November 26, 2020

Forecasting is an effective tool in business planning

In the current environment, business planning has become an increasingly important component of helping business owners set a course of action that has purpose.

Successful business owners will plan, revisit the plan and change the plan in response to changing market conditions. And in times of uncertainty, they will run alternative scenarios to help build a picture of where their business might be heading.

Forecasting is a financial tool that can assist business owners in formulating their plans by providing valuable insights into profitability, financial stabiltiy and the future cash position of their business. The information gleaned from robust forecasts can help business owners make decisions and facilitate sound financial management that improves business outcomes.

Robust financial forecasting can help improve how a business manages:

• Its assessment of expansion, diversifcation or improvement strategies

• Staffing, including when to recruit, roll out training programmes or use contractors during busy periods

• Cash flow by identifying when cash is constrained and what the future funding requirements will be. This proactive approach instills confidence with funding providers as it is evident the business owner is actively managing the finances of their business

• Its utilisation of resources

• Co-operation and co-ordination between departments

• Marketing campaigns that are aligned with production schedules

• Its compliance with tax obligations.

There are two critical steps to making a robust forecast. First, you need to build the foundation of your forecast through a thorough analysis of past and present data. Second, you should conduct a scenario analysis.

To build your foundation, estimate your future revenue streams and expenditure based on past and present data. Your revenue analysis should consider:

• Past trends including traditional busy and slow periods/seasonality

• Factors that influenced historical highs and lows

• The composition of your client base giving consideration to what their problems and needs may be

• Your terms of trade (ie how and when you are paid)

• Your position in the market and your market share compared to competitors.

• The industry outlook

• Economic conditions.

A review of your outgoings should consider:

• Fixed versus variable costs (variable costs will increase in relation to sales)

• Marketing campaigns

• Staff requirements

• Upcoming capital requirements (eg new plant and equipment)

• Production planning

• Supply chain logistics (eg shipping requirements or bulk inventory purchase requirements)

• Compliance costs

• Current debt structure.

Once the base data are developed you can use this to test ideas and run scenarios. Common types of scenarios to analyse include:

• The impact to the business from a decline in revenue (eg a 10 per cent drop in sales)

• Expansion into a new service line and assessment of working capital needs

• Debt structuring options from a cost and servicing perspective

• Planning capital expenditure.

Forecasting forces you to continually assess the present and future and when it’s done well, it can help improve your business’ ability to mitigate risk and take advantage of opportunites. To discuss how forecasting could help your business, speak to your adviser or get in touch with the business advisory team at Findex NZ.

•The views and opinions expressed in this article are those of the author/s and do not necessarily reflect the thought or position of Findex NZ Limited.

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