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7 tips for the perfect business forecast
Creating a great business forecast is crucial for the future of any company. Though it will not act as a crystal ball telling you exactly what will happen in your future, it will give you a great sense of direction and help ward off any nasty surprises. Stay ahead of the game with our seven top tips:
#1: It’s a creative process
There is no one right way of creating the “perfect” forecast as every business is different – so you need to be flexible and creative in your process. Brainstorm ideas, think outside of the box and challenge yourself. Think about what to include and what not to include, and be ready to make some predictions and educated guesses to help your forecast take shape. By taking time over the process you are more likely to consider every factor and forecast for different eventualities.
#2: Communicate and coordinate
You might be the best person to create your forecast and have a great knowledge of your business – but you can’t know everything. A vital part of constructing a brilliant business forecast is communicating and coordinating with others from different areas of the business to gather as much information as possible.
It is also worth getting advice from someone outside of your business. External input can give you a different perspective of your company, and can help you think of issues, shifting trends in the industry, or changes in regulations that you had not factored in before.
Once you have used this input to create your forecast, it is equally important to communicate your outcome back to your workforce. Transforming your forecast into an easily digestible one page plan with projections and distributing it to all business departments is a great way to ensure that all members of staff have an idea about what the forecast says. This will help to engage staff and encourage them to deliver.
#3: Forecast for your whole business
You might be trying to develop one specific area of your business, but it is important to remember that all areas of your company are linked. If one area falls behind, it could have a domino effect on the whole business – so you must forecast with the whole business in mind. It is also worth keeping track of all interdependencies in your business, ie what needs to happen and in what order, to help you keep track of the big picture.
#4: Understand the inputs before deciding on the outputs
Starting to forecast with a target figure in mind encourages the creators to select data that achieves that “magic number” of revenues, giving them an unrealistic idea of what they can achieve. The only way to create a logical and realistic forecast is to work from the beginning. It is a lot easier to forecast expenses than revenues, so start with common expenses such as rent, utility bills, technology and salaries, and work from there.
You also need to think about how your business drivers and external factors, such as economic conditions or trade relations, could affect your forecast. By identifying and considering these factors, you can have a clearer understanding of how they may affect your outputs – giving you a chance to maximise your control.
#5: Stress test
Your first forecast will be based on one set of assumptions, but what if those assumptions change? Think about different scenarios that could affect your business, and how feasible your projections are. Work out what could change and what extra elements you need to take into account. After all, it’s better to go bust on paper than to risk doing it for real.
Most importantly, learn from your mistakes and don’t be afraid to change your forecast as you go along. Make sure it best reflects the changes in your business and the changing trends in the industry.
#6: Without cash, you’ll crash
A business can run out of profit several times, but it can only run out of cash once. There are seven drivers of cash, but they are also seven sponges, soaking up cash and potentially choking your business. Sales growth is one of these drivers so, if you’re forecasting for an increase in your business income, check the impact on your cashflow so you can predict when more growth will become a pinch point.
#7: Plan to manage, don’t manage to plan
A well thought-out forecast can help plan and assess all aspects of your business, and will help you stick to your strategy. Once created, you can use it to think about specific areas of growth or any potential issues. But remember, don’t get stuck in analysis paralysis – the factors and assumptions affecting your forecast will be constantly evolving.
You could spend hours, days or even months coming up with the best and most detailed forecast, but to gain the full benefits you need to make sure you use it. Track your results and compare the reality with the predictions as you go. Make the most of your efforts, and stay ahead of the market.
Having a great forecast gives you a way to be proactive, not reactive, about your business. For help and advice on creating a business forecast to help you develop your business or secure finance, please contact Andrew Williamson.