Business Financials: Look to the Future, Not Over Your Shoulder
Jul 30, 2018
We have eyes that look forward to where we’re going and whilst some people may say they have eyes in the back of the head, the reality is they don’t.
So why is it then, that when we’re looking at finances, we are continually looking backward and not looking to the future? Pilots are at the front of the plane watching where the plane is going, into the future, as they fly us around the world. They’re not looking behind them at where they’ve been. The past is useful and has a place. Pilots use their experiences and lessons learned in the past to help them fly the plane into the future.
SO WE TOO SHOULD BE FOCUSING ON FINANCIAL FIGURES THAT ARE LOOKING INTO THE FUTURE WHILST USING THE HISTORICAL, PAST REPORTS TO GUIDE US.
People in agricultural businesses are great at doing this.Whilst they use their experience over the years, even decades, of growing and harvesting their crops, they are continually looking to the future to make decisions. Decisions like whether to grow the same crop again, whether to grow different crops, whether the application of more water to the crop will result in better yields, what area to plant, what the impact of commodity price fluctuations will be on the profitability of each type of crop and the list goes on.
I recently was preparing figures for one of my agricultural clients and noticed that the forecasted revenue from one particular crop was significantly less than in prior years and I thought there must have been an error in the calculations. On further investigation, however, the anticipated drop in revenue was due to a combination of reduced planting and a significant drop in the commodity price.
Whilst they cannot control the commodity prices, they did have control over how much was planted that season. They used their historical knowledge of what is required to get the best possible yields, worked on tweaking that with the aim of getting an even better yield to help alleviate the impact of the reduction in the commodity price.
Other businesses don’t always have such a focus on the future rather they look at the historical reports and expect the future to be a replication of the past subject to any minor changes they may make in increased revenue or reduced costs.
The premise of most forecasts I’ve seen is to take the figures for the previous year and apply a small increase. This is effectively just looking over your shoulder at what you did do and then continue to do more of the same.
A BETTER APPROACH.
I believe, is to think about what you want the future to look like, put some of those early dreams you had when you started the business back on the table and create the future the way you want it to be and where you want to go just like the airplane pilots do.Part of this is to consider how you can take advantage of the opportunities currently available, or how you can create a different offering for your existing clients. Once you’ve done this, then and only then have a look at the historical figures and overlay that over the future figures you’ve identified making any adjustments that need to be made to ensure that you’ve not forgotten any revenue or expenses that will be ongoing.
When looking at your financial reports, remember that you are effectively looking over your shoulder at the past. Review these numbers as a record of the past, then apply a new mindset of looking into the future and review the figures again.
Find out where the pressure is in your business
The Business Barometer will measure your business finances across three critical areas: Core Concepts, Focused Management and Planned Growth.