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Running your business, you may feel that looking at what has already happened is the best way to project what will happen next. In reality, though, it’s not the best way to operate. Looking ahead to the future with the help of the present will give you a solid idea of how you’re performing, and where you need to ramp things up. You need to be sure that more cash is flowing into your business than flowing out, and you’ll only know this if you forecast.
So when you’re operating day-to-day, and have plans for your business to stand the test of time, you need to be forecasting both short and long-term.
If you’re looking ahead to a short-term, perhaps a year or under, then you’re just looking at what will happen immediately. You’re probably already doing this to an extent as you always need to know how things are looking so you can judge what decisions to make about investing in new stock, or similar. A great example of a short-term forecast which would last a month or two is in retail.
Let’s say you’re putting on a sale to get rid of some of your old stock. You’d put the new reduced prices into the forecast to see how much revenue you’d get from it, for example.
Longer-termed forecasts will include such things as economic peaks and troughs, inflation and politics. Because we can never know exactly what will happen next – think Brexit and Trump – creating a long-term forecast will only ever be a guess. However, because you’ve created one it’ll help you to think outside the box about where the country/world economy may be, and how you’ll build your business to the point it can withstand these changes.
It’s like if you were going for a job interview. You’d plan your short-term by preparing for the questions, sorting your smart attire and journey to the offices, etc. Many people may not see past the interview itself, focusing all of their energy on charming the interviewers and making themselves come across well, but what if you do (or don’t) get the job? You need to have a contingency plan for both: if you don’t get the job it’s back to the hunt, but if you do then you need to be ready to excel in the role and fit in well with the team. Thinking of this in this way is easy to relate to, but you need to be thinking in this short/long-term way otherwise you’ll back yourself into a corner.
Rather than a short ‘shelf life’, make sure your business is ready to be weathered and will withstand whatever happens next
To grow sustainably, you need to have a really deep understanding of your figures. This can only happen if you’re constantly checking in with the ins and outs of your accounts, and forecasting for different eventualities. You’ll know when you’re due to be paid, when you need to pay out to suppliers or similar, and can adjust if need be.
In some industries, like manufacturing, a lot of costs can occur up front, so knowing you have enough cash for this before you’ve even sold anything is crucial. Similarly, invoice payments can be delayed and sometimes you simply won’t get your money on time. People conveniently forget to pay, go into administration or whatever else, so having a backup plan for such things is imperative. Using your forecast, you can add scenarios (more on those shortly…) to ensure you have a ‘plan B’ for these kinds of problems.
Having a plan is only the start and in future blogs we’ll look at some of the day to day metrics to show you precisely what’s happening within your business driving you towards (or away from) your plans and aspirations. However as the adage goes “Failing to plan is planning to fail”!
At Burgis & Bullock we’ve teamed up with Futrli which integrates seamlessly with Xero to update your forecasts with live accounts data enabling you to make better plans and better business decisions in real time. If you would like to know more about business planning, cloud accounting or would just like a chat about your business future contact your local Burgis & Bullock office on 0845 177 5500 or using our on-line contact form.