Why do Companies have forecasts?
Mainly so they can plan for future fluctuations, this could be considering seasonal variations, growth plans, change in overheads, taxes, operational changes etc. the list goes on. The main goal is to achieve a high performance Company, using planning to achieve that. All Companies who have long term profitable clients have a plan!
Building a profitable and sustainable strategy
If you have a high growth business, you need to have purpose in your business, a forecast will give a financial purpose and goals to aim for.
But no one knows what the future holds?
No one does, plans change all the time, but if you continually go by gut instinct, especially when growing, then you don’t really know how anything will affect your finances and therefore decision making going forward. With a forecast you can take account of scenarios that you expect may happen, like opening a new office, taking on more employees and plan for that.
Gaps and surpluses
Forecasting a future bank balance helps to estimate where there will be gaps in funding (this could be crucial to the future of the Company continuing to trade!) or when we have a surplus where we could take on extra employees/open another office etc to drive growth instead of it sitting there doing nothing.
How up to date is it?
Just to use a scenario of employees as an example:
So, it’s the start of the year, we have spent a chunk of our working time putting together a forecast or a cashflow, then a few weeks later our key employee leaves and we must replace them with someone else, chances are they may need to be paid a different amount depending on who we decide to take on? The forecasts/cashflows are out of date immediately, we therefore need to not only compare forecast to actual, we then need to REVISE the ongoing forecasts. The same would apply if our providers increase their prices, we think the bank may not increase the facility, or we have a new customer or have general worries about the market, we need to do a revision.
Monthly management accounts are a crucial part of keeping things as accurate as possible, this then forms the basis of these revisions (together with input from you about trading conditions).
The management accounts help to work out when profits and losses arise, we compare the budget to actual and then update the cashflow, it should be part of the infrastructure of the Company, particularly in a growth scenario.
How do we know if there are changes?
Communication is a key part of this process; any changes need to be communicated in advance which is a change from historic recording for the accounts or management accounts.
What if I don’t do it?
Many Companies decide to put off the cashflow position until after they grow, and you can do this so far, whether it be in your head, on paper or using a spreadsheet or software, there comes a point where you need resource and expertise to do it accurately and effectively also you can concentrate on what you should be doing inside the business.
It’s never been more accessible to people who have cloud accounting as their platform, we have access to forecasting software that can help towards preparation at cost effective rates.