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Forecasting for Business Growth
In the business world, knowledge is a powerful asset. While we can’t rely on a crystal ball for predictions, it is undeniably important to forecast the financial performance of your business. In fact, forecasting should be an integral part of your operational strategy. Successful business owners recognise the value of historical data, strategic planning, and accurate forecasting in setting their business up for success. This article will delve into the importance of forecasting, the financial metrics involved, and how you can leverage the data it produces.
The Importance of Forecasting
The significance of forecasting for businesses is straightforward. It offers guidance, structure, and preparedness in managing a business, especially in an environment characterised by uncertainty. Thorough forecasting provides business owners with clarity, enabling them to work towards their business goals by using data and planning to predict the financial position of the business over a specific period, typically 12 months.
Armed with this information, businesses can make better, more informed decisions concerning growth, maintenance, succession planning, or major investments. Moreover, forecasting data holds importance in various aspects of business, including finance applications, as lenders seek to understand how your business is performing over time before approving commercial loan applications.
The Financial Metrics of Forecasting
Forecasting for your business involves a range of financial metrics that ensure comprehensive coverage, giving you confidence and a holistic view of your business’s trajectory. Three-way forecasts are a common and reliable method for monitoring and tracking business performance, and involve the following elements:
Profit & Loss Forecasts: Predicting your business’s profit and loss over the next twelve months, this forecast incorporates factors such as projected sales (adjusted for discounts and cost of goods sold), income from dividends and interest payments, staff wages, regular business expenses (e.g., bills), and various other items typically found in your profit and loss (P&L) statement. The data is then extrapolated over twelve months, often starting from the next financial year, to determine the likely profit or loss situation at that time.
Cash Flow Forecasts: Cash is king – in business, having sufficient cash on hand when needed is critical. Thus, being well-prepared with cash flow projections is paramount. McKinley Plowman offers a free cash flow projection template that allows you to input your sales figures for up to a two-year cycle, along with other inflows and outflows, providing an overview of your cash flow. When integrated into a broader three-way projection, you can input figures you deem achievable or desirable, observing where your cash flow fits into the picture. This helps you develop strategies to smooth out any periods of particularly high or low cash flow.
Balance Sheet: A projected balance sheet serves as a valuable tool to estimate your business’s assets and liabilities in the future. This is particularly relevant when seeking finance for business investments (e.g., fixed asset purchases), a projected balance sheet becomes a necessity.
Leveraging Forecasting Information
As a business owner, having this information at your disposal is beneficial, but how can you practically apply it to your business? The interpretation and utilisation of forecasting data can be influenced by various factors. For instance, if your business is in a growth phase, you might use forecasting information to set goals for future expansion. By outlining the figures you hope to achieve in 12 months, comparing them with the projected figures, and working alongside your business advisors, you can develop strategies to bridge any gaps. On the other hand, if your business is struggling, the projected figures from your forecasting activities may shed light on this challenging situation. In such cases, you can use the data to identify potential shortfalls and proactively make changes to increase the likelihood of turning your business around.
How MP+ Can Help
Executing a thorough three-way forecast not only takes skills and expertise of a business advisory professional, but most business owners simply don’t have the time to do it themselves. McKinley Plowman can provide you with clarity in three-way projections and advise you on how to make the most of the information that arises. From here, you can be confident that you have laid the foundations for success and prosperity over the next 12 months and beyond.
Call us today on 08 9301 2200, or contact us via our website for more information or to book an appointment.
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