Budgeting and financial forecasting work hand in hand to establish the path a company needs to take to achieve its goals. By budgeting effectively, management takes the company in the ideal direction.
Forecasting shows if the company is heading in that direction. While budgeting qualifies management’s expectation of revenues, financial forecasting estimates the amount of revenue that will be attained during a fixed period. Used together, budgets set a longer-term goal and forecasts show if the company is keeping pace with those objectives.
Certified Public Accountants (CPAs) are accountants who have specialized training and have passed the rigorous testing that earns them the CPA designation.
CPAs have advanced financial analysis skills compared to accountants without the CPA designation. While accountants can do the routine work of keeping the books and creating financial statements, a CPA can conduct financial analysis that helps improve revenue, reduce expenses and reach company profitability goals.
Businesses benefit from hiring a CPA for their budgeting and forecasting because the CPA can create realistic budgets and identify financial moves the company can make to meet them. CPAs can also use forecasting to make changes to budgets according to market conditions. As a result, companies save large sums of money while also preparing for the future.
CPAs create yearly budgets with precision. They understand the process of accurately estimating revenues and expenses, expected cash flows and debt reduction plans. A CPA helps management create plans that boost cash flows and reduce debt. For example, a CPA can analyze whether it makes more sense for the company to reduce debt or invest in new equipment.
When it comes time to reevaluate budgets, CPAs provide invaluable analysis. Most companies routinely reevaluate budgets once per fiscal year; however, drastic changes in market conditions may necessitate more frequent reevaluations. For instance, many companies have been drastically affected by the sudden onslaught of the COVID-19 virus. Fear has gripped the nation, leaving many businesses with plunging revenues that force an immediate budget revision.
CPAs help management make difficult decisions when budgets must be redrafted due to an unexpected economic shock like COVID-19. Companies must decide where they can cut expenses without damaging the long-term prospects of the enterprise.
In addition, CPAs are skilled at extrapolating the effects of events into the future to create a long-term projection of an event’s impact. These models provide management with the tools they need to make informed decisions at critical times. As a result, companies can react to events but avoid overreacting.
CPAs use historical data to predict future earnings. These forecasts are essential to maintaining a healthy business because they show management how they need to allocate their upcoming budgets. Accurate financial forecasting requires extensive financial analysis skills. CPAs bring this to the table through the extensive training required to pass the Uniform Certified Public Accounting test.
In addition, CPAs regularly update forecasts when there is a change in operations, inventory or business plan. For instance, if a major customer was lost to the competition, a CPA can extrapolate the effects to assist with financial planning.
Updated forecasts also help management take immediate action based on forecasted data. For instance, companies impacted by the COVID-19 crisis may struggle to decide how to respond. A CPA can use incoming data to update forecasts, allowing management to make strategic decisions that protect it in the short-term but keep it prepared to ramp up activity once the crisis passes.
Companies need budgets to outline the direction management decides to take the company, while forecasts illustrate whether performance indicates these goals will be met. A CPA helps management fine tune its budget goals, using financial analysis skills to determine realistic goals and find ways to reach them.
As time goes by, business goals change due to market conditions. When this occurs, CPAs can forecast whether goals need to be adjusted up or down. This helps management make sound business decisions that preserve the health of the economy for the near- and long terms.
CPAs provide valuable service because they are trained in financial analysis rather than just bookkeeping, tax preparation and preparing financial statements. Because of this extra training, they provide insightful analysis that creates the budgets and forecasts that make businesses maximally profitable.
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