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What you should know now about the future
There are very sophisticated forecasting tools, and there are quick and dirty ways to do a year-end projection. Typically, the more effort you spend on the forecast, the better the results, remembering that you are still fundamentally guessing at the future, even if it is in a somewhat scientific manner. Here are four key points to remember, says Ted Feher, senior manager for Horne CPA Group in Houston:
1. Gather your data. Eschewing the sophisticated tools to do a reasonable year-end forecast only requires that you have some detailed historical data (at least the past two years). Most accountants will usually try to look at 10 or 11 months of year-to-date data for those past two years and compare them to the 10 or 11 months year-to-date data for the current year.
2. Assess your position. Once you have the data, ask yourself how to compare this year to last. Then look at the remainder of the year and see how it compares to the year as a whole, how it compared to the end of the prior year, and how it compares to the past few months. There is no correct way to do an analysis. The more questions you ask, the more likely you are to discover the correct relationships. You are really just looking for a pattern.
3. Consider your specifics. You might have some factors that are unique to your own practice or perhaps unique to the particular period at which you are looking. For instance, the vacation pattern may differ from year to year. Maybe there were weather-related phenomena in a prior year. There may be fewer or more employees during the remaining months this year than in prior years. The mix of services being offered may be different. All of those things become part of the judgment about how the year-end may look.
4. Estimate your year-end position. After you have analyzed your data, estimate a range of what the profit picture may look like. Given the ranges, you can consider some alternatives: What is the impact if you buy more equipment before year-end? Should you put more into a retirement plan? Should you pay bonuses? Should you buy more supplies? Should you close during December? The list is endless, limited only by one’s ingenuity and imagination.