Business forecasts: why these are more important than ever

By George Clayson, Associate Director, Business Advisory at Knill James

After causing more than a year of economic turmoil, the coronavirus pandemic is slowly starting to recede. As the business world gets back on its feet and the outlook is increasingly positive, it's vital that your business is ready to make the most of whatever the future holds.

But no business can thrive without financial forecasts, so now is the time to make preparing forecasts one of your top priorities. And if you've already done your forecasts, they should be reviewed to ensure that that they are still fit for purpose.

What should be in a forecast?

For forecasts to be useful they must also be diligently prepared so that they can be relied upon. The devil is in the assumptions, not just the details, and also in the correct integration of each of the three constituent parts - namely the profit and loss account, the balance sheet and the cashflow.

Every forecast needs to set out predictions for future revenues, costs and the profitability of the business. A number of assumptions will need to be included, covering:

• Future price rises, both in terms of the goods and services that you sell and the cost of those sales
• Future margins
• Direct and overhead wage costs
• All other overheads
• Capital expenditure

Such assumptions will need careful consideration for the forecast to be plausible and convincing. Well prepared and well-thought-out forecasts will provide better data for ongoing management and review purposes. They will also have greater credibility with other stakeholders in the business, such as suppliers and lenders.

Cash is still king

Above all, forecasts should set out your cash requirements. Always remember that cash is king: it is vital to know both when your business will need more of it and how much will be required.

To establish future cash positions you need to be able forecast:

• How long your debtors will take to pay
• How long you will take to pay your suppliers
• What your overheads will be and when you will pay them
• What provision should be made for payroll, VAT and Corporation Tax

There are so many details lurking within all these projections that will have to be carefully considered. Once produced, the forecasts need to be constantly reviewed, as not only will they impact heavily on future management decisions, they will also underpin a great many of them.

Benefits of great forecasts

The benefits of well-prepared forecasts cannot be overstated. At the very least they will:

• Require management to regularly think about the business, its plans and strategies
• Stimulate positive forward-thinking rather than historical reflection
• Inspire dynamic management decision-making
• Generate vital cashflow planning. Cash is the fuel that keeps the business engine running and you need to know when you are going to need more of it
• Assist when raising finance for the business. Well-prepared forecast are a 'must-have' for potential funding providers
• Form a crucial tool for enhanced performance monitoring

Focus on the future

Armed with great business forecasts you will have dynamic, reliable and integrated financial information to help you make key decisions at a crucial time as we emerge from this pandemic. We are here to guide you through how best to prepare them, what tools to use and to provide a reality check, so that you end up with fantastic forecasts which will be a vital management tool going forward.

If you would like any assistance with your financial forecasts and business planning, please get in touch with George Clayson on 01273 480480.