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Five-minute money masterclass: faultless forecasting

Written by Adam Pescod on Tuesday, 03 June 2014. Posted in Financial management, Finance

Learn to forecast like a pro with our five-step guide for startups

Five-minute money masterclass: faultless forecasting

A realistic forecast of revenue, profits and cash flow is a core component of most business plans, especially when the time for investment comes a calling. More than this however, regular forecasting just makes good business sense. If an entrepreneur doesn’t know how much money is entering and leaving the company coffers – and when – they could find themselves in hot water. How, then, can an entrepreneur make sure their forecasts are as foolproof as possible?

Don’t overestimate

It’s only natural that a start-up will struggle to conjure up a concrete figure when it comes to future sales. However, it’s better to err on the side of caution instead of going totally overboard with the projections. “You have to be realistic,” says Stephen Hay, co-founder and CFO of Bishopsgate Financial, the consultancy firm. “Quite often a company will be more nervous about contracting with a smaller company or start-up so there may be more hurdles to jump to get there.” 

Ultimately, there’s no point forecasting revenue that you know you aren’t likely to bring in any time soon. “You need to ensure your sales forecasts are achievable in relation to your costs and resources,” adds Peter Andrew, head of innovation at Alba Innovation Centre, the technology business incubator. “Using a good sales pipeline or funnel model will help you understand the sales journey from customer interest to payment and ultimately to accessing the cash.”

Beware cashflow pitfalls

Cashflow is the biggest killer of start-ups. Therefore, it’s hard to overstate the importance of factoring into a forecast anything that could negatively, and unexpectedly, impact a company’s cash situation. “One of the reasons many early stage companies fail is that they don’t keep an eye on this important barometer of a company’s health,” says Tim Fouracre, founder and CEO of Clear Books, the cloud accounting company. “Some cash flow items, such as VAT payments and rent, occur quarterly and can catch you out, so you just need to make sure you’re aware of them and how much they will be. Similarly, other major pay-outs can cause problems, such as corporation tax.”

Allowing for any anomalies or sudden changes in circumstance can ultimately prevent a business taking a turn for the worse. Hay adds: “It pays to allow a margin for error to ensure that you don’t risk the whole business if targets are not hit or an unexpected surprise or two occurs.”  

Check out the competition

For the first-time entrepreneur, forecasting will seem like a whole new world, especially if they haven’t come from a finance background. And for those wary of forking out for even a part-time accountant in the early stages, it can be a daunting task indeed. However, it can often be handy to take a look at the figures of other firms in your sector, just to make sure you’ve got everything covered. “Every industry has key stats that can help you compare your figures, for example, gross margin,” explains Andrew. “This helps to see if your figures are comparable to your competitors. It is also useful to use company financial check sites like DueDil and Company Check which offer free financial information on limited companies, including latest accounts from Companies House.”

Yet it’s still worth keeping your own business in mind – not others – when you get down to the specifics. “The forecast must fit your business needs and reflect the key information to you and any external stakeholders, especially if you need investment,” Andrew adds.

Assume the worst

Pessimistic entrepreneurs are a pretty rare breed. In fact, entrepreneurialism and negativity don’t belong in the same bed at all. However, as far as forecasting is concerned, following the ‘worst-case scenario’ model is generally a wise approach. “Credit control is essential, but it’s best to assume worst case when forecasting, as sometimes it is,” says Hay. “It may not always be as bad as that, but it only takes one or two months of not being paid to put immense pressure on a business. Even when you are factoring or invoice discounting, credit control is essential as any long standing debtors will not be covered and that would result in an immediate cashflow problem.” In essence, Hay adds, “forecasting ‘best case’ scenarios can lead to ‘worst case’ outcomes.”

Keep a close eye on currency

With the internet providing a marketplace for so many start-ups in this day and age, dealings with foreign customers and suppliers are quite commonplace from the outset. Small manufacturing businesses may also take advantage of cheaper labour costs in overseas territories, so throwing currency fluctuations into the forecasting mix comes highly recommended. “For any business trading internationally or dealing with foreign suppliers, an accurate forecast of future revenue, profits and cashflow will hinge on managing FX risk,” says Philippe Gelis, co-founder and CEO of Kantox, the foreign exchange firm. “Although these currency fluctuations are beyond your control as a business owner, establishing a coherent FX policy should be top of your list. It’s your job to make sure you understand your business’ ability to absorb a potentially large FX movement and plan accordingly.” 

About the Author

Adam Pescod

Adam Pescod

EB's former editor, Pescod was tasked with ensuring these hallowed pages are rich with excellent, engaging and error-free stories, all written with the entrepreneur in mind. Pescod previously plied his trade penning pieces about pubs and pints. He is also a sucker for alliteration. 

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