We provide the full range of financial forecasts to any level of detail and complexity you require. If you already implement a simple spreadsheet system and want us to help you improve it, or if you currently have no means of forecasting whatsoever and want to start small, that’s fine. Equally, if you have a larger operation, or are particularly tech-minded and want a cloud-based system that provides a combined algorithm-derived and user-defined predictions in real-time through your existing accountancy software, we can help with that too.
Forecasting, however, is not simply a passive process. All forecasts and Cashflow and Profit/Loss projections in particular, should serve as both a predictor of and a stimulus for change. Aside from giving general advice about how to compile a forecast and the kinds of information that might be useful within it, we can help you adjust your expenses in order to maintain the level of cashflow and profit that you require. One key area in which we excel at this is in Taxation Planning.
Our partners are certified tax accountants and, as such, are able to advise on the best way to structure capital gains and expenditure to ensure that you only pay the tax that is due. A smaller tax bill can have a dramatic impact on your company’s profitability and free up cash to pay other bills in an emergency. Taxation planning can also help you to accurately predict your tax bill for a given period, to avoid any sudden surprises.
If you’re new to your area of business, predicting revenue can be a real challenge and it can be useful to have a range of contacts with experience of your market. We can provide this; if not through our own extensive experience in a wide range of enterprises, then through our network of contacts. Why not take advantage of our free initial consultation to discuss your requirements?
Financial forecasts are used to predict the financial performance of a company over some projected time-period, typically the following year. Some forecasts, such as budgets, are used for planning; whereas others, usually commissioned by external agencies, can be used to assess the likely success of a particular company, often a rival.
Forecasts commissioned by, and concerning, your own company are more or less essential as part of good strategic planning. Many small and medium-sized businesses try to manage without decent forecasts, perceiving the expenditure as unnecessary or lacking in tangible returns, but in reality, the majority of small businesses collapse because of problems with cashflow, something that can be easily avoided with accurate forecasting.
One of the main challenges in forecasting is to accurately predict revenue. Fixed Costs are easier to predict, based on previous years, as are Variable Costs, which vary with sales. Forecasts, therefore, are often produced in the form of models, which allow the user to alter particular revenue variables in order to account for fluctuating sales performance and a volatile economic climate. Three types of forecast are particularly useful to the small and medium-sized enterprise:
A budget is primarily a management tool, designed to help managers consider future conditions when responding to a particular situation in the present, and to measure their performance. Aside from the familiar ‘spending restrictions’ (resource control from projected costs) that a budget imposes, it may also contain information about projected sales, revenue, resource consumption, taxation and cashflow (see below).
For a new enterprise, a startup budget is an essential tool, not only in planning the first year of business to ensure profitability, but also to secure funding from potential investors. This will need to contain information about fixed assets, like equipment, vehicles, etc., and capital (sources, collateral), as well as services that the business requires, like insurance and IT support.
A budget can be a large undertaking, particularly for a large company, requiring input from and cooperation between a number of different departments.
A crisis of liquidity (an absence of available cash with which to pay bills and creditors) is the primary reason that businesses fail. Although a simple lack of sales is one reason for this, more frequently, failing companies have made sales, and may even be in profit, but suffer because their lines of credit are too long, because customers pay late and/or because bills, especially tax bills, are unexpectedly high. These companies fail simply because they have not planned effectively; not because their products and levels of service are inadequate. The cashflow forecast acts as an early warning system that can notify you of an impending liquidity crisis well in advance.
Cash, therefore, is king; and regular, accurate cashflow forecasting is an essential component of business administration, regardless of the size or type of business. For struggling businesses, or those with a ‘lean’ accounting approach, cashflow forecasting can be conducted daily; but for those with more cash at their disposal (a cash surplus in the bank, for example; or a steady source of finance), periods of 2 to 4 weeks are acceptable.
For small and medium-sized enterprises, cashflow forecasts can be relatively simple. In essence, a cashflow forecast is a sum in which expenses outgoing are subtracted from revenue incoming, and for some businesses, a spreadsheet may suffice. The problem with this basic approach however, is threefold:
Firstly, there may be a discrepancy between the due date of accounts payable [link to bookkeeping] and the actual date on which cash is received in payment. This can be the result of late payment, time taken for transactions to clear, and so on. Secondly, the period for which actual (as opposed to projected) data is available is typically 30 days. For a cashflow forecast to be useful, it should contain projections up to at least 90 days. Long-term data is generated either by a ‘guess’ based on experience of the industry, or by complex algorithms that take into account previous payment frequencies and size, as well as cost projections [link to cost accounting]. A simple spreadsheet cannot really account for the variability and complexity of this projected data. Finally, a simple spreadsheet allows little room for modelling. A cashflow forecast maintained in this way might serve its purpose as an early-warning system, but it does not really allow for experimentation to improve cashflow by modelling situations where, for example, a customer pays 24 days late, or a particular bill is shifted from a quarterly to an annual payment.
A Profit/Loss Statement (as opposed to a projection) is a simple reckoning of revenue vs expenditure, similar to the Trading Profit and Loss account required in your Annual Accounts submission. A Profit/Loss Projection contains the same information, but is a predictive tool that projects these figures out to some future time.
The information contained in a Profit/Loss projection is based on experience, or derived from industry standards. First, the total expected sales for each month is calculated, and then monthly subtractions for fixed and variable costs are made. Most businesses have a typical pattern of
revenue and expenditure throughout the year. In retail, larger sales volumes are expected around Christmas, while an ice-cream seller expects more profit in the summer, and so on.
Expenses, too, may be predictable in a time dependant way; related to the consumption of fuel, for example (more in winter months), or a wage bill (higher during peak season). Any equipment that you use will require checking, servicing and replacement with predictable frequency, and this can also be included. Many businesses and financial planners include a ‘contingency expenses’ section in their Profit/Loss Projection for anything unexpected that might happen. In each case, a certain amount of experience is useful in choosing accurate figures. Previous years may serve as a guide, as may data from purveyors of industry standard information, such as Dun & Bradstreet, although this can be expensive. In all cases, it’s important to continuously check and update projected information with actual as it arises.
A Profit/Loss Projection is important for reasons similar to the cashflow forecast (above) since it gives early warning of a situation where losses might be incurred, and serves as a useful guide to investors, lenders and managers alike. It is important to recognise, however, that a business can still fail whilst it is in profit if its cashflow is inadequate.
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