Ask us how: Forecasting

Posted by Michael Derin
Published on October 16, 2013 under NSW Business Chamber Partnership

Around the world, corporates are required to make announcements to the public based on their past financial year results and business performance. 

As the economy becomes more buoyant being aware of your business forecast and using this as a driving force in ensuring you business reaches it’s critical targets will result in a positive impact for your business.

There are many reasons why forecasting is a great tool in measuring the performance of your business, and it’s important to know the keys to forecasting success.

BUSINESS FORECASTING FOR THE NEXT TWELVE MONTHS

Forecasting no matter what the market conditions are is critical to have finalised by the end of the year. Small corporates should view this as a chance to work on their business rather than in their business. 

Many listed groups who have announced their forecasts for the year ahead, they go through a very strategic process to revise and build their business plans each year.  Forecasting is an essential part of building this vision and strategy for medium and long term success. 

I am currently implementing strategic vision papers and forecasts with a number of small corporates that Azure Group work with. The approach we use is to look at where a business vision is for the next 3 years and then working back to determine what is required in the next 12 months to achieve this longer term vision.

For example, we have a client in the Engineering space currently with offices in Sydney and a $4 million turnover.  Their plans in the next 3 years are to achieve $10 million turnover with offices in Melbourne and Brisbane.  In addition, they want to expand their level of engineering services from civil engineering to mechanical and telecommunications. 

Working back from 3 years we have forecasted what their revenue needs to reach each year to be able to get to $10M and have assumed that in 2010 they will need to have launched one of the new offices and expanded into mechanical engineering resulting in an increase in revenue to $6M.

To get to $6M we then needed to break this down further and look at the number of clients and projects that they need to complete to achieve these targets and have begun to assign targets and KPI to specific senior people within the company. 

We then needed to review where the work will actually come from and have recognised that they will need to spend $150K on a key person to drive sales in the business.

We have also needed to ensure that staffing is in place to deliver the work for clients in a leading manner. You may have a $3,500,000 cost in people and executives.

Considering the new office opening we have implemented a costing plan and allocated $200K to facilitate this and ensured that Sydney office can accommodate an increase in numbers that will help achieve the $6M turnover.

What you are strategically doing is building a financial forecast for your business that substantiates your strategic decisions and ensures the business is profitable in the future, whilst still aiming to get to your $10M vision in 3 years time.

BENEFITS A BUSINESS CAN GAIN FROM FORECASTING

It’s an interesting statistic but 32% of Businesses fail due to lack of financial management, cashflow problems, under capitalisation at the start, excessive director drawings, overuse of credit, no budgets or inadequate cash provision for taxes.

A business will have more power if they understand each financial year their current financial position and forecast and work their growth plans and strategies around these. 

The benefits of forecasting can have an extremely positive impact on any business.  For example listed corporates are announcing their forecasts to drive a positive reaction from investors. 

On a smaller scale the small corporate is forecasting to drive positive reactions from their clients, employees, suppliers or customers.

For forecasting to have a real benefit in your business you need to also be monitoring results on a regular basis. 

If you have been strategic in how you have developed your forecast then you have the ability to make sure you are continuing to monitor and manage the financial success of your business.

IMPORTANT FACTORS TO DELIVER IN YOUR FORECAST

The fundamental objective for any business when they are developing their financial forecast is in not only understanding the financial drivers that create business success but also you’re past experience in business that may have a detrimental effect on your future forecast.

On delivering your forecast it is important to reflect on past performance, I recommend you ask yourself some key questions such as: 

• do you understand the drivers behind your sales that delivered the sales dollars?
• did achieving your dollar sales target deliver higher profit?
• have you identified future downward trends that require urgent attention?
• should you continue your marketing $ spend as per last year?
• which divisions of the business are performing best?
• which clients are profitable and why?
• how many jobs or projects have you completed this year? What is the average $ job?
• how many products have you sold?
• how is your cash position and working capital?

If you haven’t asked yourself these questions then you are more than likely developing your forecast blind and it may have a detrimental effect on how your business actually performs over the coming 12 months.

WHAT DIRECTORS GAIN BY COMPLETING FORECASTS

In small corporates the Directors are heavily reliant on their business to be successful for them to receive a profit distribution from the business.

To gain the most out of their forecast, the business directors also need to reflect on their personal financial goals and align their forecast to their financial plans. 

For example, the engineering client I mentioned previously, both Directors are hoping to achieve a $500K profit each from the business when it reaches $6M.

For them to achieve this they need to be aware of how much it costs the business for each sale they make. 

By working backwards they have recognised they need a gross margin of ..... to generate an annual $1M profit.

A budget will establish your fixed costs that need to be covered to break even and forecast revenue and associated variable costs that will drive the business before profitability.
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