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Accountancy  •  Business Services  •  financial advice  •  Personal tax  •  Probate and Inheritance Tax  •  Small Business

How to create a business forecast

By Simon Paterson on 13 May, 2014

Producing business forecasts are an important exercise if a business is looking to either gain finance or increase the level of finance they require. Below are a few useful tips to consider when completing the exercise.

Key tips to produce a useful business forecast

  • The first stage in business forecasting is to produce a profit and loss forecast, which shows the level of sales, direct costs, overheads and subsequent profit and loss of the business.
  • The second element of forecasting is to produce a cash flow forecast (which is linked to the profit and loss forecast) and this will indicate the timing of cash in and out of the business and will give a indication of the level of cash needed to support the business over a period of time.
  • Ensure when producing the forecasts you are clear between variable costs and fixed costs. If you are not clear then there is a possibility the costs will not correlate to the sales you are expecting to do e.g. if you pay commission to staff then base this on the level of sales expected.
  • Be realistic about the forecasts. An over optimistic profit and a rosy cash position is not helpful if this turns out to be wide of the mark.
  • Forecasts should be an ongoing working document. When new information about the current of future performance of the business is known then the forecasts should be amended accordingly.
  • Forecasts are an indicator and can never be truly accurate. They are a guide and should be used as such.

Recently, RJP worked closely with a local retailer to help secure additional bank funding for their business. The company was profitable but they had a lot of money tied up in stock and needed to re-finance the business. We helped them to create cash flow and profit and loss forecasts, which in turn enabled them to secure additional funding and expand the business. Now, forecasts for this company are incorporated into the quarterly management accounts procedures and used as part of a rolling 12 month forecast.

If you would like advice on any aspect of accountancy, contact Simon Paterson by emailing sp@rjp.co.uk.

 

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