What Is a Financial Forecast?
Have you ever opened your year-end accounts and been surprised by the profit? A financial forecast is how you see those moments coming, while you can still do something about them.
Or had that moment when you realise there isn’t enough cash to pay the wages bill? Perhaps an unexpected phone call from your bank, telling you that you’re over your borrowing limits?
Such moments are soul destroying, but the bigger problem is the effect they can have on the viability of your business. The strangest thing is that they often happen when sales growth is going exactly as planned, which really takes the wind out of your sails.
So don’t get overconfident. If you relax credit control terms, stop negotiating keen purchase prices, pay bonuses and settle your suppliers more quickly, growth itself can lead to big trouble.
If only you had a crystal ball, you could look into the future and take action to avoid these problems. That’s where financial forecasts come in.
The questions a forecast answers
You have goals, targets and plans for your business. But:
- Have you broken them down into a monthly plan and forecast?
- Will your current sales team have enough time to meet their targets, and know enough about the numbers to bring in profitable work rather than volume?
- What additional resources do you need to achieve your sales plans, and how will those affect your cash?
- Do you need to invest in equipment?
- Will you have enough money?
It’s tough to work out why profits aren’t what you expected, or why costs are so much higher. But if you set your goals clearly in your mind and then prepare projections for the months ahead, you’re building that crystal ball. The next step is to measure your progress against it — and that’s where you find your answers.
Types of forecast
- Short term: your day-by-day cash position.
- Annual forecast: each month for the next 12 months, or your financial year.
- Medium term: each month for the next 24 months, or two financial years.
- Summary forecast: year by year for the next five or ten years.
- Three-way forecast: profit and loss, balance sheet and cash flow together.
The benefits of financial forecasting
- Analyse the financial viability of your future plans, including launching a new product or venture.
- Carry out “what if” analysis: expected, target and worst-case scenarios.
- Identify when you might need cash, and plan how and where to get it.
- Model different scenarios and see how each one affects your cash flow.
- Model the impact on cash if you outperform your sales plan.
- Conduct break-even analysis so you know how much you need to sell each day to make a profit.
- Craft KPIs as quick checks on performance: weekly or daily sales invoiced, weekly productive versus non-productive hours (%), daily output per team (£ or units).
- Update your forecast regularly, as you go, to stay on track against your goals.
- Improve cost control, because you always know what you should be spending.
- Compare actual results against forecast.
- Support funding applications — up-to-date forecasts help you get the money you need.
Making it work
A forecast is a plan you compare against what actually happens, analysing why the variances occurred. Do that consistently and you will really understand your business.
We can also help you build a strategic plan involving all your departments. That tends to boost your team’s confidence in your leadership quickly, because they buy into the plan and can see where they fit into it.
To find out more, why not contact us or book a meeting?
