More than anything else, entrepreneurs crave certainty; real figures upon which they can base their growth and development plans. In an unpredictable world this isn’t easy, but with good forecasting you gain real foresight and direction.
Entrepreneurs are forever the optimists of the business world and, when asked about the future, will often say they expect things to be good or to improve. But the difference between positivity and foolhardiness is to ensure there are some genuine facts to back up your claims. It is essential that you sit down with your accountant or finance director on a regular basis and go through the numbers and make projections on things such as profit and loss and cashflow. Some entrepreneurs frown upon the idea of projections, considering them to be little more than pie in the sky. This is perhaps understandable, but projections aren’t about looking into a crystal ball, rather they are about really getting a grip on the mechanics of your business and making contingencies for if and when things go wrong.
How to make projections
Key to getting realistic projections is to make more than one and then to analyse your business future in light of all of them. Typically, businesses consider the worst-case, mid-case and best case scenarios. Optimists dislike considering the worst-case scenario, but this is one you can’t afford to ignore. If all of your contracts are short-term, or if your sales fluctuate considerably, then you are more at risk than those businesses which don’t. The worst-case scenario would be that all of your business falls away.
However, your response to this is then to improve the worst case by mitigating its most lethal edges. This will move you to the mid-case scenario where there will be little growth, but you are able to maintain your existing level of business. During a recession, more than at any other time, analysing your customer base will help you to understand your risk here. But in case customers do fall away, you should make contingency plans for acquiring new ones. The best case scenario, which predicts growth, is the most exciting, but what you should be looking at here is how much budget you need to invest in order to make this a reality. If this spend would leave you in danger then you should revise what your best case is as in a recession this is probably a risk too far.
The benefits
Your track record on areas such as meeting budgets and forecasting are important for two reasons: It will help you to understand whether you are an optimist or more cautious by nature. Secondly, for your bank or investor they are a key indicator on how much faith they should have in your judgement. If your forecasts have been wrong in the past, you need to understand the reasons why. We all make assumptions, but these change over time and need to be regularly challenged and business models adapted accordingly. One area that can really impact on cash-flow is the amount of time it takes to turn an invoice into cash in the bank. You should know what your average time is, use that to predict future cash-flow and then attempt to lower it if is harming your business development.
In conclusion, the key to getting forecasts right is to understand all of the many variables that affect your business. This might sound like a headache but it will help you create some contingencies that will allow you to react when one of the numbers heads too far north or south. Therefore, rather than being a headache or pie in the sky, budgeting and forecasting is about knowing what to do as and when you have to.
© Crimson Business Ltd. 2009