Insights

A lot of business owners spend a long time devising and writing their business strategy but then go on to produce inaccurate ongoing forecasts. As 2012 draws to a close, now is the time to start thinking about your business forecasting for the coming year and how to approach it.Forecasting is often underestimated as a simple task. After all, what’s so difficult about putting a few random numbers into a spreadsheet to illustrate how well you will perform over the next 6 – 12 months? However, experience has told us there is more to good forecasting than initially meets the eye.

RJP has helped many clients to produce more accurate working forecasts and the top tips below aggregate insights gained over many years.

Be cautiously optimistic

Accuracy is obviously critical when forecasting but at the same time, it is important to strike a balance between being optimistic and pessimistic. Although few businesses will double in size each year, many will be aiming for growth and this should be built into the forecast. Also prepare more than one forecast for the year to take into account worst case, best case and most likely scenarios. When preparing forecasts, produce a profit and loss forecast as well as a cash flow forecast.

Use all available information

Forecasting is a lot more involved than just estimating sales levels and needs to consider the movement of all money into and out of the business, plus margin levels. It is important to forecast the impact of VAT payments, tax payments and slow paying customers on forecasts.

Know your market and target audience

To be able to accurately predict future performance is difficult if not impossible, but it is essential to have an understanding as to how your market will develop as a whole, including competitors and seasonal trends.  Equally important is to understand how your existing and target customers are likely to behave in the future.

Good forecasts and financial backing go hand in hand

If you rely on external investment, whether it is from business angels, a venture capital group or your local bank, they will want to see you have an excellent understanding of market forces. Being able to demonstrate this will help to build long term relationships and trust with financial stakeholders.

Build in flexibility and ‘what if’ testing

Forecasting is not something done once and then considered a job done for the year. It’s important to revisit your projections and have the flexibility to revise forecasts as time progresses. Similarly it is useful to consider ‘what if’ scenarios and test the impact of hypothetical changes to business levels. For example, if your key supplier was no longer around and you had to use another supplier, what would the cost implications be? Likewise, what would happen if a key team member became ill and sales fell by 5%? After doing this, factor in a contingency plan to cover any unfortunate situations.

Ensure you practice tight credit control

One of the main reasons for forecasting is to get a good projection of cash coming into and out of your business. Poor credit control can mean otherwise accurate forecasts are rendered completely redundant, so it is important to have good procedures in place for chasing slow payers. To encourage customers to pay on time or even early, some of our clients find it works well to offer discounts to prompt paying clients. The rationale for doing this is based on the cost of alternatives – namely interest levels – for overdrafts and loans to subsidise working capital levels if money isn’t coming into the business as quickly as it might.

Don't loose sight of what’s most important for your business

Forecasting is very important as a business management tool but it is not as important as running the business well and keeping customers and employees happy. Compare forecasts with your management accounts information on a monthly or quarterly basis and carry out variance analysis on large fluctuations. This can help you run the business more efficiently and also prepare forecasts for the next year.

Simon Paterson is a partner at RJP and an expert in business forecasting. To find out more about tools available to help you forecast for 2013, please email him at sp@rjp.co.uk.