How to forecast accurately

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How to forecast accurately

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Why should you read this guide?

Writing a forecast for your business is an important element of being in business. Why would you bother carrying on if you didn't think you were going to make money or be successful? This guide will give you some tips on how to do this.

Background

It is worth pointing out at the very start of this guide that forecasting in any subject is of course predicting the future - which for most people is not possible. That said, the act of forecasting itself is very worthwhile as it helps to focus the mind on what should happen in the business over any given time. Forecasting tends to be the name given to the actual number elements of business planning and covers areas such as cash flow, profit, sales etc.

A number of parties will expect to see financial forecasting e.g. banks, public sector advisers, equity providers and accountants. Although they can serve a purpose to these parties if you are looking for funding, each of them also take a great deal of comfort from the fact that you have bothered to do them in the first place.

How to write a forecast

There are templates you can complete for financial forecasting and you do not need to make these up yourself. There is information where to get these at the bottom of the guide. The important thing to remember is that each of the figures that you put on a spreadsheet actually means something. For example if you put down that you are going to sell £5,000 worth of something in January make sure you know why this is likely to be the case. This should be based on a good mix of previous experience and your educated thoughts on the future trends of your business in the marketplace. Each figure will relate to other figures that you put down i.e. if you are going to sell £5,000 in January and £15,000 in February you would expect other figures in February to go up as well e.g. staff, delivery costs etc.

If you are setting out on a new venture then forecasting is very important. You need to know that what you are about to do will make money as well as providing you with the income that you need and are used to. It is very difficult to do this accurately and to resist showing a massive turnover and profit in the first year. You will be very enthusiastic about your new business but a word of warning - nothing turns off a potential lender/investor than an over inflated cash flow projection. It involves more work but if you really cannot resist showing a very enthusiastic plan then do more than one. Show your best and worst case scenarios and then show one that provides a breakeven outcome.

Remember the words

As mentioned above, nobody really expects you to have some kind of business crystal ball. Let's face it - anything can happen over a period of a month let alone 12 or 24 months. In order to show that you have not just picked the figures out of thin air you need to justify each of them. If you are forecasting sales to rise by 20% over the year what are the reasons for this? If you are doubling staff costs half way through the year make sure the reason for this is obvious. The words that accompany a forecast do not need to be lengthy. This is not your full business plan narrative, simply bullet point each row to provide a clearer understanding of why you arrived at the figures.

Summary

Business forecasting is a useful tool for you and external parties. Nobody really expects you to predict exactly what is going to happen over the period. As long as you give this your best estimate and justify your figures your plan will make sense. Finally remember to monitor the forecast as this should become a workable tool for your business as you move through the year.

Further information

The link below takes you to a Business Link forecasting tool for cash flow, profit and sales forecast. Other sources would be your accountant, business link or business gateway in Scotland. Each bank also has its own tools that are available free.

http://www.businesslink.gov.uk/Starting_a_Business_files/SU0020.xls