This week, we are delving into the world of forecasting – what is a forecast, how to forecast, and why your business needs one.
Most businesses especially in their early years, start with an informal forecast in place, looking slightly ahead at predicted revenue, often based on recent historical income. The focus for the business can become about the ‘now’; running the business, selling, delivering for clients. The shift to a more formal approach to forecasting is usually driven by a compelling event, good or bad.
Any business that’s been caught out when income has dipped and cashflow has become an issue, quickly puts renewed focus on forecasting future earnings, after sleepless nights no doubt.
On the other hand, the shift to proactive forecasting often occurs when there is a specific goal in mind; for example, planning to open a new office, purchase equipment or hire staff. Forecasting helps the business understand if they have the financial capability to execute their plans.
Roadmap to creating a sales forecast
“So where do I start?”
It’s often the first question we are asked when helping businesses prepare a forecast.
Starting with a budget helps you fully understand current expenditure. What are the fixed costs that generally remain constant in the business? For example, rent and staff salaries. Make sure to include VAT and corporation tax obligations as well.
We then look at the redicted income that the business can reasonably expect in the coming months. Past performance is a useful indicator but make sure you factor in seasonal variations. What new business is likely to be won, is the sales pipeline building? What data do you have on client retention; is client income stable?
By mapping data into the forecast you can start to visualise income for the next 6-12 months (a realistic timeframe for most businesses).
Making business decisions based on the forecast
Once you have your budget in place, you have the base and the information required to put the steps in place to recover your cashflow position or indeed, if you can afford to execute your goal now or have to plan ahead for it.
If for example you’re planning to open a second facility, and you know the one-off and ongoing costs; mortgage or rent of the building, additional staff costs, energy, equipment and so on, you can map the figures into your forecast budget and make informed decisions.
Say for example, the new facility is within reach but will stretch the finances of the business, forecasting will help the executive team model scenarios that will reduce the risk and adjust timings to maintain cashflow and profitability. The business will know if an increase of 10% in revenue is enough to make the project a reality and put in steps to realise the uplift. Sourcing investment or funding might be the more attractive option in the short term and having an accurate forecast again, helps the business take this route.
“This situation happened with a client that realised they needed to increase the sales revenue to be able to achieve the budget required for a second office.
“As a result of analysing the data they are now recruiting, we’ve recognised that it’s not the leads coming in that’s the problem, it’s having the capacity to convert those leads and deliver the work.
“So taking on new members of staff will raise costs initially, but the long-term effect should be a healthy rise in revenue, which should hopefully mean they can hit their goal of opening a second office,” said Direct Peak’s Managing Director, Karl Newman.
Forecasting is fundamental for a healthy business and our aim is to help you use the information in our articles to help you plan and grow your business.
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5 events that prompt forecasting!
These are five commons events that prompt a requirement for immediate forecasting that you should be planning for in your business right now…
- A sudden reduction in income e.g losing a key client
- Disruption – political, economic, technological, social challenges that impact revenue
- Planning for capital investment and funding
- Competition – new entrants, technologies disrupting market dynamic, introducing uncertainty
- Legislation and compliant obligations changing that introduce unplanned costs.