How to Create an Accurate Business Financial Forecast

Posted on 6th October 2017 in Cash Flow

Written by Freya Hughes

A lot of things depend on accuracy – from your finances to gymnastics, you’re not going to be in a good way if anything isn’t spot on. You’ll find yourself drowning in erroneous data if you misplace a decimal, and if you’re working out a routine on a bar, you could easily fall and break something. Getting things exactly right will increase your strength and health, so here’s how to ensure your data is spot on.

Step away from the spreadsheet! Using a cloud-based forecast will allow you to see into every crevice of your company, in real-time. That’s exactly what you need to move forward confidently. Each department and area of your business needs constant monitoring, and without accuracy you’d be wasting a whole lot of time and effort. If you cannot rely on your numbers, you may be in for a surprise and find you’re closing the doors of your business a lot sooner than you ever expected.

Forecast what might come next and you’ll be ready to push through any tricky periods. You need to use as much of your data as you can to set up a reliable and accurate forecast. We believe that a 3-way cash flow forecast is the only way to see the future.

These are a select few of the hundreds of questions you need to ask yourself.

  • How are you going to set targets?
  • How are you going to know where to spend your investment?
  • When will you run out of cash?
  • How are investors going to monitor your progress?

By forecasting daily or weekly, you’ll find you can start answering these questions. You need to understand your past results and be on top of your current results, and you’ll see how accuracy means your projection will be spot on.

The key three

Chalky hands three rings gymnastics

Understanding what are the core things that make up your forecast is the first step. You need to get familiar with all of them

The powers that be at Investopedia have summed up the definitions and functions of your balance sheet, P&L and cash flow statement. Let’s have a look at exactly what these do and how they help you to create an accurate forecast.

Balance sheet

“A balance sheet is a financial statement that summarises a company’s assets, liabilities and shareholders’ equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by shareholders.”

Profit & loss (P&L)

“A profit and loss statement (P&L) is a financial statement that summarises the revenues, costs and expenses incurred during a specific period of time, usually a fiscal quarter or year. These records provide information about a company’s ability – or lack thereof – to generate profit by increasing revenue, reducing costs, or both.”

Cash flow statement

Your cash flow statement “records the amount of cash and cash equivalents entering and leaving a company. The CFS allows investors to understand how a company’s operations are running, where its money is coming from, and how it is being spent.”

Use all three of these as part of your business analysis. They cover every part of your finances, so it’s definitely best to keep all of them up to date and be in regular contact with them. They form the basis of your forecast.

To take your projection to the next level, key performance indicators and your non-financial data should be inputted into your forecasting too.

The next level: KPIs and non-financial data

Man swinging from hoops

KPIs

Measuring KPIs is going to give you a granular view of each part of your business. They are quantifiable measures to determine how well you’re doing against your operational and strategic goals. Simply choose which aspects to measure, and keep tabs on the direction your business is taking. Breaking down your targets into KPIs makes measuring the success of your business manageable; looking at your company as a whole can be overwhelming and you’re likely to miss something crucial.

Use KPIs to your advantage – allocate these metrics to each department of your business and have your managers monitor them. By doing this you’ll find your team are working in unity. Managers will have a much deeper understanding of your business, knowing exactly what results you expect and the company needs to move forward. They can be financial or non-financial, so every variable can be looked at.

Read our beginner’s guide to KPIs

Putting your KPIs in your forecast will show you in-depth how you’re doing. Let’s use an example to get you thinking in the right way about KPIs. As most people have been to a pub or a bar at least once in their lives, we’re going to look at the metrics you need to measure in one. See the full list here if you want some additional information. Here’s an example of some specific metrics:

  • Wet (drinks) sales gross profit
  • Average customer headcount
  • Average customer wait time
  • Waste %
  • Dry (food) sales gross profit

So you can see that a bar owner would measure the things that will directly impact their revenue. For example, measuring the waste % shows when you’re not getting a return in your expenditures. This, obviously, is a problem so tracking the rate at which drinks are being wasted will allow you to think about changing your stock.

You’ll notice as well that aside from the profit-based KPIs (wet and dry sales), the other three are non-financial. These revenue drivers are seriously important, but some business owners over look them. If you want to get a really accurate forecast, you need to input these figures – you’d literally be ignoring parts of your revenue stream otherwise.

Displaying your KPIs

Man on pommel

Performing is the thing here. In gymnastics it’s about technique and strength, in business it’s not so different

To get this information into your forecast in a way that you can check into at a glance…

Use the Snapshot card. This is the best way to display up to five metrics, and is simple and very insightful. You can use the settings area (on the back of the card) to customise it to however works for you. It’s simple and hugely insightful.

Or you can use the Report card. This is a fairly simple card, which needs constant monitoring for it to be really effective. It gives you the results of tracking your KPIs, but you’ll also use this type of card for many of your other insights. Report cards are very powerful and flexible, showing you: any account, category, account group, non-financial data, formula (KPIs), historical and future periods for actual and/or forecast data over bespoke periods.

But if we strip this back a bit, considering you may not actually run a bar, there are some core metrics which we think are good to keep your eye on. These are:

KPI 1: Revenue over the next 12 months. Some of the most successful businesses in the world have a hockey stick curve in the cumulative income line – something we are all gunning for!

KPI 2: Net income/profit. You must be aware of how much profit you’re likely to make, so you can make informed business decisions.

KPI 3: Net cash flow. This helps you identify KPIs that you can’t afford to fall below zero.

KPI 4: Bank accounts (cash flow). This is a great one to highlight areas of concern.

So if you’re just getting started, try these out and see how much clearer tracking the progress of your business becomes.

Don’t be afraid to ask you accountant for some help. It’s better you get this right with assistance than delaying the process with trial and error…

Coach helping gymnast

Creating your forecast

This is certainly the most exciting step, and is actually one of the quickest. To build your forecast, head to the scenarios section and hit ‘New’. From here, enter your settings and info, and match your accounts payable, receivable and your main bank account – and remember to press save! That should have taken you about ten seconds, so you can see there really is no reason to not be forecasting.

On your new scenario page, choose last year’s actuals and ‘Quick create’, then press ‘Build’. That should have taken five seconds. And you’ve got a two-year forecast based on last year’s actual P&L data! For a 15 minute job, that’s an accurate projection of where your business is going to be in the future. Not bad, huh?

To really get the most out of your forecast, you need to be checking it regularly. As in weekly at least – not monthly. Because we are obsessed with the growth of FUTRLI, we look at our forecast every day. The team know their responsibilities and contributions to the company’s overall well-being, and forecasting regularly will translate this unity into your business. Take it from us: checking in with your figures on a regular basis will not only see your business take an uptick in success, but you’ll also notice your staff taking everything a lot more seriously.

Hands on bar


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