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Why is forecasting important?

Posted 29/05/2020 by Patrick Leavy

Do you want to grow your business into an entity that will potentially outlive you? If the answer is yes, then this blog is perfect for you!

Why plan?

People who plan out the future in numbers, tend to have more successful businesses. More money in their pocket, more money in their pension, more money for their staff, happy suppliers and happy customers.

Why should you have a forecast?

  1. to set targets and navigate towards them successfully throughout the year
  2. to show to banks or investors when you are trying to raise funds to grow the business. For banks you are showing that you have planned ahead so that you can afford the monthly repayments of the loan.
  3. to see if the plans in your head actually play out well in numbers – hold your dreams to account!
  4. to satisfy other directors and investors that you are on the right path
  5. to control spend and pricing – variances on the forecast can indicate problems

What are the types of forecast?

  1. Near-term forecast – more accurate, often in cash terms rather than profit & loss
  1. Medium to long-term forecast – more speculative, usually in profit & loss and balance sheet form.

What is the ideal set up for growing your business successfully?

  1. Sign up for monthly accounts reporting from Farnell Clarke.
  1. Sign up for monthly forecasting meetings too

This is the winning combination. Forecasting works best when it is a regular collaboration – not a ‘set and forget’ gesture.

A monthly conversation with a finance partner pulls you away from the day-to-day and keeps you focussed on working ON your business, not just IN it.

You are investing your time in the business’ future, taking time out to assess the goals and how the various parts of the machine come together to reach those goals.

What does that mean? It means that planning should be thought of as an investment, not as an additional cost. It’s not something you HAVE to do, like a tax return. It is something you SHOULD do, like exercise. It is deferred benefit that builds up over time, like with regular exercise, as opposed to the instant benefit that a tax return brings (meeting a government deadline). Perhaps that is why some people stop exercising – each workout does not bring in-and-of-itself a tangible gain (it just feels like effort!), so it’s easy to think that it is useless and forget the cumulative benefit with the ‘little and often approach’.

Look at the bigger picture

It’s easy to get lost in the detail month-to-month, so it’s a good idea to also show your data in quarterly format in your monthly reports. The bigger trend will appear in these graphs and tables.

Why do you need monthly accounts?

Monthly reporting (also known as management accounts) is like getting the certainty of your year-end accounts every month. Your accountant brings the books up to date every month and makes the necessary adjustments as if it were year-end. So you ‘know your numbers’ as the year plays out.

The importance of monthly reporting is linked to the importance of forecasting, as summed up by a great quote from the book Agencynomics:

If you don’t know the current position of your business and where you intend to go, how can you possibly get there? It would be about as pointless as spending a day on the road driving around with no intended destination: you need a target, a goal

But not only that, you need to measure your progress towards that goal.

What should you measure in my monthly reports?

There’s a saying ‘what gets measured gets done’. If you measure the right things, you’ll do the right things, and they will get you closer to your goal.

To start with you should measure the standard business numbers: sales, profit and cash. As you progress you should focus in on metrics that are the real drivers of success: wages to sales ratio, leads to conversions ratio, volume of web traffic, customer reviews etc. Picking the right ones will come from your conversation with your finance partner at Farnell Clarke.

If you really get your business data straightened out, then you can work out your margins per product and your profit per customer. You’ll then be in a position to focus more on the most profitable customers and the most profitable types of work you do.

You’re getting monthly report so how does forecasting help?

Forecasting provides the targets and prompts both you and your finance partner to plan ahead. It prompts a link between recent performance and future performance. Once you’ve seen how your business performed recently in begs the questions “what does that mean?” and “do I need to do anything differently to stay on target?”.

Forecasting FAQ

I have a budget. Is that the same thing as a forecast?

They’re similar but not quite the same. A budget is like the paper map in the glove compartment. A forecast is like the sat nav on the dashboard – constantly adapting to driving conditions.

Think of the budget as a static document where you set out your desired destination before you set off. The forecast then helps you get there as you go along. The forecast is usually presented as a combination of actual data for prior months combined with forecast data for the remaining months of the year.

Aren’t forecasts always wrong?

Yes, they are! Your forecast will always be wrong, it’s just a matter of how wrong: you are trying to get as close as possible, not bang on. Does that mean they are useless? No. Forecasts are always a work in progress and very useful for focussing the mind on what drives your business, and working towards goals.

Does the time and effort of planning outweigh the usefulness?

Not if you’re using Xero and a planning plug-in like Futrli or Float. They import the Xero data automatically so the past trend is there, and you can focus on planning the future. We use these apps at Farnell Clarke so we can spend time talking to you, not updating spread sheets.

Farnell Clarke has a specialist who has spent the last six years helping organisations plan their next moves and works on forecasts for companies.

Get in touch to see how regular conversations with a trusted finance professional will boost your business!

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