Expert Advice

Accurate forecasts

Accurate forecasts play a key role in arming decision-makers with the necessary foresight and relevant information to help them respond to changing market conditions. While it’s impossible to predict the future, a well considered financial forecast can help a business to: maintain solvency; improve cash flow; maximise profits; and increase responsiveness to trends in the marketplace. In the current economic conditions, it has never been more critical to cement these fundamental business foundations.

What is a forecast?
Successful companies use three complementary planning exercises to set realistic long-term targets and then manage activity on a daily basis to achieve them. Firstly, the business plan sets out your strategy and long term direction of the business for the next three to five years and establishes long term financing requirements. Secondly, the annual budget allocates resources for the year ahead and helps control costs. Thirdly, short term forecasts support tactical decisions and manage cash flows. Short term forecasts in turn consist of three linked documents, which can be updated weekly, monthly or quarterly. Used together, a profit and loss account, cash flow and balance sheet give you greater control of your business and the confidence to respond quickly with short-term decisions. They also enable you to manage cash flow in a manner that ensures that you can meet your long term goals.

Profit and loss account forecasts help you analyse the impact of current trading conditions and marketing strategies against your long term growth plans. Compiled from sales forecasts, they allow you to promptly address underperformance before it affects your bottom line.

Cash flow forecasts are often derived from profit and loss account forecasts, by taking into account the timing lags between a sale and clearance by the bank of the associated payment from customers as well as the credit taken before paying suppliers. By taking into account all non-trading transactions too, such as receipt, interest on and repayment of loans, purchase or sale of assets and issue of shares, cash flow forecasts allow you to anticipate peaks and troughs in cash resources. They are critical in ensuring the business is solvent and funded in the most efficient manner.

Balance sheet forecasts are usually derived from the two previous forecasts and are primarily used to manage the levels of raw materials, components, work in progress and finished stocks. One of the main benefits of forecasting is the ability to maximize profits. Most businesses start out by setting themselves long term profit plans. Remember you cannot rely on the accounting system to monitor the attainment of these targets. By the time an event has been reported in your books it’s already too late to take remedial action. Frequent forecasting will help to create a more stable and profitable business in both the short and long term. For maximum benefits, forecasts rely less on complete accuracy and more on regular use, which is why they should be as easy and efficient to maintain as possible. It’s for this reason that specialist software is so appealing for new businesses. Software packages such as Sage 50 not only save valuable time and resource in managing the calculations and key performance indicators, but they are scalable to accommodate new levels of detail as you grow. So rather than divert time to building and integrating individual spreadsheets, which can rapidly become very complex and hard to manage, decision-makers can instead use pre-designed software to anticipate trends and experiment with different business scenarios in a risk-free environment.

Forecasting naturally includes uncertainty and will be subject to many variables, such as the economy, new technology and competitive activities. It is therefore important to invest time in learning how to navigate the different planning tools in order to best access and experiment with information in each of your forecasts. Expert support and training are additional benefits of specialist software packages and will help you to build better forecast and respond faster to interpretations of market trends.

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