We have a question for you. As a business owner, when was the last time you did any financial forecasting for your business? There are usually two responses to this question – you will either confidently reply with a date sometime in the last year, or you will awkwardly look at your feet and tell us you haven’t done one recently (or at all). Don’t worry! We know that financial forecasting is one of those things that often slides lower on the priority list the busier you get as a business owner. But that doesn’t make it any less important. In fact, a good, updated financial forecast can dramatically increase the performance of your business no matter how big it is.
Chart A Course To Your Goals
It’s a universal truth that if you aim for nothing, that’s probably what you’ll get. But if your business has goals and a set path to achieving those goals, you are much more likely to achieve them. A financial forecast is essentially a roadmap of what you’re aiming to achieve and how you intend to get there. It provides a lot of insight as to the resource requirements and milestones needed to reach your goals. It will help you plan a budget for activities, see any obstacles you will need to overcome and allow you to plan for unforeseen events as well. In general, businesses with a financial forecast stand a better chance of achieving their long and short term goals.
Measure Your Progress
If you were sailing a boat from England to France, you wouldn’t set a course and then just sail. You would check in during the journey, making sure you were following your planned course, reading instruments, evaluating data and adjusting your course when needed to keep you on track. The same is true of a business. comparing your budget against your actual results and monitoring the variances between them gives you the information and feedback you need to take corrective action. It also shows you how well you are doing compared to your targets, what areas you need to improve in, and helps get you back on track.
Make Better Management Decisions
As a business owner you’ll be called on to make important decisions on a regular basis. These decisions can be small, or they can have a real impact on the business. In order to make sure you’re making the right decision, you’ll want to be in possession of the full, up to date facts at all times. A solid financial forecast means you will be as aware of your business position as possible, and have all the data you need on hand to help you make better decisions. Business owners who work with accurate financial forecasts regularly will be able to learn from the past and more accurately predict the future, placing them at the forefront of the industry.
Work Out Your Financial Needs
Over the course of a year there are probably going to be times when you need to spend more, and times when you will be able to save, or find further investment. Financial forecasting plays an important role in working out the financial needs of your business going forward, and ensuring your business as adequate capital to do everything it needs to do. For example, if your business is expanding, then you may need further capital to make it happen. A financial forecast will show you if you have enough funds within the business to achieve that, or if you need to source external funding.
Preparation is key, and good business owners are prepared for anything that comes their way. That often means examining different options, what would need to be done in those scenarios and having a plan in place to manage them, which a financial forecast is a key part of. For example, say we have 2 businesses, business A and business B. Business A has a regularly updated financial forecast and a good idea of what’s going on in the business. Business B does not. Both businesses suddenly lose 25% of their income stream. Business B goes into panic mode, trying to figure out how to claw that 25% back, and how to keep things running while that happens. Business A had planned for such a scenario, and already knew exactly what they needed to do. It wasn’t pleasant for them either, but they were clear about what decisions needed to be made and when, and how to financially recover. Which business would you rather be?
At Purple Lime, we work with business owners who want to improve the way their business is run at every level. The people who want more from their accountancy partner than a single output once a year, and instead want to dig into their financial data to make real changes to the business. Our range of services can provide you with real-time financial data, reports and advice, putting you in control of your business, including regular financial forecasting and updates. We become your finance department, helping you understand the numbers in your business and helping you forecast for the future more effectively. To find out more, just get in touch with the team today.