When you own and operate a business, being armed with knowledge provides clarity, increases certainty, and offers a key edge on your competition. While we can’t ask a crystal ball for help in seeing the future, forecasting financial outcomes remains a pivotal component of a business’ strategic direction. Savvy business owners and entrepreneurs understand that combining historical insights, forward-looking strategies, and thorough forecasting sets their business up to achieve its goals. Here, we’ll look at what forecasting is all about, the key financial indicators involved, and how to harness the insights they generate.
The Forecasting Advantage
Forecasting, in essence, provides a roadmap for businesses navigating the often-unpredictable business landscape. It illuminates the path ahead, allowing business owners to strategically position their business by leveraging data-driven insights to anticipate their financial standing in the forthcoming year.
The data generated by sound forecasting enables better strategic decision-making, particularly in the areas of investment, expansion, conservation, succession planning, or significant investments. What’s more, lenders and financial institutions often scrutinise forecasting data, as they look for confirmation of your business’ performance trajectory before approving loan requests.
Key Financial Indicators in Forecasting
Business forecasting taps into several pivotal financial metrics, painting a comprehensive picture of where your venture might be headed. Three-way forecasts provide a robust framework for this, comprising:
Profit & Loss Forecasts: This extrapolates predicted revenue, taking into account factors like projected sales (accounting for cost of goods sold), income from various sources, employee wages, routine operational costs (e.g. bills), and other items typically found in a Profit & Loss (P&L) statement. This data is then extrapolated over the upcoming year, quite often applied to the following financial year, projecting profit or loss scenarios.
Cash Flow Projections: Cash is king, as they say, so ensuring consistent cash flow is important. Online cash flow projection templates can assist in mapping out sales over several years, along with inflows and outflows. Your P+P accountant can of course assist with this too. Within the broader three-way forecast, it offers a snapshot of your cash flow status, allowing you to plan for periods of particularly high or low cash flow and mitigate accordingly.
Balance Sheet: A forecasted balance sheet is instrumental in estimating future assets and liabilities. Especially where finance will be required for significant asset purchases, such projections are critical.
Utilising Forecasting Insights
Once you have forecasting info to hand, next comes its practical application. How you leverage forecasting data can vary based on a range of factors – for example a rapidly expanding business might use this data to outline ambitious future targets. When you align these forecasted numbers and with the oversight of a business advisor, strategies can be devised to bridge the gaps and help your business achieve those targets. Conversely, if challenges loom, the data might highlight potential pitfalls, offering a chance to pivot proactively and set your business back on course.
How P+P Can Help
People + Partners’ Accounting + Tax and Advisory teams work together to help you not only understand your business’ current financial position, but effectively plan for the future with timely forecasting and business planning. If you’re ready to grow your business and gain a better understanding of how it can be improved, please reach out to us on +61 2 9093 1311, or get in touch with us via our website.