Planning for the future – the importance of forecasting
The New Year is just around the corner, so there’s an increased urgency to get on top of your 2016 planning and to start thinking about the future of your business.
With the real-time numbers provided by modern cloud accounting software, such as Xero online accounting, it’s never been easier to get a current view of your business as it stands right now.
But the data in your accounting software also lets you see beyond this current standpoint and straight into the future too.
Having a window into the projected future of the business gives you immense foresight. And by planning ahead you can make the right decisions for the business with increased confidence and certainty.
The importance of forecasts and projections
The ability to project your figures into the future is an incredibly powerful tool.
With your forecasting ‘crystal ball’ to hand, you can look for the bigger sales opportunities, avoid the cash flow dips and focus your efforts more strategically on improving your bottom line
Your current business information is the foundation for any kind of forecasting, so the more up-to-date and the more holistic your data is, the more precise your projections and forecasts will be. Cloud accounting really is the ideal platform for this kind of work, based as it is around real-time numbers – providing you with initial data that’s a genuine reflection of your past and current business position.
By looking at the historic patterns, dynamic highs and lows and seasonability of your business information, you can project these numbers forward into the coming year. And that allows you to set forecasts and targets that are based in fact, not fiction.
With these realistic forecasts in place, you have the framework for a yearly business plan that’s founded on empirical data, not just on a wing and a prayer.
Measuring forecasts against your actuals
Whatever the size of your business, there’s value in taking a long-term approach to forecasting, and comparing your historic forecasts against the actuals for the same period.
Even with the crystal ball of forecasting, it’s possible that there will be discrepancies and unforeseen fluctuations between the predicted numbers and the figures in your actuals for the given period.
Don’t see this as a downside, though. In fact, comparing forecasts against the genuine numbers for that period gives you even greater insight into your business and your market. If there’s an unexpected drop in sales at the same point two years in succession, you can work that dip into your forecasting for the next year.
This process helps to improve the planning process going forward – and the bigger your pool of data, the more refined your projections can become.
The value of key performance indicators (KPIs)
Having key performance indicators (KPIs) in place helps you track how well the company is meeting its business plan.
The actual areas of performance that you focus on will be different depending on your type of business, your size, your industry or your customer market. But there are some core indicators you’ll want to put in place whatever kind of enterprise you’re running.
- Customer acquisition and attrition – are you bringing in enough new customers? And are customers leaving (try to analyse why that might be).
- Gross profit margin – are you pricing your products/services correctly? In other words, is there a big enough margin to meet your overheads and create a healthy profit?
- Cash flow – is there a steady pipeline of cash coming into the business? Are your invoices getting paid and is there money in the business to fund your business plans and overheads?
- Ageing debts – are your customers paying on time? Is your cash flow situation poor because of a build up of unpaid invoices and outstanding debts?
- Growth – is the business expanding or contracting? Is the company evolving along the predicted growth lines you have planned out?
- Customer feedback – are you delivering great customer service? Are you customers happy and are there any issues you need to resolve?
This is just the tip of the KPI iceberg, but there’s real value in considering which metrics will be of most benefit to your business and then putting KPIs in place to measure them.
Talk to us about your 2016 planning requirements
At Comerford Foley, we offer an all-round business advisory service for our clients, with strategic analysis and business planning at the centre of what we offer your business.