Many small businesses create a financial forecast as part of their initial business plan. But is it part of your regular financial management? Forecasting may seem like an unnecessary chore but, says Peter Bartram, it’s essential if you want your business to grow safely.
The benefits of forecasting
When David Lea-Wilson was planning to set up the Anglesey Sea Salt Company, he got down to some serious financial forecasting.
“Because I was starting a company that would begin with no sales, I had to have an estimate of how long I could survive before business came in,” he recalls. He thought he would break even within three years. In fact, it took four, which shows that even the best-laid financial forecasts don’t always turn out to be wholly accurate.
But David’s company is now a high-growth success story and his speciality salt products are sold in the best stores such as Fortnum & Mason and Harrods.
Since those early days, David has run careful financial forecasting before each of the four major company expansions. “Each time we’ve been keenly aware of what we’ve got to do to justify the expansion,” he says.
Forecasting allows you to grow safely
Financial forecasting might seem like a laborious task but it’s essential for any small- or medium-sized business that wants to grow safely.
“Effective managers don’t just react to events – they anticipate and plan for the unexpected,” says Phil Holmes, Professor of Finance at Durham Business School. “Successful organisations open their minds to various scenarios and appreciate the dynamic factors that affect each outcome.”
Steve Earl, managing director at Zeno Group, agrees about the importance of financial forecasting. He makes it part of senior managers’ job descriptions to forecast weekly – and they’re held to account on the accuracy of their forecasts.
He says: “You need to make your team understand that forecast revenues are something they need to commit to and be measured by. By doing so, this enables them to understand the direct impact they have on business performance.”
But Steve believes that a small company should keep forecasting simple. “The more time it takes, the more mistakes creep in. So we track a single line each month for each revenue source – a client, in our case. We add comments in spreadsheet cells to explain reasons for variations from previous forecasts. We’ve managed to change forecasting from a chore into something that people are interested in – so they get a better understanding of their value to the business.”
Forecasting helps you to get investors
At the Anglesey Sea Salt Company, David has found financial forecasting an essential tool when finding outside investors.
He explains: “We used it to show what dividends they would get in three years’ time, but also how that money could instead be used to reinvest in the business. It strengthened our bargaining position.”
It was also essential in their plans for expansion, like the addition of a major factory. Not bad for an outfit that started out with a saucepan on the kitchen Aga.
But David has a word of warning for business optimists new to financial forecasting: “Go to the assumptions you’re using and make them worse than expected to see what the effect is in two or three years’ time.”
It’s a way to make certain that your business’s financial future will be sound even if plans don’t turn out quite as you expected.
10 top tips to successful forecasting
- Have a routine. Make financial forecasting part of your business culture – do it regularly and don’t forget.
- Keep checking. Review forecasts and update figures regularly – quarterly, monthly or weekly, depending on need.
- Deliver. Insist staff are responsible for delivering on forecast revenues and costs they’ve signed up to.
- Keep it simple. Simplicity will help you achieve reasonable accuracy and avoid unwelcome surprises.
- Be realistic. Base forecasts on realistic assumptions taking account of your industry’s norms.
- Give it time. Make allowance for you and your colleagues’ time to deliver on the plans on which the forecasts are based.
- Monitor your competitors. Allow for the activities of competitors which may reduce expected revenues.
- Use other people’s data. Seek out reliable data as guidance when factoring in response to advertising and marketing campaigns.
- Get the right IT. Use a software package to make financial forecasting simpler – and to test alternative scenarios quickly.
- Provide a contingency. Allow for the unexpected – which upsets even well-laid plans.
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