Creating a 3 Way Forecast with FUTRLI & Xero or QBO
Posted on 2nd November 2017 in Forecasting
Written by Freya Hughes
Forecasting is the best way to get an idea of where your business is going. What you need to remember though, is that the more data you can get into your forecast the better. To ensure you’re projecting your figures properly, we’ve rounded up everything you need to know – from the benefits, to creation and analysis.
Running your business on a spreadsheet is not leveraging all that technology can offer.
True insights can only be achieved if you have a tool which analyses current performance and gives a seamless view to your future.
97% of our direct business customers come to us for forecasting. Where they then get the unexpected bonus is that the integration between forecast and actual data means that all visualisation of any metric/KPI/formula/insight, is possible for both past performance, and predicted performance. This is essential when enabling a team to take ownership of the figures that they contribute to.
There are a host of reasons why you need to be forecasting today. Some of the key benefits are:
- Predict outcomes from current or future assumptions
- Feel secure in your decision making
- Learn from your past mistakes
- Save cash
- Achieve sustainable growth
- Get an edge over your competition
By using cloud accounting and syncing with FUTRLI, you are working in a real-time environment. That empowers strong and fast decision making.
New data that’s been added to your Xero or QBO account will be pulled through to FUTRLI automatically, and of course you can refresh your data on demand too.
Flex and unify
Many businesses will have an existing budget set at the beginning of the year. These can of course be uploaded into FUTRLI and saved as a budget, but you can copy this and use it as version 2 – your forecast, which will flex and move with your business as the year progresses. For more explanation as to the difference between a budget and forecast, we explain this here; you need both.
Working in this scaleable fashion means your team will unify, and will strive to hit the same overall targets. By sharing your forecast with employees, they’ll understand how their tasks and roles are helping feed into the success of your business. One of the best ways to teach your staff how they are contributing to the bigger picture is by measuring their progress with key performance indicators. Hold that thought, though, because we’re going to cover how they contribute to your forecasting shortly.
You must forecast activity in your P&L as that is where the assumptions about your operational activity resides. But balance sheet movements and the impact on your cash flows are equally important, and all should be monitored, ideally, weekly. This is difficult in a spreadsheet, but not with FUTRLI.
A basic round-up: Your P&L shows you the revenues, costs and expenses incurred during a specific period of time (a month or quarter, for example); your balance sheet displays your liabilities vs your assets, so you see a literal balance between the ins and outs; cash flow statements show all the cash your business receives from its ongoing operations and external investment sources, as well as all cash outflows that pay for the operation of your business during a given period.
If you don’t forecast the whole picture of your business, you are increasing your chances of business failure. At its most basic, if you want to apply for funding you must have a 3-way cash flow forecast: this is summarised by Investopedia in their article about the relationships between financial statements:
“Stockholders and potential creditors analyse a company’s financial statements and calculate a number of financial ratios with the data they contain to identify the company’s financial strengths and weaknesses and determine whether the company is a good investment/credit risk. Managers use them to aid in decision making.”
Creating your 3 way forecast
There are different tools within FUTRLI for different uses. The dashboards are your operational companion. Alerts monitor your most important metrics at all times. PDF reports transform all of your data into board reports, funding applications or business plans. Forecasts are your window to every possible outcome your business has. We’ve made the platform as visual and flexible as it is because we understand that everyone consumes data in different ways. While an accountant may need a table of numbers, many of us will appreciate a visual representation in the form of a bar chart or pie chart, for example.
Any existing budgets that you have can be exported from your accounts package and then, by using our import template, brought into FUTRLI. Even at import, we go a step further. We have designed our template to let you turn your budget into a cash flow forecast at the same time.
You can set the appropriate sales tax and credit terms for every item you wish to forecast (with flexible payment profiles), allowing you to accurately model the cash flow impact of a zero-rated tax invoice to be paid in 60 days or the tax obligations of an item paid today with 20% VAT/GST.
Navigate to the Forecasting section of FUTRLI. You will be prompted to map your “default settings” which is where the 3-way magic happens. You will enter your tax settings (if you pay GST/VAT) and map your default bank account, accounts receivable and accounts payable lines. These only have to be entered once, to let the system work out the core automatic 3-way forecasting calculations for you.
There are 7 ways (!) to create a new budget, forecast or scenario (as they are all created in the same place to streamline your user experience). You can use your historical data to instantly create a picture of how you expect the business to perform in the future, by using the last years actuals option for instance: this gives you a full forecast in 5 seconds taking your last year’s operational data as the basis. If things stay the same how does this affect your cash. It can be a great diagnostic and a great place for you to start if this is new to you. Hit New on the forecast page next to your organisation and you’ll be presented with the varied options.
Alternatively, you can:
- Build your forecast from scratch, by creating forecast items against your P&L or balance sheet (the great thing about building your assumptions is that you can see a 12 month period for your entire P&L and Balance Sheet in one place, resulting in an efficient workspace). Your cash flow is then calculated based on the forecast items you’ve entered into FUTRLI – of course!
- You can create from a copy of another – perfect for scenario planning
- You can create what-if scenarios linking one forecast to another, again for excellent scenario planning, the difference being that you can use one of these as a base forecast and then layer your assumptions in other linked forecasts. Why? You only need to update the base forecast if things like fixed costs change (rent etc).
- The advanced last year’s actuals creation gives you the option to model changes in all P&L categories, by flexing amounts or % increase/decreases as well as credit terms. Use this to see if you are being a bank for your customers – use this guide for more information about this!
- Forecasting based upon Xero or QBO tracking/classes. Sometimes forecasting at business level is not detailed enough. Use this option to get more focussed departmental/project/regional etc. forecasts that can of course be analysed in dashboards and PDFs.
One of the key benefits of forecasting in FUTRLI is that each account line, unlike Xero or QBO, can have multiple forecasts per account. Businesses tend to be complex, and one amount for an account does not usually apply. By creating a different forecast line per account, you can name them, have different assumptions at invoice and payment level and easily track their activity down the line in the bank, accounts receivable/payable accounts or cash flow statement, as every transaction can be drilled into.
Making your forecast work for you
The most important relationship the forecasts have in FUTRLI is that due to their integration, all forecast data can be viewed as seamlessly as your accounts data. Use this in operational dashboards, and PDF reports to gain insight over:
- Actual performance vs forecast and budget performance. This sounds basic but should be assessed monthly at minimum.
- Rolling forecast + actual position. You want to know as time passes what your predicted year end position is going to be. Use the forecast + actuals option on our cards in dashboards and PDFs to gain valuable insights.
- Every forecast is stored as a granular transaction on a day – if your business requires reporting weekly or even daily – this is achievable at the click of a button.
- The granularity of the forecast visualisations being reportable at account, category, group (creating custom groups is a must) and formula (KPI) unlocks hidden insights for you and your team.
Building upon your forecast
It is essential that you identify the Key performance indicators (KPIs) that are relevant to your business. While industries will have similarities, a business’s lifecycle and size will mean that each one will have KPIs that are particular to them at a given point in time. And, they will inevitably change as your business progresses for varying reasons. That said we have a beginner’s guide to KPIs, a fully stocked KPI Library, and of course our industry-specific KPI lists to get you started.
These are standard for all businesses however in a more general sense:
KPI 1: Revenue over the next 12 months.
KPI 2: Net income/profit.
KPI 3: Net cash flow.
KPI 4: Bank accounts (cash flow).
We’d recommend that you create Snapshot cards on your dashboard to monitor these daily – we use them every day at FUTRLI.