Financial Forecast Modelling for SME businesses
Do you wish your business had a financial crystal ball? Sadly they don’t exist but the closest thing in reality is a detailed financial forecast covering your medium to long-term plans. By creating a financial forecast to quantify your business plan you will be able to see the likely financial outcome of achieving your goals and objectives. It is an essential tool for a successful business but despite this, many SME businesses don’t have one. What are they missing out on?
What is a Financial Forecast?
A financial forecast is an essential roadmap of your key fiscal indicators including profit, cash and balance sheet value. It reveals what your finances might look like in the future based on several potential scenarios that you determine. Using your predicted monthly sales and costs over the next few years, typically 3-5, a realistic financial forecast model is developed to show an expected profit & loss, balance sheet and cashflow month by month over the same period. A spreadsheet is a very effective tool for building a financial forecast model as it can be easily adapted to suit your business. By linking the balance sheet and cashflow directly to the profit & loss account you can easily create various different trading scenarios to see the impact each alternative has on the value of your business and cash requirement in future months and years. A financial forecast, or financial plan as it is sometimes called, becomes a very effective tool to support strategic decision making. It can also be used to model best and worst case scenarios so you are prepared for the impact of external factors affecting the plan.
Why do I need a Financial Forecast?
Not having a financial forecast is like walking in the dark and can result in sleepless nights. By contrast, armed with a forecast you can clearly see the impact of various possible futures on your finances. This allows you to make better decisions and provides you with reassurance. And because a financial forecast includes a balance sheet and cashflow, you can see the changing value of your business and how future trading impacts on your cash requirement. This is essential in ensuring you don’t run out of money. The process of creating the forecast is itself very revealing. The detailed financial planning and analysis required to build the forecast will enlighten you on various aspects of your business. It is an opportunity to identify ways to control costs and improve profit. As you build the forecast you will create a business budget for each section of the company which becomes the target against which your departmental managers will be measured.
Once completed the financial forecast model is an essential business tool that has a number of uses:
Financial target: The forecast should stretch 3-5 years into the future with year 1 becoming your financial target for the current year. Communicate this with your management team and assign responsibility amongst them for achieving targets. This should be updated and rolled forward annually.
Actual vs forecast variance analysis: Report actual performance against the forecast each month to identify variance from target. Set corrective actions as required.
Funding Applications: If the forecast shows you require extra funds it is the perfect tool to explain and justify to your bank the need for the loan and your ability to repay.
How do I create a Financial Forecast?
Start with your expected sales and costs. Then you’ll need an experienced Management Accountant to help you turn these into the full model. It should only take a few days’ work depending on the complexity of your business but it will be a very valuable investment. With the forecast in place, each month you can compare your management accounts against the model to track the progress of your business performance. You will find this very reassuring.
Need Help with Financial Modelling?
Secantor has experienced FDs and Management Accountants who can build a financial forecast for your business. We’ll guide you every step of the way, from analysing and interpreting your current financial profile to completing the build of a bespoke model that fits the shape of your business. Our independent business experts can also assist with developing and shaping your strategic business plan from which your financial forecast flows. Book a call with one of our team to find out more.
