Future accounting information is inherently valuable for decision-making because it is so relevant to the decisions we need to make now. Forecasted, projected, budgeted, or whatever you want to call it, future accounting information is never more valuable than when the economics of farming are in transition.
Any metric for measuring financial performance or financial condition can be forecasted. Forecasted financial statements are used in many situations to provide insights about what is most likely to happen to a business in the near future. I like to think of forecasted metrics as "windshield metrics," because they are forward-looking.
With historic or past financial metrics we are looking in the rear view mirror, so to speak, to assess trends in business performance over time and to figure how we got to where we are now. Windshield metrics add a whole new dimension to our management. They provide insight on what direction the farm business is headed and how we should manage in response.
Windshield metrics should reflect farm managers' expectations about what is most likely to happen during the year to come. Occasionally, forecasted financial statements and metrics are prepared for more than one year into the future. This is often recommended when a major change in a farm operation is being considered.
Forecasted income statements need to be accrual-adjusted to produce useful information, just like the ones for previous years. The easiest time to prepare a forecasted income statement for next year is usually right after the income statement for the previous year is completed. Remember to think about using windshield metrics as you plan for next year.
In my next blog I will describe one of my favorite windshield metrics for periods of economic belt-tightening on farms.