Whether you are new to business, planning on purchasing a business or have been in business for a long time, taking the time to prepare a forecast has many benefits. Firstly, you have to set budgets or targets for income, expenditure, personal drawings and capital expenditure. These can become highly motivational during the year – did we meet our target revenue this month? Have we managed to keep within our expenditure budget? Secondly, you will gain an understanding of your future cash flow and banking requirements. Will our existing overdraft facility be sufficient? Will I have enough funds on hand at the end of the year to pay for that long overdue holiday? Thirdly, you will know what your profit for the year is likely to be and your future financial position. On the basis of this knowledge you can estimate your tax bill for the year, see the likely financial results of your current business strategy and run different scenarios to see whether these results can be improved on.
If you only need to understand what your end of year result will be forecasting can be done very quickly using the annual results from the previous year as a guide. If you want a more detailed monthly forecast to understand what your peak overdraft requirements are, or to set monthly targets to monitor, the forecasting will take a little longer but is very worthwhile. Whether you choose to prepare an annual forecast or a monthly forecast, you can easily run different scenarios to see what the effect different business strategies will have on the results.
Once your forecast has been finalised the figures can be entered into your accounting system so that you can monitor your actual results against your forecast or budget during the year. Forecasted annual profits and and end of year position figures can be automatically updated giving you the confidence to refine your business strategy as you go.
The benefits of forecasting are well worth the effort and the process is made as easy as possible by using a good accounting system and forecasting software. The team at The Accounting Collective can help in many ways. We can advise on the best accounting and forecasting software to use, work with you to prepare your forecasts, use our knowledge of your industry to ensure that your forecast data is as accurate as possible, advise on different business strategies and challenge the key assumptions you have made. Give us a call – you will be surprised how easy and beneficial forecasting is.