How good are your financial forecasts?

my forecasts are great on paper, trouble is customers don't keep up with their promised payments.

i always do a business plan and financial forecast and look and stick to it everyday.

what i also do is a "what if plan" more or less halving all the Cash In sections.

this has proven valuable in times of unsuspected problems.

regards
Stephen Doyle

to be honest they are normally spot on.

i do forecast for the 3 years but mainly the year on year is the ones that i use.

the difference is where i thought some of the sales would come from this changed as my business had to change or evolve into new products or services to achieve my level of sales.

regards,
Stephen Doyle

I don't usually do anything past the year.

Been working out what i done last year, see how it looks.. and what i need or want to try to do.. more of target.

Put the figure down, break it down into weekly / daily amounts and then work out how i do that and what i need to change or add so i can meet these targets.. been aiming at 30% of last year.

My business plan is three words - Make a profit. I've never needed a formal business plan in my life, and they are only any good on the day they are produced. On day two things can go belly up and you have to change it, or you can get a huge new deal and have to change it again. I don't do financial forecasts for the same reason.

For what it's worth I spent a decade doing business forecasting and learnt a few things.

1. Forecasting revenue for new products and services is necessary but impossible.
2. Forecasting revenue from historical data is necessary and possible but only until something that you couldn't/didn't foresee happens
3. Forecasting costs is both useful, necessary and possible so long as you're honest and really knowledgeable. Mostly though people are neither, so double whatever your worst estimates and hope.
4. Properly forecasting costs under various volume scenarios can tell you what you need to price at to make the level of profit you need to eat. If your price turns out to be higher than market rates, you've got a problem. I know hardly any small businesses who do this simple thing. If they did they probably would not start their business.

I've seen every kind of forecast. Almost all are too optimistic, generally by orders of magnitude. However, I have seen some spectacularly wrong in the other direction. The two biggest being mobile telephony growth - hopelessly underestimated and 0898 (we didn't factor in the use of them for porn).

So these days I only attempt to forecast what I genuinely know and only over very short timescales. I spend a lot of time looking at costs and trying to find realistic breakeven points. I then ask myself whether the products I'm looking at can realistically achieve the volumes needed - so I'm essentially building a revenue forecast backwards.

Once I've crucified the numbers enough and if I still think there's a chance (I rarely do) I'll forget them all and just get on with making it work because I know that no matter how much effort I put into them, they'll be proven to be mostly boll0cks as soon as I write the first cheque.

I have predicted the next twelve months

I have concluded that if things dont change soon



They will stay the same !!!

cjd said:

2. Forecasting revenue from historical data is necessary and possible but only until something that you couldn't/didn't foresee happens

So these days I only attempt to forecast what I genuinely know and only over very short timescales. I spend a lot of time looking at costs and trying to find realistic breakeven points. I then ask myself whether the products I'm looking at can realistically achieve the volumes needed - so I'm essentially building a revenue forecast backwards.

Click to expand...

On the money (the other points are good too )

If it were not for the uncontrollable (fuel, weakness of the pound) then I'd be good to go. But the above mean a huge price hike is taking place, about 30%.

I analyze sales after every month and compare them with the last year sales in the same month. If there is going to be a marketing campaign, everything is being detailed analyzed.

I had a cunning plan.

But no one expected the Spanish inquisition.:|

Slings an arrows of outrageous fortune would seem to make plans a tad trite, except in the very short term.

I think they generally come under the heading of dreams.

Earl

I tend to have a three year plan which helps me to plan growth.

However, I also have a twelve month rolling plan which allows me to plan for the short term. This is amended on a monthly basis which means that I am never too far out.

My biggest failing is that I am probably a little too cautious in my planning and need to employ the SWAG method a little more consistently.

Mister B

I see major mistakes being made on business plans... on the cost side.
People tend to guess at costs.

The best way is.. to start with the fundamental profit model - at the core.

Define unit costs for personell...eg cost of a computer, cost of a mobile, expenses ,training, safety etc....recruitment fees, no contribuition period for staff whilst they learn... So LEAD TIME!! ensuring you recruit them ahead of where they are needed.

Supervision requirement...

Then automate the addition of cost, looking through the profit model,
to determine numbers and types of staffing etc.

Then looking through staffing to add all of the costs associated with the staff - supervision etc

So when you up the sales for different scenarios - the model automatically adds in appropriate costs - at the right time.

Most people I have seen on business plans fail to increase costs properly with sales, and have no audit trail to determine - WHY do you need five staff. So their "high sales" scenario and long range scenarios tend to be woefully inadequate

This leads to what I call MUGS = Marketing universal graph system
Which is a graph going down that happens to leap up in about 18 months.
When I see it is generally because, costs have not been scaled properly



And some of the spreadsheets I have seen handed out as templates by "professionals" are nothing short of negligent.

The level of complexity for project businesses, is several levels higher, and needs project templates - particularly using proper and prudent views on the value of work in progress, whilst taking maximum use of the standards to recognise cost.

A process as complex as this, needs macros to handle it properly
And cannot be done manually on spreadsheets - so learning excel macro is a must for anyone who wants to do this well.

Having done all of that

The last serious business plan I did ..was to raise £10million public private for a high profile tech business stayed to pretty well to plan for the first 3-4 years.

The main thing we have noticed, is that the a-priori ratio of different types of project was predicted wrongly

BUT the point is because all of thenumbers have a plan audit trail, then you can go back and see which assumptions are wrong, so later forecasts become more and more accurate as underlying assumptions are tuned, so you can get accurate

Doing this on my retail business - sucking in historic data from accoutns , and predicting the rest based on profit models, including P&L and automatic cashflow and was pretty exact and year projections uncannily accurate - but only because we had learned from history.

I also used other businesses benchmarks in setting up the plan.

I have serious spreadsheets that do this, for anyone that has planning in mind - that could be tailored.

Much of my life has been in pure tech business development.
And thatit can be finger in the air!!

So the approach to pure tech is different - which I think is risk management planning.

What is the minimum thing I need to develop or prove - the tiny kernel of the idea, in order to be able to plan the rest properly
Set the plan to reach that objective first. And then conditionally rachet other resources. Dont divein blindly

In my own businesses and advising others, the most important forecast in a business is the cashflow forecast.

If you do not keep an eye on this you are dead.

Its worth reviewing daily or weekly

Profit and loss I would look at monthly and more often than not, even after years of being in business entreprenuers are optimistic by nature so any forecasts generally reflect that.

In a nutshell though in my own forecasts and that of other businesses if its a start-up you are doing well if you are only 50% out on costs and sales.

If its been going over 3 years you have a feel for the numbers and could only be about 10-30% out on sales. (Costs become quite predictable)