“Forecasting, what a load of rubbish! I don’t know what is going to happen so what is the point”. A phrase I have heard many times when discussing forecasting for the first time with a business owner.
Yet it is no coincidence that a lot of the most successful business owners I work with have a 12 month forecast permanently in place and use it to assist them in making some of the most important decisions about their business, now more than ever given present circumstances.
What I have found is that a forecast completed with the correct amount of detail provides a business owner with real insight into their business. The questions that are raised when preparing a forecast often give any business owner a different thought process about their business and has allowed them to see it from a different point of view. Examples of questions often raised include:
- What is the gross profit margin your business should be achieving and is it good enough?
- What is buried in fixed costs that has not been reviewed in detail for too long? (never ceases to amaze me what can be removed here!)
- What value do staff members provide?
- Does the business get value out of all fixed costs? (One business I worked with reduced their rent by £3k a month after realising their office did not provide the value, they thought it did.)
If prepared correctly a good forecast will challenge a business owner to understand their business in more detail and often face up to the decisions, they have secretly been ignoring for too long.
Then there is the question of really getting to grips with the cashflow of their business. Understanding how and when large irregular payments effect a business. Payments such as VAT, corporation tax or rent all lead to dips in cashflow for most businesses, which should be understood and planned for.
Looking for where the peaks and troughs are in the cashflow of a business and being to anticipate months in advance any shortfalls is crucial. This allows enough time to address the issues and if necessary, raise additional funds in a timely manner.
Scenario planning should be reviewed as part of the process, what happens if….
- My biggest customer pays me 30 days late
- My turnover reduces by 10% or even 20%
- When do I need to cut back?
- How much do I need to save?
- I need to increase stock holding by £X how does this affect cashflow?
- We need to recruit; how much can I afford?
- Or how much additional income do I need to make the new role we need affordable?
Understanding the implication of decisions or events as or before they happen is also important in gaining a deep understanding of your business finances and being able to take informed decisions quickly and with confidence.
Part of the business
Once a business has a detailed forecast in place it needs to be used and updated on a regular basis. Forecasting is of little use when it is created agreed and the put in a draw never to be seen again. A forecast should be updated with actual figures during the year, so you have several months of actual figures and several months of forecast figures. Updated every month (or quarter) allowing a business to see its predicted outcome during a year, enabling it to work on ways to affect and improve the outcome as the year progresses. Seeing clearly what impact decisions are having as they happen month to month. The alternative is using last months (or years!) out of date figures or no figures at all, as the business owner does not have the correct support to assist them.
I have found this to be of most value to a business. By putting a forecast for the year in place and ensuring you monitor, measure and update the forecast throughout the year it gives a business owner a real focus, something to energise them as they navigate through the daily challenges of running a business.
It may be that the business beats its targets, or it falls short. But a target set properly with external support to challenge the business owner, will in my experience, lead to a better result then if no targets were set at all.
Business that use an integrated forecast have a deeper understanding of their figures, they see issues coming in advance, both positive and negative and can act quickly to address them. The forecast combined with real monthly figures will quickly become the bedrock of the data that allows a business owner to make informed decisions about their business and ultimately become more successful.
Ensuring you have the correct software and accounting systems in place to allow all of this to happen smoothly and efficiently is crucial, at Spark we use Xero and Spotlight reporting. Work with experienced advisers who understand the process and can pick up on the details that are so often missed, bad information is potentially more dangerous than no information!
At Spark we provide this service to many of our clients on a monthly basis within days of the month ending. It has proved invaluable in providing clarity and reassurance over the past month but more importantly has allowed businesses to grow into very successful stable organisations who are in as strong a place as any to deal with the current uncertainty.
For any forecasting related questions, please let contact firstname.lastname@example.org or call us on 0121 794 4009