I have a new toy! For the past couple of weeks I have been experimenting with a software program called foreCASH, a tool for creating business budgets and forecasts.
Not everyone is convinced about the usefulness of having a forecast though. I sometimes hear the argument that forecasting doesn’t help as it won’t stop a major disaster from derailing progress.
That is a very negative way of looking at life! Basically saying that “what will be will be”; that you have no control over whether this year is a good one or a bad one.
It’s true that forecasting is most effective when the business environment is relatively stable and predictable, but that’s not a reason to trust your business, your investment of time and money, to fate!
My top reasons for forecasting are:
1. How much is enough?
A forecast gives you a way of judging the outcome of your hard work: a way of seeing how much sales you need to make to generate enough cash to pay all the bills (including your own wages). Can you reach your goals with the business model that you already have, or do you need to make a more strategic change?
2. Green Light/ Red Flag
It gives you an early warning system for detecting whether you are on track for meeting your targets or not and it gives you more information about why things are not going to plan. This needn’t necessarily be bad news – things could be better that you planned, in which case you need to understand why.
Nowadays most businesses have some combination of loan repayments and finance contracts to pay monthly and these aren’t taken into consideration in a Profit and Loss report.
Add to that the joy of paying tax on your profits much later than you made the sale that the profit arose on and your cashflow will be a very complicated beast indeed!
(Personally I find that it is the deposit for finance for new investment that is a cash flow killer, the monthly repayments are much more manageable.)
4. The past is not a good indicator of the future.
If things worked out well last year it doesn’t mean this year will be plain sailing. In fact it most likely means that this year needs to be even better!
In the UK all small businesses will shortly be commencing auto-enrolment pension schemes, which will increase the cost of employing people. And there will be other changes as well – some input prices may go up, the split of sales between different products/ customers may change.
Making a forecast will help you decifer how you think these changes will affect your business – it’s not just about sales increasing year on year.
Forecasts are all about control. You can’t control the world around you, your competitors or your customers, but armed with a forecast you can control the way you respond to the challenges that they present.
Success by chance is great, but repeated planned success is so much better.