Why business forecasting matters
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.
We have a wealth of experience in financial modelling contact us if you would like to understand our approach in more detail. Every model that we build is bespoke to the needs of the business.