There’s no doubt about it: financial forecasting can be complicated. And while most business owners understand its importance, very few fully grasp its nitty gritty and how to maximise its value.
As accountants, that’s where we come in. From helping countless businesses develop forecasts, we’ve compiled a list of our top tips to help you with forecasting. Tips that will help you create and use forecasts for what they were intended – i.e. to cut costs, budget more effectively, prepare for future situations, enhance collaboration, and optimise inventory etc.
While how often you develop your forecasts depends on your industry and what you hope to gain, these key strategies will help any business navigate the difficult forecasting process.
- Maintain a buffer
One key lesson when forecasting is not to plan for 100% capacity, but to maintain a buffer to cover unforeseen circumstances such as increased staff sickness or higher-than-expected orders. This buffer provides peace of mind and flexibility, ensuring your business can handle surprises without significant disruption.
- Avoid perfectionism in forecasting
Trying to model everything perfectly can turn into a full-time job and still be inaccurate! So while it’s tempting to aim for precision in every detail, focus instead on key metrics such as expected new business, client retention rates, normal expenses, and typical write-offs. As long as the overall profit and capacity align with your goals, minor discrepancies are less significant.
Given the uncertainty of the next 12-24 months, consider developing multiple forecasts:
- Target budget: The goal you are aiming for.
- Worst-case scenario: The minimum acceptable outcome.
- Best-case scenario: The optimal result.
Monitoring these budgets will help you allocate resources effectively and plan necessary actions, such as marketing efforts to support revenue streams.
- Understand client behaviour
Clients have predictable patterns and there’s power in understanding and using these when it comes to your forecasting. Why? Using this knowledge allows you to create a more accurate forecast by accounting for these regular ebbs and flows.
If you don’t know already, familiarise yourself with your client’s payment habits, i.e. conversion rates from inquiries to paid work, seasonal trends, and the length of the sales cycle. For instance, if your sales process typically takes six months, you can predict what business will materialise in the first half of the year. Typically, you can expect some predictable patterns, such as a rush before holidays and slower periods during summer months.
- Choose between marginal gains and big hairy audacious goals (BHAG)
There are two prevalent leadership approaches: the Marginal Gains approach and the BHAG principles. The Marginal Gains approach, popularised by Sir Dave Brailsford’s success with the British Cycling team, focuses on incremental improvements in every aspect of performance. The BHAG approach, as introduced in Jim Collins’ book Built to Last, involves setting ambitious, long-term goals that inspire and energise the entire business.
Why am I telling you this and how does this relate to forecasting? Because your business should choose one approach to help you get clear on your goals. For example, the Marginal Gains approach suits stable, mature businesses looking for continuous improvement, while the BHAG approach fits those needing significant innovation or change. For example, aiming for a 1% increase in profitability on each job can cumulatively make a substantial impact, whereas a BHAG might involve launching new service lines.
- Reforecast regularly
Regular updates to your forecast are crucial, especially in volatile times, so we recommend re-forecasting at least quarterly, if not monthly. When doing so, it’s also important that you engage in ongoing dialogue with partners who have insights into billing plans and cash flow expectations. This ensures your forecast remains relevant and responsive to changes.
- Utilise rolling timeframes
One practice that’s invaluable when forecasting is implementing a rolling 12-week work plan and a rolling 12-month capacity forecast. This provides clarity, aids in resource planning, and helps identify when to hire additional staff or seek new work, ensuring your business remains proactive rather than reactive.
- Be honest and realistic
Ground your forecast in reality. While ambitious goals are motivating, they must be based on realistic assumptions. For instance, if you plan to convert more leads than usual, ensure there is a valid basis for this expectation. Similarly, if you expect a partner to increase their workload, verify their capacity and willingness to do so.
- Know your business’s habits
Just like your customers, understanding your business’s habits and workflow patterns is equally important. This means, recognising the seasonality in your operations – such as the rush before the Christmas break and the slowdown during July and August – and incorporating these patterns into your forecast so you can better predict and plan for busy and slow periods.
While accurately predicting future trends is always a challenge, it is possible if you’re forecasting correctly. By adopting these strategies, your business can develop a robust and adaptable forecast, better positioning itself to navigate uncertain economic conditions successfully.
Need help?
We can help ease the pressure in many areas when it comes to your finances, from budgeting and forecasting to implementing cost-saving measures and streamlining your processes. Contact us today, and we can help you get those lumps out of your pipeline, so you´re cash-rich all year round.
