Do you have financial forecasts for your business?

Although things often change, a financial forecast helps you anticipate the future performance of your business. You can include anything that’s important for your success such as your revenue, costs and cashflow. 

 

It’s helpful to take a longer term view, looking ahead perhaps three to five years. You can also plan for the next 12 months and even create quarterly or monthly projections. You can then review your forecast regularly and update it if you need to. 

 

Previous performance. If you have run your business for a year or more, you can start by looking at your sales, profit and loss (P&L) statements and your bank statements. Most importantly, you can also look at your operating costs, which is a step many business owners overlook. Ideally, you will use accounting software in the cloud, like Xero, so you will have reliable and accurate information. 

 

Research. To make your forecast as useful as possible you must understand what could affect your business. This might include things like materials shortages, inflation, interest rates, changing customer behaviour and preferences. You can find a lot of useful information and advice online and your accountant can help too. 

 

Sales planning. Once you have reviewed your recent performance, your market and your strategy, you can start preparing your financial forecast. 

 

For example, based on previous experience, you might expect two existing customers to move on in the next twelve months. This will represent both a loss of income and a reduction in expenses. You might find that one of these customers wasn’t very profitable. As a result, you could revise your products and services and terms and conditions. 

 

You will want to replace these customers and perhaps add two more. To maintain your cashflow and profitability you might withdraw some products and services for new customers. You’ll also need to consider things like seasonal variations in sales, new products or services you plan to offer and extra employees. 

 

Understand your costs. You must take account of fixed costs like your rent, insurance and salaries for your support staff. You will also have variable costs which change with the volume of products or services you sell. They might include materials, deliveries and sales commission. It’s helpful to look at your previous sales to understand how the costs may vary. 

 

Assess your cashflow. You can look at how much your customers will pay you over the short- and medium-term and your known expenses. You must also consider your liabilities for VAT, PAYE and Corporation Tax. You might also need to reserve funds to buy extra equipment or move to larger premises. This will give you an overview of the money regularly coming in to and leaving your business. You can then improve stock control and service management and increase your profitability. 

 

Change management. There’s always something new to deal with when you run a business. A valued supplier might shut down or your market sector might feel the impact of US tariffs, for example. Overall, it’s a good idea to look at realistic, best and worst cases, so you will know how to respond. This could mean putting money aside to cover the worst case and preparing to obtain funding for the best case. 

 

Compliance. Match your forecasts to your business’s financial year so you can anticipate and meet all your tax and regulatory commitments. 

 

Xero accounting software has tools to help you with cashflow forecasting and budget planning. It provides you with a snapshot of your business finances so you can make decisions with confidence. Xero provides: