Businesses of all sizes and shapes crave financial certainty, and that remains in short supply. With costs increasing, businesses must forecast that financial impact if they are to plan for the future.
Businesses are facing a perfect storm of increasing costs, soaring inflation, continuing Brexit-related trading challenges and a tough labour market at a time when most would have hoped for a period of stable post-Covid growth. Understanding the impact this has on cashflow and profitability is critical. Business owners need to be ‘on top of the business’ and not just ‘in the business’.
Forecasting at the beginning of the financial year will help set the financial goals you wish to achieve for the business, whilst forecasting quarterly or even monthly will help identify potential pinch points and flag up risks.
Business owners will want to look at four key areas of the business when preparing forecasts:
- Sales – for each quarter and the full financial year.
- Expenditure – both the day-to-day and big-ticket items
- Cashflow – the cash in and out of the business on a monthly basis
- Profits – how much cash will be in the business each quarter or at the end of the year
I would recommend that business owners look to a rolling monthly forecast given the continued and deepening uncertainty faced.
When preparing forecasts, business owners should consider the following:
- Define the forecast period – that may be the next three months or half year, or it might be the next 12 or 24 months.
- The impact of rising costs and inflations, considering both the best- and worst-case scenarios. For example, what would happen if inflation were to continue to rise and what impact might that have on salaries and the cost of sales?
- Revenue scenarios – what would your finances look like if you achieved best-case sales and revenue targets, and worst-case scenarios.
- The impact of any unexpected costs.
- The loss of a key member of staff, or the inability to recruit staff to deliver on growth.
- The impact of a restricted supply chain
These can be difficult questions for business owners to answer on their own. Your accountant should be able to guide you through this forecasting process and help you get under the skin of your finances. Please get in touch with James Johnson on the details below if you need assistance.