What Is A Financial Forecast?
Have you ever looked at your Year-End Accounts & been surprised the profit for the year was nothing like you expected?
Or experienced that moment when you realise there isn’t enough cash to pay the wages bill?
Or had an unexpected phone call from your bank, to tell you you’re over your borrowing limits?
Such moments are soul destroying & can have dire consequences on the viability of your business. Strangely, they often happen when sales growth is going as planned.
So don’t get overconfident; if you relax credit control terms, stop negotiating keen purchase prices, pay bonuses & pay your suppliers more quickly, growth can lead to big trouble.
If only you had a crystal ball, you could look into the future & take action to avoid these problems.
That’s where financial forecasts come in, helping you to re-gain your focus!
You have goals, targets & plans for your business. But;
– Have you broken them down into a monthly plan & forecast?
– Will your current sales team have enough time meet their targets?
– What additional resources do you need to achieve your sales plans?
– How will these impact on cash?
– Do you need to invest in equipment?
– Will you have enough money?
It’s tough to figure out why the profits are not what you expected them to be, or why costs are so much higher than expected.
But if you set your goals clearly in your mind, then prepare projections for future months you’re creating a forecast. The next step is to measure your progress against it; by doing this you’ll find your answers.
Examples of types of forecasts
1. Short term: day by day cash position.
2. Annual forecast: each month for the next 12 months or financial year
3. Medium term: each month for the next 24 months or 2 financial years
4. Summary forecast: Year by year for the next 5 or 10 years
5. Three-way forecasts: Profit & Loss, Balance Sheet & Cash Flow
The benefits of Financial Forecasting
– Analyse financial viability of your future plans, including a launch of a new product or venture
– To do What If Analysis: expected, target & worst-case scenario
– To identify when you might need cash & plan how & where to get it from
– Model different scenarios & see how they impact your cash flow.
– Model the impact on cash if you outperform your sales plan
– Conduct breakeven analysis so you know the how much you need to sell each day to make a profit.
– Craft KPIs as quick checks on performance
– Regularly update your financial forecast, as you go, to stay on track to achieve your goals & targets
– Improve cost control, because you always know what you should be spending
– Comparing actual results v. forecast
– Funding: up to date financial forecasts will help you get the money you need
A forecast is crafting a plan, then comparing it with what actually happens against it, analysing why variances occurred. By doing this you will really understand your business.
