4 Ways to Achieve Better Financial ForecastingJune 08 2016, 0 Comments
As a new start up there is always an obvious risk when you begin as you cannot predict how well things will go. From a financial standpoint, there will be times at the start where you will be acting in uncertain times. Therefore, you will have to accept this fact and despite how unpredictable it may be, you need to be comfortable working when forecasting can equal a variety of outcomes. However, there are still measures you can take in order to help create a more accurate forecast, which will ultimately help plan your business activities out as well as any of your future goals.
The biggest aim of a forecast is to give yourself a rough estimate so that you can make smart business decisions. You should establish how you plan to do your forecasting. Typically, accountants use accrual based financial reporting, which means that sales & expenses are recorded each time you sell your product or service, not when the cash is actually given or taken.
It is always worth baring in mind that accruing owed money takes time and additionally, most of the time invoices will be paid a month later. Therefore, for a start-up with no cash, you will need to design a cash based forecast instead of the above mentioned, accrual basis forecast that accountants like to use. As your business grows, so must you and that will mean eventually you will need to have both types of forecasts.
Building A Strong Forecast
You could waste a lot of you time setting up logs to keep all of your projections in, but why waste time that you could be putting towards generating business. Start by getting the accounting software you need so you can easily manage and alter your forecasts as you go. From here, get familiar with spreadsheets and how they function as this will make your life easier once you get to know the basics. As you begin to encounter some transactions, use the software to input all of the data so you can easily keep accurate records that will as a result, help you create a forward-looking budget based on your starter trends and sales.
It is always important not to over complicate things for yourself. Analyse your business thoroughly and identify how you can be more effective in order to expand your profits. If when reviewing your situation, the future isn’t looking great, then spend time evaluating your structure and overall operation. This will give you a better idea of what changes you need to make in order to create a better outcome for yourself, with the aim of increasing your profits.
At this point, don’t get ahead of yourself. You could have a one of a kind product or service but it’s high unlikely that you’ll hit 10% of your market in year 1 or even 20% furthermore in year 2. As good as it will look on paper, it sadly isn’t realistic so don’t get carried away - give yourself a fair predication as it will only benefit you in the long run.
Know Your Business in & Out
It is important to look use revenue and cost drivers whenever applicable – they are a unit of activity that causes an alteration in either you cost or your revenue. What is meant by this for example is say if your business were to sell hats. From a sales outlook, the revenue driver will be the volume of hats you sell and the total cost you sell them at. From a costing outlook, the cost drivers could be the manufacturing costs to make the hat itself. The other cost drivers could be labour costs, material costs and the wage of the employees who are designing the products.
What this does is it allows you to turn all of your products/services into separate entities where you can designate a specific price to each part. From there, you can make your forecasts based on what you accurately know about each of the costs drivers. Knowing this information means that you get to know your business in more depth. That way, if you’re ever discussing investment opportunities or deals with stockists, you will be able relay your business to them in more detail as you’ll be able to breakdown and explain your revenue and cost drivers.
Review as You Go
Make sure you review your forecasts on a frequent basis and adjust your projections accordingly. The first estimate you made could now three months down the line be too confident or too negative. Once business is up and running, you’ll be able to precisely assess your sales and costs. If you predicted that you would sell thousands of hats when you only actually sold hundreds, it is at this point you can update your forecasts so they are more realistic with what you’re experiencing.