No one can tell the future. It’s just not possible. But, in business, you need to be able to start forward-thinking if you want to be truly successful – especially in the world of creative agencies, where things happen quickly.
How can a business owner make a decision with confidence if they don’t have a good idea of its potential consequences? A forecast should be the bedrock of any business owner’s financial management. Here’s why.
What is a forecast?
A forecast essentially sets out what you think is going to happen financially for you and your business in the upcoming year. It helps you plan strategically, allocate resources, and determine the best way to approach projects, costs and activities.
A robust forecast doesn’t just show you where you’re going. It also helps highlight any problems you can expect to run into in the short to medium term. If you’ve got problems with cashflow, for example, a forecast will bring this to your attention.
How do I create a forecast?
You don’t base a forecast on guesswork, hopes and dreams, or where you’d like your business to be in an ideal world – you build your forecast from your previous financial data.
Up-to-date, accurate financial information is critically important to help you understand where your business is now. Even more important is to use this information to forecast forward and make decisions based on potential outcomes.
Taking the numbers from your year-on-year reports and using them as a basis for how future trade will happen – factoring in anything you know of that might affect things for the year ahead – is a good place to start.
If you’re a new business without a complete year behind you, you can still make a forecast, set on market trends and your current expenditure.
While a forecast may not always be totally accurate, it’s always better than second-guessing your financial future.
Set your goals
Setting goals is essential if you want to achieve growth, and having a forecast will help you do that.
Using year-on-year financial data helps you paint a picture of what you can expect to spend and earn over the coming months. And these figures allow you to set dates and goals for using your money to develop further.
A forecast also helps you understand whether these goals are realistic – do they make smart business sense?
In our experience, too many business owners take on new staff because they’re busy – when in fact, there’s inefficiency that, if addressed, would ease the workload and increase profits.
A well-maintained forecast allows you to see what the future looks like – and whether the ‘goal’ of hiring or expanding your team is necessary or not.
As well as helping sense-check your goals in the first place, a good forecast also sets a clear expectation for you to review your activity against. Periodically checking in against your forecast means you can proactively make any tweaks or changes as needed, saving any unexpected shock further down the line.
Having a realistic view of where your money is going should, ultimately, help you minimise your expenses and become more profitable.
Forecasts should detail cash flow by month. Again, this will show early warning signs as to when cash may drop low (often when VAT and corporation tax have to be paid, when a large customer changes their credit terms, or stock has to be paid upfront).
Either way, if you expect cash to run low in the future, a detailed forecast allows you to address the problem in advance – rather than running into it and having to manage the crisis.
Forecasting your costs is much more reliable than throwing money on the table and hoping for the best.
Shifting with the market
As part of putting your forecast together, you’ll have to spend some time analysing the market that you’re in. Just by going through this process, you’ll probably find that you’re able to make your business model more proactive rather than reactive.
If any trends are starting to form, your forecast should be able to take this into account and help you plan to follow those trends. Act fast enough, and you may be a frontrunner in your industry.
Don’t hang around
Most importantly, forecasting changes a mindset. It will encourage you to start looking forward – understanding how today’s decisions affect tomorrow and beyond. If structured and used correctly, a business forecast is a powerful tool to drive you forward in a controlled and profitable manner.
It can be easier said than done, though, so if you’re unsure how to get started, get in touch with the team at Spark. We’ll set you on the right track.