When you are running an enterprise, it is vital to keep one eye on the future. Over the lifespan of your business, there will be opportunities and challenges – and knowing what they are ahead of time will help you to embrace them. It will also help you to ensure your company is following the right trajectory of growth and building upon your success.
A financial forecast is one way you should track the future of your business. By having one, you will be able to determine the health of your company, how you predict your financial status to change and when you might be in a position to grow or expand. It’s also key to attracting investors and being successful in loan applications.
Due to the role a forecast plays, it is vital to ensure that you create yours with accuracy. With this, you can ensure you are adequately informed about your finances, which in turn will influence your decisions and reduce the risk of running into obstacles.
Here, we have listed seven of our top tips for crafting a financial forecast that will support your business at every point.
- Consider different scenarios
- Look at your financial history
- Predict expenses first
- Understand your sales strategies
- Adjust for cost fluctuation
- Compare against competitors
- Constantly reassess
Consider different scenarios
While a financial forecast should be an accurate picture of your future finances, the reality is it is hard to predict exactly what may happen. For every common challenge a business needs to prepare for, several unexpected situations could take place. These include recessions, disasters (such as fires or flooding) and even global pandemics. Each of these has the ability to adapt the way you operate and influence consumer behaviour, which may alter your finances.
When creating your forecast, you should therefore consider all the different scenarios that could impact your business, including the best and worst-case. This means understanding the risks posed to you and playing out what may happen in each context – including the potential financial impact. Doing so will grant you flexibility in your approach.
Once you have considered the risks, craft contingency plans that demonstrate the action you would take. This should be reflected in your financial forecast so that you are able to make the numbers add up regardless of the scenario you may end up in and keep on steady ground.
Look at your financial history
Businesses tend to work in patterns, which makes it far easier to predict what may happen in your future. Looking at your financial history will enable you to determine your current position and where you may be heading.
Taking regular checks of your accounts is recommended to keep up to date with the health of your enterprise, but you should also check these ahead of a financial forecast. Look for trends in areas such as revenue, sales, profit and expense. This could include seasonal peaks or growth.
When looking at previous finances, consider how these may change in line with any upcoming plans and strategies you intend to implement. You should also think about any other changes to your enterprise, such as the introduction of a new product range or upscale in operations. Combining this with evidence of your previous finance will help you to create a more accurate forecast.
Predict expenses first
Unlike your sales, you have control of the outgoing costs from your enterprise. As such, it is easier to predict expenses than it is to predict income. This makes it an excellent place to start when creating a forecast.
Looking at your monthly overhead expenditure should be your starting point, as it will allow you to calculate your regular ongoing costs. This should include supplies, staff wages, insurance, energy bills, services and any other expenses associated with the running of your company.
You should also consider any further spending you may carry out, even if you don’t already. This is particularly significant if you are introducing new processes, products, service or even recruiting people into your business. The cost of these and their start date should be accounted for into your forecast to give a truthful picture of your expenditure in the coming months and years.
Understand your sales strategies
Unlike expenses, sales can be hard to predict. Looking at your sales to date is a great first step, but no month is ever the same when it comes to selling, unless you have a predictable recurring income stream.
To accurately predict your sales, it’s essential to understand your sales strategies. Every enterprise hopes to see rising sales over time, and you likely have strategies in place that facilitate this – such as rewards schemes and staff targets. Using these targets, you should be able to determine your expected sales revenue see each month and how much these are likely to grow. You should also account for seasonality and anything else that may dictate customer demand, as this could cause your sales numbers to vary from one period to the next.
If you are struggling here, it is worth discussing with your sales teams, who are likely to have greater insight into how many sales they can make. With full comprehension of your sales strategies, you will be able to better calculate your revenue and profit, which will underpin your forecast.
Adjust for cost fluctuation
Another variable you need to account for in your financial forecast is cost fluctuation. It is unlikely that your costs will remain the same forever, so it’s natural to adjust your plans to incorporate changes. This could apply to your outgoing expenses, but it could also affect your goods as you increase your prices.
Understanding cost fluctuation means keeping an eye on things like inflation and the cost of supplies. Social, economic and political events may also have an impact, such as Brexit. As such, it is worth engaging with open communication with your suppliers, so you are forewarned when prices are set to increase or even decrease.
By incorporating such fluctuation into your forecast, you will ensure more robust predictions and make sure you have made the right allowances for expenses and costs.
Compare against competitors
The best forecasts are those that are founded in reality. However, as we’ve already touched upon, it is next to impossible to know what is going to happen in the future.
A solution to this problem is to look at those who have gone before you. By comparing yourself with others in the industry, you will be able to look at their financial projections and use this as a basis for your own. If you are a more niche business and are struggling to find competitors, try to find those with similar operating models (even if they are dealing with entirely different products) and use this as your benchmark.
Of course, you won’t be able to access full insight into other companies’ finances as much of this will be private information. So, at a higher level, you should consider their ratios, such as gross margin.
Every business is different, so no two set of accounts are the same – but comparing with others can be a baseline. If the finances of your competitors differ drastically from your projections, it may be a sign that you have been either too optimistic or too harsh.
Constantly reassess
The aim of a forecast is to give you a clear picture of how your finances may grow and the direction you are moving in. Despite this, even the most accurate prediction is subject to variation as circumstances changes and new opportunities and obstacles make themselves known.
Due to this, it is essential to revisit and reassess your forecast frequently. A rule of thumb is to check it at least once a month. Each time you check, you should take note of your current financial state and any new events that may alter your forecast, and consider the subsequent impact.
If adjustments need to be made, you should document what has been amended and why. You should also share the updates with any relevant stakeholders to ensure everyone is on the same page.
By continually reassessing your forecast, you will ensure it is as accurate as possible at every stage, with full comprehension of all the contextual factors.
Get advice
An efficient financial forecast is an incredibly useful tool for your business, enabling you to understand your status and the future of your company. It also helps you to identify when you will need support and of what kind, as well as unlocking your lending potential by assuring creditors of the trajectory of your enterprise.
If you need assistance in crafting your forecast, we can help. Our team has expertise in business finance, meaning we are well placed to assist your planning.
Beyond this, we also have access to a range of funding solutions. If you have created your forecast, but spotted unfavourable gaps or needs for assistance, these solutions may help you to overcome the challenges and move towards your goals.