Predicting financial ups and downs

Studies show that one of the main causes of business problems is lack of one specific type of planning: financial forecasting. Don't miss this advice out how to look into the future.

In association with Sage

It’s easy to lose sight of the bottom line when you’re busy dealing with the day-to-day running of a business. It’s all very well having a business plan for allocating budgets or growing your customer base, but studies show that one of the main causes of business problems is lack of one specific type of planning: financial forecasting.

Without it, your business could end up in serious financial trouble if, for instance, funds needed to pay bills dry up at the wrong time, even though the company books show a potential profit. If the gap between bills to pay and money coming in could be estimated in advance, many problems could be avoided.

Why should you do a forecast?

There are many advantages and no real disadvantages to financial forecasting. Forecasts enable you to:

  • Manage your business’ cash flow
  • Identify trends and potential bottlenecks
  • Identify the impacts any changes may have on your business
  • Improve budgeting
  • Locate opportunities to increase profit

Preparing to create a forecast

You can begin by gathering some basic information. Below are some checklists to help you find the right information. Ideally, allocate figures in each of these areas for every month of the year, so you can begin to see discrepancies or fluctuations. It will then become apparent if one month is likely to be more or less profitable than another, and if you are likely to have cash flow shortfall at a particular time in the future.

Income and Expenditure

Start by identifying your expected income and expenditure, and use this to estimate your profits:

  • Sales
  • Costs – those incurred in order to make sales
  • Overheads – other costs associated with running your business, for example, heating and lighting

Cash Flow

Now look at the elements affecting your cash flow and include them in your forecast:

  • Receipts
  • Payments
  • Capital expenditure, wages, and drawings (those profits used to pay the owner of the business instead of a regular wage)
  • Capital, loans or grants introduced
  • Loan repayments
  • VAT receipts and payments if applicable

Balance Sheet

Now look at the money coming into your business to finance the fixed and current assets:

  • Current assets – for example, cash, stock and debtors (what customers owe you)
  • Current liabilities – for example, bank loans, overdrafts and creditors (the amount you owe)
  • Capital and reserves. Capital is the money that’s been put in to start the business. Reserves – as the company becomes profitable on an annual basis, the reserves will increase if they are not drawn away.

Only by compiling all these essential elements of information about your company can you begin to see an accurate picture of your financial situation. This will help you to spot the gaps you’ll need to plug in your funds, or peaks and troughs of cash flow on the horizon that you will need to counteract. Then you can take action, such as spreading outgoing payments over longer periods or prioritising chasing monies you are owed. The more forecasting you do, the more you can take the sting out of the inevitable ups and downs of your business finances.

Related Topics

Managing Cashflow

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