to think about the tools that you need to accomplish the task. is won’t be the same for everyone. If you have already been in business for awhile,

and are looking for nancing in order to grow, you will have historical nancial documents and experience to draw from and put in your toolbox. But, if you are newer to the business or have always worked for someone else, you might not. at person’s box might include observations while working for your employer or interviewing the owners of your company.

HOW TO FORECAST Now that you understand your “why,” and have your tools ready, it is time for action. Forecasting is the act of predicting or estimating. One popular method is to create pro forma nancial statements. is exercise answers the question, “What will happen if X occurs?” O en people will create a worst-case scenario, best-case scenario, and the scenario in between that is most likely to happen. is allows you to be ready to take action quickly as variables change. For example, calculate all of your xed expenses. ose are expenses that will not change even if your business has a slow year. at might include your rent, phone

bill, accounting costs, legal fees, salaries, and your personal xed expenses if self- employed. You will want to be sure you have enough gross margin to cover those xed expenses. Gross margin is your revenue less variable costs. Variable costs are those that go up and down with your level of business. at would include wood, nails, sandpaper, labor, and transportation costs. is is your worst- case scenario. When business is booming, you will need to get in the habit of saving a portion to help cover those times when you are at your worst-case scenario. Remember back to the discussion on the market cycles. ere are no real

surprises; in the long run, a downturn will happen. Prepare for it, and you will outlast your competitors and be able to continue supporting your family when others struggle. Work your way over time to saving about six months of your xed expenses. You can adjust this some if you have revenue from other sources like a spouse that works outside your business. Something important to remember at this point is to not cut corners. Don’t assume that if times are bad you can cut most of your expenses. You still need to maintain your tools, support your family and your sta , and have some fun. Without these things, morale goes down, things break

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