What kind of forecast should you adopt?: 2/4 Forecasting as a Process
If you read my last blog post on the subject of forecasting, you’ll know that in order to get the most out of any forecasting programme you will need to treat forecasting as an ongoing process, rather than a one-off, fix-up-and-forget exercise.
The next question, then, is what kind of a forecast should you adopt for your regular update process?
Read on for more….
Here are the main types...
1.) Simple Cash Forecast
We all know that businesses can survive almost anything if they have enough cash in the bank to pay the bills, the taxman and the wages. So, if times are tough, or you don’t have much of a cash buffer, this is the place to start.
What exactly is a cash forecast?
It’s as simple as a spreadsheet, with cash in, cash out and the net cashflow, which then shows your expected bank balance
If things are tricky, then keep this on a daily basis; if there is a bit more leeway, then you could just look at it as a weekly or even monthly total.
You might find it very laborious to keep typing data into a spreadsheet that already exists in your accounts system. Well, unsurprisingly, there’s an app for that. Just ask and we can help you set up this kind of cash forecasting tool to automate part of the process.
2.) Profit and Loss forecast
Maybe your business has plenty of cash in the bank, or maybe cash and profits are pretty similar, and you find it easier to track income and expenditure. If so, then you might prefer a profit and loss forecast.
To do this right, you will need to understand that income or expenditure are not always matched exactly by cash incomings or outgoings in the same month. For example, you might pay rent in cash for a full quarter upfront, but the cost is treated as 1/3 of the total in each month of the profit and loss account.
This is a really common kind of forecast – not least because you can track your actual performance against the forecast very easily in most accounting systems.
A budget is a kind of profit and loss forecast, but it will be done once a year (usually) and then held static so that you can measure performance against it. Think of this as a baseline forecast – but bear in mind that it won’t help you look forwards in a fast-changing world – forecasting needs to be a process not (just) a one-off job!
3.) Full 3-way forecast:
Sometimes you need the “full-fat” version of a forecast, where you forecast your income and expenditure on the profit and loss account, as well as your cashflow, and your balance sheet.
Typically, this would be appropriate if you are seeking investment from a third party, or a loan from the bank.
However, if you really want to be able to plan for the future, and react fast to the ups and downs of business life, then the approach to go for is having a well-built 3-way forecast that is regularly updated as new intelligence emerges. Set up properly, this kind of forecast will enable you to change one metric (charged hours, units sold, average contract value) and see the effect of that cascade through the whole forecast. Agile, responsive, insightful... this is where you can get to.
We are experts in designing and building these kinds of forecasts, so please don’t hesitate to ask.
Have a good day!
Jennifer
Jennifer Denning
Managing Director