Nobody has a crystal ball, so what is the point of trying to predict the future performance of a business?
A good financial forecast is an important tool to help you manage and grow your business. It will only be of use if you have a method of tracking actual performance against forecast in order to understand the key variances and dedicate the time to reviewing variances and actioning change in business behaviours. Such a forecast will:
- Help set realistic targets for a sales team to manage driving the business forward
- Help you understand when you will need to recruit and increase your workforce
- Help you to understand the capability in your current infrastructure and when you will need to acquire additional premises / machinery / facilities
- Help you identify cost saving opportunities
- Help you to make sure you are on top of your working capital cycle and the working capital requirement as your business grows
- Allow you to “sensitise or flex” your assumptions – for example, what would happen if we increase the volume of sales, but with a price reduction?
Whilst we believe that a forecast is a useful tool in every business, there are specific occasions where they are particularly useful:
- When raising finance – a funder will want to understand the current and future cash flow of the business and to make sure that any new debt is affordable
- When setting up a new business – running out of cash is one of the biggest failings of new businesses – having a realistic plan from the outset will help you better understand the working capital requirement of your business
- Business exits – an investor will want to understand the future plans for the business and will want to understand management’s ability to budget in assessing whether the projections presented are credible
A robust forecast will home in on the key performance drivers of the business, understanding historical performance to help with sensible assumptions. A poor financial model will look at finger in the air percentage increase and decreases which is of little use to potential buyers or investors.