Whether considering a new project, entering a new financial year or starting a completely new business, the importance of Planning and forecasting should not be underestimated.
While at the end of the forecast period, most plans will have a variance to actual performance, failing to plan is Planning to fail. Documenting business plans business for future allows stakeholders to critique the assumptions that are being made in the business and review their completeness.
While Planning and forecasting can incorporate almost infinite complexity, below are some of the important elements of building a successful forecast.
Cashflow
When putting together a forecast or plan it is important to make it as realistic as possible. For example a forecasts that contains a profit and loss statement only, does not take into account the timing of cash inflows and outflows or the subsequent the cash movements during the forecast period. Cash is king in any business, and the timing of inflows and outflows is essential in assisting management to make business decisions. A three-way forecast integrates the profit and loss, balance sheet and cash flows of the business and contains accounting integrity of the double entry system.
Assumptions and drivers
The best forecasts include detailed assumptions and activity drivers. These assumptions may use historical data from the business or market and industry averages. Dynamic business models with activity drivers (ie number of passengers, hours, tonnes), adjustable unit pricing (ie $ per unit sold), line items that recalculate based on the performance of a related item (ie cost of goods sold as a percentage of sales, customer churn as a percentage of sales) create more realistic models, that are also more easily interpreted by key stakeholders and allow them to understand how they are likely to achieve budget.
Stress testing
Despite the importance of Planning, it is unlikely that everything will go exactly the way you plan it first time every time. A good model allows you to test the plan in the event of changes in the assumptions. For example, testing the effect on the forecasts where input prices are higher or lower than expected, production costs are different to expected or the number of units that are being sold varies from your original plan.
Keep it up to date
In addition to the above, the passage of time and change in business environment will mean that a forecast done at the start of the year may not still be relevant half way through the year. It is important to review forecasts often, to see how the business is tracking against the forecast and update where necessary, making it a working document that provides the most accurate view of the future possible.
Hall Chadwick provides business Planning and forecasting services to a range of businesses. Whether initial business plans, annual forecasts or Planning for a new project, our team can provide you with the right advice that ensures that directors and stakeholders can make informed decisions in their business.