Stuart Crook discusses the importance of business projections and how to forecast during an economic downturn.
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Regardless of a pandemic and the ensuing period of financial instability, the production of regular, forward-looking financial numbers is vital to providing business owners with critical information to inform their operations.
However, navigating an unstable and unpredictable economy does make things trickier for business owners. An important first step is understanding what forecasting actually is.
What is forecasting?
Forecasting is a tool that helps business owners anticipate their enterprise’s future performance based on a range of different factors, including expected turnover, sales, and costs.
By producing these projections, entrepreneurs can get a sense of what they can anticipate the next 12,18, 24 or 36 months of their business will look like, taking into account profit, loss, cash flow, and annual payments such as tax and VAT.
It can be a complicated task and one that may be off-putting, but it becomes incredibly difficult to make informed decisions about the future of the business without a forecast in place.
It is important to point out here that forecasts are not static, and predictions will likely change based on several different factors, one of them being the economy. The point is they should always be live documents.
They should not gather dust on a shelf or lay forgotten in an inbox. After all, they set the parameters by which success is measured and give authority to business owners making decisions.
Types of forecasting
There are two commonly used prediction methods when it comes to forecasting:
The Qualitative Method
These are short term predictions that take into account market research and specialist insight to compile results into a forecast.
The Quantitative Method
The more widely used method that includes making predictions based on a business's historical data, such as sales and costs incurred.
Once produced, these documents should be shared with all relevant staff members, allowing them to have sight of the objectives and understand their roles in achieving them.
Profit and loss projections will not be sufficient for this exercise, whereas integrating cash flow and a balance sheet will give a clearer picture to all those directly involved.
Forecasting during COVID-19
When the UK first went into lockdown, no one could have anticipated the situation we would still be in nine months later. Back in March, many business owners rushed to produce forecasts designed to raise additional finance.
They were created with assumptions in mind, most notably when things would get back to normal, with every forecast being different depending on the industry. With many businesses applying for Bounce Back Loans, VAT deferrals, or grants, any forecast would have needed to take these applications into consideration.
When looking to raise additional finance, the bank will want to ensure plans have been put in place for all eventualities. They will want to know:
What happens if turnover drops?
Will the business run out of cash?
When will we get our money back?
Have you considered the interest, capital repayments and arrangement fees?
So, the forecast needs to answer all of these things. Whether you are going to the bank or not, every forecast you produce, pandemic or otherwise, must be SMART. Without a clear and measurable forecast, the document that took so long to generate won’t give you much value in the long run.
In most cases, the forecasts produced during the pandemic will now be at least six months old. With the second lockdown in the UK came more Government initiatives, although fewer businesses have applied for additional funding this time around.
Furlough has also been a large factor to think about when forecasting, especially given that it significantly reduced staff wages for many.
Before creating a new forecast, review your previous assumptions. For example, furlough is likely to end in March, businesses will have to start paying back deferred VAT, and potentially loan repayments will begin too. These changes in circumstance will impact your future outlook.
Cash flow and the balance sheet will be fundamental here, rather than profit. After all, a business can survive without making a profit. However, it won’t after a period of negative cash flow.
If after reassessing your forecast, it looks as though you will have a negative cash flow but a positive balance sheet, now is the time to take another look at your finance provisions and renegotiate. If you leave it to the 11th hour, it will be too late.
Forecasting can be time-consuming, but it is critical to understanding the immediate future of your business, and whether you need to take crucial intervention.
Forward planning during a period of financial instability is never easy, and during these times forecasts will need to be revisited and adjusted more often than usual to reflect the changes in the economy.
That doesn’t mean they are impossible to produce, and it will never be a thankless task. In fact, it could save your business.