forecasting your business finances
To manage your business effectively, a good financial forecast is essential. Many of us are quite used to producing some form of forecast once per year, perhaps a Business Plan or a Budget. This is important, but far more important is keeping a continual up-to-date forecast of what is really going to happen.
If your financial year runs from April to March you might produce your budget (say) sometime in March. Usually this will just sit in a corner somewhere. If lucky it may get referred to but it very soon gets out of date. By June or July reality has taken over and the figures are looking very different to the original plan.
In business if there is one thing we can be sure of it is that nothing will ever go quite as planned. For this reason it is important that we keep track of what is going on. We then need to RE-FORECAST what the outcome will be for our financial year.
What does a good forecast contain?
A good forecast will show MONTHLY figures for costs and sales. Ideally it should show direct costs separately so that you can keep a close eye on Gross Profit figures. You should show overheads separately. You should also list each main item e.g. Salaries, Rent/Rates, Phones etc.
You can show sales in whatever form best suits your business. You might split into your main customers or split by your main products or even both. There will also always be a line for “other” or “miscellaneous”. If this figure gets too big, you might also split it out in the future.
You should show your costs monthly. Most small businesses would not do accrual accounting. This means that you show things such as (say) quarterly or annual bills in the quarter or particular month they become due. We should remember that this is not a cash flow forecast. It is a P&L forecast. So, show costs and sales in the month they are actually due. When we come to looking at a cash flow forecast we can use the P&L forecast to calculate when you will pay out or receive the cash.
Keeping it up to date
Every month you will examine actual figures compared with forecast figures. Using this knowledge, and your own assessment of what might happen going forward to RE-FORECAST going forward. You will then see what the rest of the year will look like. This enables you to instantly see how you are performing against you expected outcome. Most importantly it enables you to DO SOMETHING ABOUT IT. Either capitalise on some good fortune or tackle a problem.
One very important point about your forecast is to try not to be either too optimistic or too pessimistic. If you are too optimistic with your predictions then every month you look at it, things will appear bad. You will soon get de-motivated and probably give up the exercise. If you are too pessimistic then everything will look better than expected, when it may well not be!
None of us can see the future in a crystal ball but we can all have some very reasonable estimates of what will happen. Reasonable is fine – you can always fine tune it as you go along.
You don’t need to go into grim and gory detail, but do try to make it always your “best guess”.
A good financial forecast enables you to keep control of your business. You do this by being constantly aware of what is going on. It also enables you to steer your business in the right direction.
If you would like a free, no obligation chat about developing your financial forecast, please feel free to call or drop us a quick email.