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  • Writer's picturePeter Searle

Management Accounts - Forecasting

Without a plan you have nothing to compare what you thought would happen, against what actually happened. The saying goes, “if you don’t have a plan, you are planning to fail”. Many small businesses have a “game plan” which is an overarching aspiration, but they do not check against it as they go along because the plan is not sufficiently detailed. So, at the end of a year, assuming they don’t run out of cash in the meanwhile, their accountant simply reconciles the income against the out goings and works out how much tax is to be paid. The accountant might casually make some observations, “Oh, you spent a lot on entertaining”, or “you have not made much profit on XYZ this year”. If this is the case, you are missing an opportunity to reconcile as you go along. By adjusting as you go along, you can continuously improve which will avoid any nasty surprises at the end of the year. Drawing up a plan is often put off as business owners say they don’t have all the information. This is true, but they do have knowledge of what has previously happened, and they have their knowledge of what is going on in the market, which they can use to make educated guesses with. So, how can you draw up a financial forecast to monitor against and determine if your assumptions are still correct?

Step 1. Gather information.

There are somethings which you can work out accurately, for example the insurance costs, software applications and so on. As a business develops the fixed costs will get larger e.g. there may be premises, equipment, loan repayments and so on. Generally, on the cost side, the fixed costs of running the business, i.e. the cost you would incur if it had no work, can be calculated without too much trouble. These costs must be covered by the operational activities of the business.

The income from the operational activities is more difficult to assess. But as a business grows, there will be information on the previous year’s sales and the cost of sales. The forecast can be based upon these. By building on what you know and making educated assumptions the expected income from sales and the cost of activities can be derived.

Step 2. Making assumptions.

Some assumptions are based upon research and others on experience. Each year it is worth stepping back and reviewing the environment you are operating in. Are there new technologies, new competitors in the market, how is your customers doing or changes to legislation which will impact upon your forecast? Retailers are having to consider the impact of online sales on their activities. Some changes present a threat, others an opportunity. Be aware of what is going on and factor in as much as you can. Record your assumptions, as if they prove to be wrong you can always make an adjustment to the forecast and then take appropriate action to avoid an issue or take advantage of a situation. Be realistic with your forecast. Most businesses have a seasonal factor, so factor it in.

Step 3. Review and update.

So, you now have a plan. Break it down into manageable bits. The manageable bits can become targets for the staff and can be used to incentivise them if you want. Keep the plan under review. The review process allows you to predict what is going with better accuracy and opens up the discussion on what should be done. It can also be used to carry out “what if” scenarios e.g. If we secure that order, will we have enough cash to buy the materials to deliver it? The forecast is a just that, it’s no more than an educated guess. But if you don’t make some assumptions and plan, you have nothing to monitor against and you run the risk of some nasty surprises along the way.

If you need to reset how you monitor your business performance or predict the impact of events which might occur in the future, get in touch with me, for a no obligation discussion on creating a plan.

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