Spring is the time of year that calendar-year-end businesses receive financial statements that conform to U.S. Generally Accepted Accounting Principles (GAAP) and prepare tax returns. This year, take your financial data beyond compliance and use it to develop a comprehensive business plan. Also, assess how your business measures up over time and against the competition. Use financial statements to be proactive, not reactive, to changes in the manufacturing industry.Forecasting the FutureHistorical financial statements are often the starting point for planning for the future. Comprehensive business plans include forecasted balance sheets, income statements and statements of cash flows.Many items in your forecasts will be from revenue. For example, variable expenses and working capital accounts are often assumed to grow in tandem with revenue. Other items, such as rent and management salaries, are fixed over the short run.These items may need to increase in steps over the long run. For example, a company may eventually need to expand its factory or purchase equipment to grow if it’s currently at (or near) full capacity.By tracking sources and uses of cash on the forecasted statement of cash flows, management is able to identify when cash shortfalls may happen and plan how to make up the difference. For example, the company might need to draw on its line of credit, request additional capital contributions, lay off workers, reduce inventory levels or improve its collections. In turn, these changes will flow through to the company’s forecasted balance sheet.Benchmarking ResultsHistorical financial statements can also be used to evaluate the company’s current performance vs. past performance or industry norms. A comprehensive benchmarking study includes the following six elements:
How does your company measure up against other manufacturers? Contact your Elliott Davis Advisor for help benchmarking performance or creating forecasts from your GAAP financials.