For both personal and business finances, forecasting can be an area that people struggle with. This is particularly true if you are newly starting up a business or you have had a significant lifestyle change. Moving into a larger house, having children or losing a job can make it difficult to budget, and before you consciously make changes, it is always beneficial to spend time forecasting your finances as accurately as you possibly can. For businesses, your financial forecasts are usually the significant determiner in whether investors will work with you and provide crucial financial backing, so accuracy really is key.
To get this right, there are a number of tips that you can consider:
1. Use a Forecast Template
Using a template for your expenses will ensure that you are less likely to miss any big costs. So, if you have a template that includes common categories such as rent, bills, payroll, equipment, insurance, etc. most of your costs will be accounted for. Of course, your business’ expenses will vary depending on the type of business that you run and how you run the business. There is no ‘one size fits all’ approach when it comes to forecasting. You need to put in the time and effort and if you can, speak to an accountant for advice.
2. The 5 Year Plan
While most businesses forecast for a 12-month period, planning for up to a 5 year period will give you a better idea of what you should be aiming for. You may find that in the first year of trading it is impossible to be profitable because of the startup costs you need to pay out. However, after three years, profit margins could begin to develop and gradually start to increase. That is why it is important to take a longer-term view, especially if you are investing a lot of capital into initial costs.
3. Keep on Track
Creating accurate forecasts is half of the work but continuing to keep track of your progress against your forecast is vital. Too many companies wait until the end of the tax year to review their financials, and by then they may have lost serious ground and plunged into the red. By reviewing your financial position on a regular basis, there shouldn’t be any shocks come to the end of the year. It also means that you can quickly identify problems and put remediation plans into place. Perhaps your marketing plan isn’t working, or you need to renegotiate your short term business loans to get the most competitive rates. If you don’t review these until the end of the year, you could have unnecessarily lost out on money.
4. Stay up to Date with Financial News
Financial news can seem mundane to some but keeping up to date could save you large amounts of money. Whether you are looking to book a holiday and want the best exchange rates or you are affected by business tax increases, you can’t forecast accurately if you aren’t up to date with current finance news.