Managing the finances of your business more effectively
Number 3 – Forecasting
A good financial forecast is essential for effective control of your business. 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 If lucky it may occasionally get referred to but it very soon gets out of date. By June or July reality has taken over and the figures are starting to look 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 and 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, with overheads shown separately. Each main item should be listed e.g. Salaries, Rent/Rates, Phones etc.
Sales can be shown in whatever form best suits your business, perhaps 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” which if the figures get too big, might be then also split out in the future.
Your costs will also be shown monthly. Most small businesses would not do accrual accounting so things such as (say) quarterly or annual bills will be shown 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 costs and sales should be shown 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 the cash will be paid, or received.
Keeping it up to date
Every month you will examine actual figures compared with forecast figures and using this knowledge, as well as your own assessment of what might happen going forward, RE-FORECAST going forward. You will then see what the remainder of the year will look like. This enables you to instantly see how you are performing against you expected outcome – and most importantly DO SOMETHING ABOUT IT. Either capitalise on some good fortune or tackle a problem.
A good Financial Forecast enables you to keep control of your business by being constantly aware of what is going on enabling you to steer drive your business in the right direction.
Accuracy
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 forecast then every month you look at it, things will appear bad. You will soon get de-motivated and probably give up the exercise.
If your forecast is too pessimistic then every time you look at it 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.
There is no 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 by being constantly aware of what is going on enabling you to steer drive your business in the right direction.
If you would like more detail about this subject, please call or email:
Tel: 01225 580103
