Financial Forecasting – Have you got the right information for decision making?
An age old query from clients is "where did my profit go, it's not sitting in my bank account?"
The importance of cashflow and its impact on your business and the decisions made is one fundamental to its ability to grow and thrive. Cashflow also impact the value of your business to you as current owners and any future purchaser.
It is vital that you know whether your business generates or uses cash and reviewing the statement of financial performance alone will not be sufficient. Understanding the cashflow of the business and what you can do about it is vital for its prosperity.
Some questions you many want to ask yourself:
1. What are the benefits of forecasting?
2. What sort of forecast should be prepared?
3. Who should be involved in forecast preparation?
1. What are the benefits?
- Cash Control:
A cashflow forecast will help a business to see when funds are available and when they are required. It can ensure that surplus funds are not left idle, and that interest exposure is kept to a minimum.
- Evaluating Operations:
Comparing actual sales and costs with those projected in the profit and loss forecasts can highlight significant variances. This can ensure that any corrective action required can be taken on a timely basis.
- Determining the Need for Additional Resources:
Budgeting sales in advance will help to determine the resources needed to achieve those sales. For example, a budgeted increase in sales may show a need for additional staff. Plans can then be put into place to hire additional staff as workloads increase.
- Planning Purchasing Requirements
Forecasting the volume of purchases required can allow businesses to take advantage of quantity discounts. It will also ensure that stock is available when it is needed, and assist in preventing over or under stocking.
- Anticipating Financing Needs:
Forecasting can help ensure that the search for additional funds can begin as early as possible. Thus, financial crisis are more easily avoided and funds can be arranged on favourable terms.
- Recognising Profitability:
Forecasting requires the consideration of profitability. Careful forecasting can assist in the identifying and focusing on the most profitable activities.
2. What sort of Forecast should be prepared?
To determine which forecasts will need to be prepared, the purpose for which the forecasts are being prepared should be considered.
Typically, smaller businesses may limit their forecasting to preparing cashflow forecasts. However, such information may be of limited use to larger businesses, and may not give management the information it needs, or provide the full benefits obtained from a more comprehensive approach to forecasting.
In contrast, full forecasting systems combine both operating and financial forecasts.
3. Who should be involved in the preparation of Financial Forecasts?
Typically those involved in the management of the budgeted area, or those who are accountable for achieving the budget should be involved in the forecasting process. For example, sales teams should be involved in setting sales targets and the production team should be involved in the costing budgets.
If you don't have these internal resources there is no need to worry, we have all the necessary tools and templates to undertake a comprehensive financial forecast for you. Although a successful financial forecast involves input from the business owner to strengthen the validity of the forecasted financials.
Preparing financial forecasts well before the start of the financial year is crucial. Starting the forecasting process now will allow time for additional information to present itself, prompt management to address areas of concern on a timely basis and allow management to think about possible strategies for the coming year.
If you wish to discuss any financial forecasting please don't hesitate to contact us.