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The importance of financial forecasting

With so much uncertainty in the country at the moment, business owners are having to scrutinise not only their finances, but also their entire business models, and in greater depth than ever before. So how can financial forecasting help? And what should business owners consider when thinking about this?

2021 is expected to be particularly challenging for many businesses that have taken advantage of the Government assistance such as the deferral of VAT liabilities and personal tax liabilities. Not only will these start to become payable, the Job Retention Scheme grants will have come to an end, replaced by the Job Support Scheme, and for businesses that have taken on additional borrowings under the Coronavirus Business Interruption Loan scheme, repayments may start to kick in.

Having a clear financial forecast for at least 12-18 months from now is therefore going to provide an essential map to help you navigate the uneven road ahead. This is especially important given the new support measures and tax payment plan options introduced on the 24 September which will all require careful planning and cash-flow management.

Having a clear financial forecast for at least 12-18 months from now is going to provide an essential map to help you navigate the uneven road ahead.

What makes a successful financial forecast?

A profit and loss account forecast will focus on expected revenues and costs but having a profitable business does not always translate in to having cash in the bank. A cashflow forecast is therefore designed to look at the timing of when inflows and outflows occur so that you can easily identify any pressure points and shortfalls and take action well in advance. This will help to ensure a positive cashflow balance is maintained.

For forecasting to be successful, having accurate accounting records and up-to-date management accounts is an important starting point. This will help to ensure short-term fixed costs are captured and existing amounts owed to the business from customers, as well as those owed to suppliers and external financers, are correctly recorded.

Businesses then need to look at predicted income from sales and the timing of cash receipts, as well as other sources of cash, such as tax refunds and loans. Predicted cash outflows need to include every expense that a business will incur, including payroll, supplier payments, rent, loan repayments and taxes.

For many businesses that have historically been cash rich, forecasting will be an entirely new concept. However, even for businesses that have always maintained a rolling forecast, it is likely going to be time to pull out a fresh piece of paper and start again as historic results and previous assumptions on which existing forecasts are based may no longer be relevant.

In fact, many businesses may now be swerving dramatically off their original course and into uncharted digital territories such as the restauranteur who has decided to close their doors and move to an online sales and delivery service. In order to succeed with a different business model, break even margins, fixed versus variable cost bases and funding requirements all need to be reconsidered.

What benefits will a forecast provide your business?

While the idea might seem daunting, creating a new forecast can actually stimulate hugely valuable conversations about the justification of expenses and segmentation of the various pieces of a business into the most profitable and cash-generative elements. Although there are numerous software packages that can ‘crunch the numbers’, what will be key for business owners is taking a critical look at all elements of their business model and cost base and making sure that they are challenging themselves with the right questions.

It will also be important for businesses to consider best and worse-case scenarios and to be able to plan for the cost savings, and other actions, that would be needed in a worse case situation.

Businesses may be considering permanently giving up their premises and working remotely or, sadly, having to make redundancies. Forecast scenarios could be created to look at the real cash savings that would be made from these decisions and when the best timing for significant change may be.

In a best-case situation, and where a business is profitable and cash rich, there are choices to be made between rewarding staff, paying dividends, investing back into the business or accelerating the repayment of external debt. A flexible forecast model can look at the impact of these different scenarios to assist with these key decisions.

For business owners that are heading into the new normal and the new year with a little trepidation but a renewed enthusiasm for change, a detailed and stress-tested forecast can offer both peace of mind and a degree of control. Investing some time with an experienced business advisor who can provide valuable insight and assistance with a forecast could be one of their best decisions to come out of 2020.

Would you like to know more?

We have over 20 years’ experience providing outsourced accounting services to owner managed businesses.

We have over 20 years’ experience providing outsourced accounting services to owner managed businesses. If you would like to discuss how a financial forecast could benefit your business or how to create a new one to reflect the changing landscape, please get in touch with your usual Blick Rothenberg contact or one of the partners to the right.