Business forecasting is key: here's how to go about it

Forecasting is critical to small firms, especially in a downturn. So here's some expert tips on doing it accurately and effectively
In order to make an accurate forecast, business should use all the tools at their disposal. Photograph: Fred Tanneau/AFP/Getty Images

Business forecasting is key: here's how to go about it


1. Don't ignore it

Forecasting can seem quite an easy thing to put off, or indeed not do at all. In an economic downturn, just keeping afloat takes up enough energy. However, it is critical to know what's coming around the corner says Rodney Schwartz, CEO of ClearlySo, the organisation that helps social entrepreneurs: "A lack of a cashflow forecast is a recipe for certain disaster – whatever the long-term prospects, they mean zero the day the firm runs out of cash." Without a rigorous set of projections, says Schwartz, "a strategy is just a bunch of words".

2. Know what you're doing

Start with the basics, suggests Stuart Crook, partner at Wellers accountants in Oxfordshire: "The business plan is the common sense side: does our idea make sense? Where do we sit in the market? Forecasting is how to deal with cashflow, VAT, PAYE etc. You may see X thousand in your bank account and think you're OK, but if you take into account the fact that VAT is paid quarterly, suddenly the cash balance looks a hell of a lot worse. All those things need to be in the forecast."

3. Know your audience

While forecasting should be done as standard practice, sometimes it is also necessary for specific reasons such as raising finance from the bank or from external investors. "The underlying process [of forecasting] is the same, but the communication is different depending on the audience", says Rachel Carrell, CEO of DrThom, a small business of around 20 employees. The company was founded in 2002 to help people unable to visit their doctor.

"We don't change assumptions based on the audience," Carrell adds. "But sometimes we do need to categorise things differently. One group recently wanted to understand how our asthma service was going to develop, for example, so we needed to pull that out of the overall numbers and list it separately."

4. Know your market

Forecasting isn't based on your business performance and predicted performance alone, but also that of the market around you. You need to know your customer base and competition, inside out. Matrix was founded in 2003 as a startup, and has since grown to become a leading supplier of energy management services.

Simon Oldfield, finance director at Matrix, explains that to "enable us to build long-term trust and relationships with our customers and financial backers, it has been essential for us to articulate a clear vision of how we expect the market for energy management services to develop ... this has involved extensive research, business planning and financial forecasting, all of which needs to be kept up-to-date."

5. Be flexible

While forecasting is difficult in the best of times, these are not the best of times. Oldfield informs that in energy management, "we've noticed many companies have delayed decision-making because they're uncertain about the future and this has, at times, made it difficult to predict exactly when orders are going to be placed and contracts signed."

In other words, there needs to be flexibility built into any business forecast. And while large businesses talk of five, 10 or even 20-year business plans, Crook argues these are less useful for small businesses. "The further ahead that you forecast the less meaningful it is in my opinion ... in the real world, some people pay on 30 days and some at 90, and the forecast will need amending every week/month."

6. Use all the tools at your disposal

There are specific types of business forecasting software available, such as Sage. But most small businesses tend to stick with programmes they know, such as Excel. Rodney Schwartz at ClearlySo advises: "The simpler the better – one of the best is just a projection of the bank balance; this is a basic tool in cashflow forecasting."

Oldfield explains that Matrix's business forecast "is supplemented by a variety of short-term tools, including an annual budget, individual sales targets and monthly re-forecasts of revenue and cashflow ... We've also introduced business routines whereby staff take individual responsibility for planning and forecasting and monitor actual performance against what was predicted."

7. Be realistic

When forecasting, especially for the benefit of an external investor, there is a natural tendency towards optimism. Be wary of that, says Mike Cherry, policy chairman at the Federation of Small Businesses. "You need to forecast not just the expectations of the best scenario but also the worst scenario if sales go through the floor. People often over-egg it for external investment ... [but] being realistic about what your aspirations are is pretty fundamental to getting their support. They will certainly be able to see through anyone who is over-optimistic or the if figures don't stack up."

8. Control your credit

Rachel Carrell at DrThom says: "Poor credit control can throw your forecasts off dramatically. As the business grows, you can deal with small 'lumps' as they are naturally smoothed over by the sheer scale of the business. Big lumps remain a problem!"

It's one of the biggest issues that Crook finds clients struggling with: "If a supplier has got poor credit controls then they won't chase you, won't threaten with legal letters or charge you interest. People pay those that shout the loudest because they don't want their credit rating to be hurt." Make sure you shout the loudest when it comes to money owed to you. And keep close contact with your own credit rating too, as the reverse also applies.

9. Know your interest rates

Small businesses need to keep abreast of the various interests rates they pay, and forecast accordingly. "Businesses will typically have an overdraft, a loan, some hire purchase on equipment, but they don't necessarily compare the interest rates they have", says Crook. "When you have funds, you need to look at where it's best to apply those funds, and what's the cheapest way of doing it."

One strategy can be to offer cashback or a discount to clients who pay invoices on or before time, suggests Crook. "If you get your money in quicker then you're not incurring the overdraft interest rate – it might make strategic sense to offer that discount."

10. Don't get too obsessed

Despite the importance of forecasting, don't forget that the most important thing is actually running your business well. When asked if the best businesses are always the best forecasters, Mike Cherry says not necessarily: "I think the best businesses are very much focused around their teams and getting the right product to the right customers on time. At the end of the day it comes down to value and service – those are the two keys to success, rather than cost per say. Be customer-focused all the time and don't let your eye off the ball."

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