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  • Managing Cash Flow
    • Improve Efficiency
    • Enable Growth

Dos and don'ts of business forecasting

  • 2 min read
  • Article

Forecasting is a useful tool to help you foresee any critical cashflow points for your business. To make it even more valuable, you can go beyond cash to explore the ripple effects of different events during the year. Bear these tips in mind before you start your forecasting exercise.

Your forecast should be something you can track without having to pore over complex formulas or sub-sections. Equally, it should be a document easily understood by anyone, if you decide to share it with your colleagues, lenders or investors.

Keep it simple

Accounting software can be useful, and there are affordable and intuitive versions on the market. However, a basic spreadsheet might serve your needs equally well. Your forecast should be something you can track without having to pore over complex formulas or sub-sections. Equally, it should be a document easily understood by anyone, if you decide to share it with your colleagues, lenders or investors.

Track money in…

Create a basic cashflow forecast – our interactive tool might be helpful. Plot your predicted income across the year from sales, loans, tax rebates or investments. Take account of seasonal peaks and dips in your market, and reflect the impact of any sales initiatives you’re planning. Be sure to account for likely gaps between invoicing and payment: chart funds at the point they will arrive, not your billing date.

…and out

Then chart known expenses – past bank statements are useful here. Don’t forget any one-off annual payments, such as insurance premiums, as well as regular outgoings such as fuel, rent, salaries and subscriptions. As with income, record each item of expenditure at the time you will pay, rather than the point at which you receive the service.

Act on income gaps

The above process will give you an overview of your net profit or loss by month. Short-term dips into the red may be manageable, but any points where your cashflow is negative require preventive action. Consider how you might cut costs, raise prices or source finance where necessary. Or think about renegotiating payment terms with your clients or suppliers to cover the gaps.

Don’t go by history alone

Past performance might provide a baseline, but history is only part of the picture. It’s tempting to start with last year’s income and perhaps add a random percentage, but being more specific will help you focus. Factor in current and likely market conditions; intelligence about your competitors; anything you can glean from clients about their plans. Also, interrogate your own ambitions and the potential of the business – a forecast can help you push yourself, while remaining realistic.

Imagine the unexpected

Equally, don’t limit your forecasting to cashflow alone. Think through different future scenarios and consider their impact on the business. If your key supplier folded, how would it affect your ability to fulfil contracts? On the positive side, if you won a long-shot contract, how would you handle the staffing and materials implications? You might produce alternative cashflow forecasts based on these scenarios, or use this thinking as the basis to test the resilience of your business.

Don’t leave it on the shelf

Treat forecasting as a continuous process rather than a single task. Return to your forecast regularly to monitor your performance against the predictions. Adjust the forecast accordingly, and explore the reasons behind significant under-achievement. Deployed as a living, working document, your forecast will keep delivering critical data about your business.

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