Planning ahead is critical to setting and achieving objectives for your busines. This guide will show you how to:
- understand forecasting and what it can do for your business
- prepare a short-term forecast
- prepare a long-term forecast
- prepare a feasibility study
What is forecasting and what can it do for businesses?
Forecasting is fundamental to all businesses, however small. At several key moments you will need to plan for what you think is going to happen in the future, both short-term and longer-term – as you set up your business, when you seek financing and when you work out how much you will earn from your company.
You will then need to revisit these forecasts and make changes to your strategy so that you stay on track to meet your business goals.
Making regular forecasts and comparing them against actual results will enable you to:
- keep tight control over your business
- understand what’s happening in your company
- see what strategies are working and where things are going wrong
- clarify your goals and objectives and use them to inform your budget
- plan staff incentives to help you achieve your goals
Forecasts are not one-off paper exercises but a dynamic part of your business strategy. They should be reviewed regularly and updated with actual results. That way you can see how differently things turned out to what you forecast and expected, and adjust what you are doing accordingly.
Short term forecasts look at what is going to happen over the next 12 months, the next 6 months or even the next month.
To prepare a short-term forecast look at:
- sales strategies: what are your sales? where do they come from? where are they going to come from during the period you are forecasting?
- operational strategies: what are your costs and overheads? what’s going to happen to these over the period you are forecasting?
You’ll also need to forecast:
- profit and loss accounts
- balance sheets and cashflows
- financing requirements in case you need to work with external finance providers, negotiate terms with customers/suppliers etc
Each of these can have a huge impact on your ability to continue in business.
How often you review and update your short-term forecast will depend on what is happening in your business. If things are stable, you’ll probably want to look at your forecast and compare it with results every three to six months. During a period of change, or if you are having cashflow problems, you may want to revisit your forecast monthly.
Long term forecasting – looking at your company’s strategy and figures over the next three to five years and is especially useful when:
- you want to apply for finance – finance providers will want to see some sort of long-term plan
- you intend to make a major change in your business eg investing in new IT infrastructure, new manufacturing processes, launching new product lines etc
- you have partners and shareholders – they will want to know where you intend to take the company in the long-term
As well as taking into account all the things you would look at in short-term forecasting, long-term forecasting will include an element of brainstorming. What’s going to happen to your markets in the future? What types of products will people be looking for? How will shopping/buying habits change?
To enable decision-making to go ahead, any investment or major change in your business should be accompanied by a feasibility study, both financial and non-financial. To carry out a feasibility study you will need to look at:
Resources and capacity
- How much more business do you want or can you handle in the next six months, 12 months or 2 years?
- How many new customers can you satisfy with the resources available?
- How much capacity will you have available?
A financial feasibility study will detail:
- the proposed change
- the cost of the change
- the rewards of the change
- key assumptions and sensitivities
How forecasts and budgets work together
Ideally, your long-term forecasts will inform your short-term forecasts, which will in turn inform your annual budget. Forecasting and monitoring will help you organise incentives for your staff – for example, if you set targets and they exceed them, you can reward them with bonuses. In this way, you can all work towards your company’s ultimate goals.
This Business Forecasting advice article published in association with Lloyds TSB.
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