Financial forecasts
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Financial forecasting is an 'early warning system' that can help you anticipate likely cashflow problems and take steps to avoid them happening. Tom Whitney looks into the future
Of all the financial information you need to help you keep your business healthy, cashflow, sales and costs forecasts are the most important. The more frequently you do them, the better your chance of staying out of trouble. Ideally, you should update your forecasts every month.
"Regular financial forecasts can help you plan your business growth," explains Association of Chartered Certified Accountants (ACCA) head of taxation Chas Roy-Chowdhury. "By predicting highs and lows, you can manage your cashflow accordingly." Forecasts are also essential to showing lenders that you are meeting their requirements. "You need to reassure them their money is safe and that you can repay debt," he adds. "A bank that trusts your financial forecasts will be more likely to lend you more money. "Cash is king," Roy-Chowdhury stresses. "Making forecasts regularly will help you ensure that your business has the working capital it needs. A business can survive for a short time without making sales or profits, but without cash - it won't." Calculating costs Identify your firm's monthly outgoings for the year ahead. For fixed costs, such as rent and rates, this will be straightforward. Variable costs, such as materials, might prove trickier. Prediction is not an exact science, so if you are in any doubt, opt for a higher cost figure than might turn out to be the case. And remember to be comprehensive. Failing to account for all costs will have an impact on your actual cashflow. Sales forecasts Sales forecasts are usually based on sales history and educated predictions about future sales. How many customers will you keep and how many new ones will you attract? Be influenced by such factors as any price rises you are planning, as well as what your competitors might get up to and anything else that could affect demand. "Create a picture of the volume and timing of anticipated sales, the predicted revenue they will generate and when you expect to receive payment," advises Roy-Chowdhury. "For regular sales, use established figures for sales volumes, debtor periods and bad debts. Be cautious with forecasts for new products or customers - you should expect problems and delays," he warns. Each month, compare your income against your forecast. Look for reasons behind unusual increases or shortfalls. Creating separate forecasts for different products or places in which you sell can be very useful. Cashflow forecasts Bring together your sales and cost predictions in a spreadsheet to create a cashflow forecast. This will show you exactly when you expect money to enter and leave your firm and whether you are likely to be faced with the problem of more money leaving your business than there is coming in. Importantly, cashflow is based on money entering and leaving your firm's bank account. It is not a question of how much you are owed. If cashflow problems look to be on the horizon - take action straight away. Think of ways to prevent them or of short-term measures to weather the storm (such as arranging a bank loan). Forecasting can be difficult if you lack experience. So, what final key piece of advice does Roy-Chowdhury offer? "The key is always to be realistic when making your calculations," he concludes.
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